Optional forward contracts for electric power were developed by considering the use of financial options for electric power markets. They play the role of interruptible load and dispatchable supply. Optional forward contracts may be used in conjunction with, or in place of, "spot" or "real-time" pricing to help create and electric power market in which participants are given incentives to make them more responsive to changing system conditions, thus increasing the overall benefit of the power system to society. Their operational role in maintaining system security will be investigated, including the effect of their use on spinning and operating reserve requirements. How the information revealed by the contract selections of market participants can be used in security and system planning will be explored. The mathematical framework for determining socially optimal levels of system security will be extended to incorporate the use of optional forwards. The basic theory of contract selection by market participants will be generalized and extended. The long-term (planning and investment) incentives and effects will be analyzed. The model of participant behavior will be extended to include the effects of inflexibility. The effect of transaction costs and imperfect information on contract selection and market efficiency will be investigated.
