Effect of participants’ risk attitudes on one-way option electricity transaction based on utility theory

Abstract

Electricity is a unique commodity and power price can fluctuate very severely in spot market making electricity supply industry a risky business for market participants. Mitigating risk becomes an urgent need for market participants. Benefit balance is a basic principal to carry out option. Each unit of power in the one-way option should produce the same benefit and utility to the market participants. Based on expectation and utility theory, the paper builds the benefit expectation model of the market participants to find an equilibrium option price. With the utility model by combining the benefit and risk observed in the one-way option the effects of different risk attitudes of the market participants on the one-way option are measured. Analysis results shows that the risk attitudes of market participants have an obvious effect on the option under study.