Long-Term Service Agreement in Electricity Supply Chain with Renewable Energy Penetration

40 Pages Posted: 12 Aug 2019 Last revised: 7 Jul 2020

See all articles by Panos Kouvelis

Panos Kouvelis

Washington University in St. Louis

Hirofumi Matsuo

Kobe University

Yixuan Xiao

Washington State University

Quan Yuan

Zhejiang University

Date Written: July 2, 2020


Problem Definition: We study a long-term service agreement (LTSA) between an OEM of conventional power generators and a power plant operator (utility firm) in the electricity supply chain. The OEM offers maintenance based on the LTSA which specifies the service fee and the maintenance interval. The utility firm dynamically chooses among different resources (conventional, renewable, or emergency) to meet energy demand.

Academic/Practical Relevance: Although being widely used in power systems, LTSA has not been studied in the OM literature. Different from traditional supply chain contracts, LTSA contracts on a generator’s long-term production schedule (i.e., usage time and number of starts). A good understanding of LTSA provides guidance on how to design such a complex contract.

Methodology: We use game theory to model the LTSA between the OEM and the utility firm and use dynamic programming to study the utility firm’s power generation decision.

Results: We first characterize that the conventional generator’s optimal operating mode (i.e., on or off) follows a two-threshold policy which shows a hysteresis phenomenon. Then the optimal output from different resources can be obtained by minimizing the utility firm’s cost of the current period. We show that the OEM’s optimal LTSA design on the maintenance interval and service fee can be solved sequentially, and capture the OEM’s tradeoff between the service margin and the usage of conventional generator.

Managerial Implications: We find that the OEM does not have incentives to significantly reduce the maintenance cost of a generator start, while both OEM and utility firm prefer greater generator flexibility. While overall availability of renewable output is important, renewable source characteristics such as autocorrelation and variation do not have a significant impact on the equilibrium outcomes. By incorporating the number of starts into the contract, LTSA is effective in preventing the utility firm from frequently cycling the equipment.

Keywords: long-term service agreement (LTSA), power generation, renewable energy, equivalent operating hours (EOH), electricity supply chain

Suggested Citation

Kouvelis, Panos and Matsuo, Hirofumi and Xiao, Yixuan and Yuan, Quan, Long-Term Service Agreement in Electricity Supply Chain with Renewable Energy Penetration (July 2, 2020). Available at SSRN: https://ssrn.com/abstract=3433943 or http://dx.doi.org/10.2139/ssrn.3433943

Panos Kouvelis (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.panoskouvelis.info

Hirofumi Matsuo

Kobe University ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501

Yixuan Xiao

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Quan Yuan

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058

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