Price optimization of hybrid power supply chain dominated by power grid

Published date11 March 2019
Date11 March 2019
DOIhttps://doi.org/10.1108/IMDS-01-2018-0041
Pages412-450
AuthorJiaping Xie,Weisi Zhang,Lihong Wei,Yu Xia,Shengyi Zhang
Subject MatterInformation & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems
Price optimization of hybrid
power supply chain dominated by
power grid
Jiaping Xie, Weisi Zhang, Lihong Wei and Yu Xia
College of Business, Shanghai University of Finance and Economics,
Shanghai, China, and
Shengyi Zhang
School of Business Administration, Xinjiang University of Finance and Economics,
Urumqi, China
Abstract
Purpose The purpose of this paper is to examine the impact of renewable energy on the power supply
chain and to study whether the renewable generator or the power grid that purchases power from the power
spot market is better when the actual generation of renewable energy is insufficient. The authors want to
compare and analyze the different power supply chain operation modes and discuss the optimal mode
selection for renewable energy generator and power grid in different situations.
Design/methodology/approach This paper studies the grid-led price competition game in the power
supply chain, in which the power grid as a leader decides the price of transmission and distribution, and
generators determine the power grid price. The renewable energy power generator and the traditional energy
power generator conduct a price competition game; on the other hand, the power grid and power generators
conduct Stackelberg games. The authors analyze the power supply of single power generator and two power
generators, respectively, and research on the situation that the renewable energy cannot be fully recharged
when the actual power generation is insufficient.
Findings The study finds that both re newable and traditiona l power grid prices decli ne as price
sensitivity coeffic ient of demand and install ed capacity of renewable energy generators inc rease. Power
grid premium decrease s as the price sensitivity coefficient of dema nd increases, but rises as the installed
capacity of renewable energy generator increases. When there is a shortage of power, if the installed
capacity of renewable energy is relatively sma ll and price sensitivi ty coefficient of demand i s relatively
large, the grid purchase s the power from power spot mark et and shares cost with renewa ble energy
generators, leading t o higher expected profits o f the renewable energy gene rators. On the contrary, the
renewable energy gener ators prefer to make up power short age themselves. For the power gri d, purchasing
the power by the renewabl e energy generators when there is apowe r shortage can bring more utility t o the
power grid when the insta lled capacity of renewa ble energy is lower and the de mand price sensitivit y
coefficient is higher. When the installed ca pacity of renewable energ y is high and the price sensit ivity
coefficient of demand is moderate, or the installed capacity of renewable energy is moderate and the
demand price sensitivity coefficient is high, a generator that simultaneously possesses two kindsof energy
source will bring more util ity to the power grid. If the instal led capacity of renewable en ergy and the
demand price sensitiv ity coefficient both a re small or the install ed capacity of renewab le energy and
the price sensitivity c oefficient of demand both are large, the power grid prefers to purchase the powe r by
itself when there is a power shor tage.
Practical implications The goal of our paper analysis is to explore the implications of the theoretical
model and address the series of research questions regarding the impact of the renewable energy on the
power supply chain. The results of this study have key implications for reality. This paper sheds light on the
power supply chain operation mode selection, which can potentially be used for the renewable energy
generators to choose their operating mode and can also help traditional energy generators and power grid
enterprises maximize their utility. This paper also has some references for the government to formulate the
corresponding renewable energy development policy.
Originality/value This paper studies the power operation mode under the uncertainty of supply and
demand, and compares the advantages and disadvantages of renewable energy generator that makes up the
shortage or the power grid purchases the power from power spot market then shares cost with the renewable
Industrial Management & Data
Systems
Vol. 119 No. 2, 2019
pp. 412-450
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-01-2018-0041
Received 25 January 2018
Revised 18 May 2018
Accepted 25 July 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
The work was supported by National Social Science Foundation of China (15ZDB161) and the
postgraduate innovation fund project of SUFE (CXJJ-2016-327).
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IMDS
119,2
energy generator. This paper analyzes the power grid-led coordination problem in a power supply chain,
compares and analyzes the price competition game model of single power generator and dual power
generators, and compares the different risk preferences of power grid.
Keywords Risk aversion, Cost sharing, Multiple suppliers, Power grid dominant,
Supply and demand uncertainty
Paper type Research paper
Highlights:
(1) the power operation modes under the uncertainty of supply and demand;
(2) compare who makes up the shortage better when the renewable generation is
insufficient;
(3) the power grid-led coordination problem of power supply chain; and
(4) price competition game model of generators under different risk preferences of
power grid.
