Interruptible Electricity Contracts from an Electricity Retailer's Point of View: Valuation and Optimal Interruption

We consider interruptible electricity contracts issued by an electricity retailer that allow for interruptions to electric service in exchange for either an overall reduction in the price of electricity delivered or for financial compensation at the time of interruption. We provide an equilibrium model to determine electricity prices based on stochastic models of supply and demand. In the context of this model we quantify the value of interruptible contracts to the retailer of electricity and describe the optimal interruption strategy. Our numerical results indicate that, in a deregulated competitive market, interruptible contracts can help alleviate supply problems associated with spikes of price and demand.