Analysis of the Physical and Financial Attributes of Medium- and Long-term Electricity Contracts: Pricing Mechanisms and Risk Mitigation Strategies

This paper aims to explore the physical and financial attributes of medium- and long-term electricity contracts and construct a pricing model that comprehensively considers factors such as supply-demand relationships, generation costs, and spot market prices. The study provides a detailed analysis of key elements in the electricity market, including supply-demand relationships, generation costs, spot market prices, and risk premiums. The pricing model is fitted and validated using the least squares method and the Radial Basis Function (RBF) neural network. Results indicate that the improved model outperforms the classic model in terms of fitting accuracy and explanatory power, significantly reducing root mean square error (RMSE) and mean absolute error (MAE), with a notable increase in the coefficient of determination (R<sup xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">2</sup>). Additionally, price risk mitigation strategies based on Financial Transmission Rights (FTR) and differential settlement mechanisms, along with physical security assurance mechanisms, are proposed to ensure the physical safety and financial stability of the power system. This study not only offers new perspectives for theoretical research in the electricity market but also provides feasible solutions for practical operations, playing a crucial role in ensuring the physical security of the power system and enhancing market efficiency.