Long‐term service agreement in electricity supply chain with renewable energy penetration

Abstract We study a long‐term service agreement (LTSA) between an original equipment manufacturer (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. The utility firm dynamically chooses among different resources (conventional, renewable, or emergency) to meet energy demand. An LTSA contracts on a generator's long‐term production schedule (i.e., the usage time and 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 trade‐off 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. 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. 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.