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

49 Pages Posted: 12 Aug 2019 Last revised: 19 Jan 2023

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: August 30, 2022


We study a long-term service agreement (LTSA) between an OEM of a conventional power generator and a utility firm in the electricity supply chain. The OEM offers the LTSA to the utility firm which specifies the service fee and the maintenance interval. Given the LTSA, the utility firm dynamically chooses among different resources (conventional, renewable, or emergency) to meet energy demand. Different from traditional supply chain contracts, an LTSA contracts on a generator’s long-term production schedule (i.e., the usage time and the number of starts). 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 production from different resources can be obtained by minimizing the utility firm’s cost of the current period. We prove 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. Our numerical results show that the utility firm starts the conventional generator less often as the maintenance service fee of a start increases and the minimum conventional output decreases. We find that the OEM has incentives to reduce the minimum output to make the conventional generator more flexible, but such improvement may not benefit the utility firm since it allows the OEM to charge a higher service fee, which is less intuitive. While the overall available renewable output is important, renewable energy characteristics such as autocorrelation and variation do not appear to significantly influence the optimal LTSA design and the system performance, especially when the renewable penetration level is low. Finally, increasing renewable penetration leads to more frequent cycling of the conventional generator and less conventional output. With more renewable generation and less conventional and emergency generation, higher renewable penetration reduces the utility firm’s cost, the OEM’s profit, and the total emission.

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 (August 30, 2022). 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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