How much power should an electric company purchase from an independent producer to meet demand?
How much power should an electric company purchase from an independent producer to meet demand?
In recent years, a Detroit-based utility company has seen demand for electricity exceed its generation capacity. The company, which owns hydro and coal plants, has relied mainly on gas-fired boosters and purchases from independent producers to bridge the gap. But prices fluctuate wildly on the spot market, and gas-fired boosters are so expensive that the company uses them only as a last resort. This case teaches students to build a model to analyze whether the company should sign a supply contract with an independent producer. Students consider various contract scenarios, and explore the problem from both the electric company's and the independent producer's perspectives.