Generators operating in RTO/ISO power markets can enter into bilateral power purchase contracts directly with load serving entities (LSE) that purchase power for distribution to end-use customers. These bilateral contracts can serve to establish a consistent price for electricity supplied by a power generating facility. From the power generator’s perspective, the risk of low wholesale power prices is reduced and these contracts can provide a stable revenue stream for the generator. The mechanism for settling the power purchase price defined in the bilateral contract is sometimes referred to as contracts for differences. The difference between the market clearing price and the power purchase price in a bilateral contract is generally settled between the contract counterparties. While these types of contracts can mitigate the impact of low and negative wholesale power prices, since many bilateral contracts are on a short-term basis (e.g., one to three years), persistent low and negative wholesale prices could impact a generator’s ability to negotiate future electricity purchase contracts.
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