1. Introduction
In order to reduce emissions, guarantee the security of energy supply and ensure the
adequacy of energy resource, many governments set policy targets for the exploitation of
renewable energy. Traditional power generation usually relies on oil, coal and other
energy sources to generate power. With these energy sources, the power output is
relatively stable, and the technical difficulty is not tough. The power generators are more
likely to control the power capacity. However, because of the high traditional energy
carbon emissions and serious environmental pollution, in recent years, the use of solar
energy, wind energy, nuclear energy and other renewable energy power generation
gradually increases. This part of the energy, which is defined as renewable energy
resources, has no pollution to the environment, and will become the first choice of power
generation in the future. The actual power generation of renewable energy is limited by
weather and other natural conditions. Therefore, the renewable energy generation has the
characteristics of intermittence and randomness. Hu et al. (2015) studied an organizations
one-time capacity investment under a renewable energy-producing technology with
supply intermittency and net metering compensation. Taking the solar and wind energy
as examples, using solar energy to generate power is directly influenced by the generators
location and average sunshine intensity. Solar power generation companies must be
located in places with higher sunshine intensity. Besides, the daytime output is more
stable, while the output is zero at night. Wind energy is directly affected by wind speed
and the capacity of the equipment purchased by manufacturers. The wind power
generation and the geographical distribution have a close relationship. If the wind power
during the day and night is relatively stable, power generated during the day and night
can provide stable power to the user. However, in most areas, the speed, the direction and
the intensity change a lot, causing a lot of difficulties to the power generation. So in the
supply chain that includes renewable energy generators, the power supply has a lot of
uncertainty. Furthermore, the power is different from the general goods. Storing is
not only difficult, but also a big risk. Therefore,in this study, we assume the power cannot
be stored.
Due to the intermittent nature of renewable energy generation, when the grid
introduces renewable energy, the risk of power shortage will be greatly increased. How
to deal with the possible power shortage becomes the focus of academia and industry.
The intermittent characteristic of renewable energy power generation means that it
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Price
optimization
cannot generally be handled through technical control and economic dispatch (Skea et al.,
2008). Therefore, the dispatchable traditional generators is constantly used to balance the
demand and supply of power, Li et al. (2016) claimed that the problem can be solved if a
spot power market is established and power suppliers can purchase electricity in
emergency from the power spot market. This paper is based on the Stackelberg game,
utility theory, cost-sharing contract and other related research, and explores that when the
renewable energy power generation is insufficient, the generator or the power grid which
purchases power in the power spot market to cover the shortage, which is defined as
emergency purchase. To the best of our knowledge, we are the first to build such three
new models for power supply chain in different conditions, and the contributions of our
paper can be summed as follows. First, this paper studies the power operation modes
under the uncertainty of supply and demand, and we compare the advantages and
disadvantages of the fact that renewable energy that takes charge of the shortage and the
power grid purchases the power from power spot market, and then shares its cost with the
renewable generator. Second, this paper analyzes the power grid-dominating power
supply chain coordination problem; we compare and analyze the price competition game
model of single power generator and dual power generators, and compare the different
risk preferences of the power grid. Third, this paper compares and analyzes the change
of the power grid prices and the power grid premium with different parameters
under different modes, and compares the returns of generators and the power grid in
different modes.
The rest of the paper is organized as follows. Section 2 reviews the relevant literature.
Section 3 describes the related issues and defines the symbols and models involved. Section
4 shows the case of a single generator and two generators when the grid is a risk aversion.
We consider the situation when the actual generation of renewable energy is not enough and
the renewable energy generator covers the power shortage by purchasing power from the
power spot market. Section 5 shows how a risk-neutral power grid shares its cost with
renewable energy generator when there is insufficient power. Section 6 compares and
summarizes the different modes. Section 7 contains numerical examples. The last section
concludes the results and the insights presented in this paper.
2. Literature review
In the market, the demand of the product is influenced by many conditions in addition to
the price adjustment. Therefore, the demand for most commodities has certain
randomness. For general industrial products, because of the adjustment of machines
and staffing arrangements, the uncertainty of product supply is negligible. For products
such as renewable energy, whose supplies are greatly affected by natural conditions, the
supply fluctuation is relatively large, and the manufacturer faces the dual uncertainty of
demand and supply. Supply and demand uncertainty has received significant attention by
operation management researchers. As the variable renewable energy generation
increases, all the competing firms in the power spot market face supply uncertainty.
Al-Gwaiz et al. (2016) considered the supply function competition among traditional power
generators with different levels of flexibility and the impact of the participation of
intermittent renewable power generation on the competition. Buygi et al. (2012) studied the
impact of large-scale integration of intermittent generation resources on power spot
markets through a supply function equilibrium in a uniform power spot market.
Kong et al. (2017) considered that the power generator faces uncertain and independent
electricity spot price and renewable energy source supply, and explores the capacity
investment strategy under volatile electricity spot price when renewable energy
penetration rate is low. Cho and Tang (2013) examined three sales strategies for a supplier
to produce and sell to a retailer under the uncertainty of supply and demand: pre-sale,
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