AbstractForward contract is a useful tool for hydropower producers to hedge revenue uncertainty sourced from varied spot prices. However, few studies have been explored to jointly derive the optimal forward contract and operating rules to guide hydropower operations. To address this issue, the following steps for cascade reservoirs are proposed: (1) a two-layer nested approach is used to derive optimal contract targets coordinated with operation trajectory (saying reservoir water level time series) by inputting deterministic inflows, (2) the forms of the operating rules are then identified based on the optimal operation trajectory from the first step, and (3) a simulation-based optimization approach is used to jointly refine the optimal contract and operating rules with the forms identified in the second step. With China’s Hubei Province as the market boundary, the Qing River cascade reservoir system was selected as the case study. The results show that (1) the two-layer nested approach could find the optimal deterministic operation together with contract targets; (2) the total cascade output is related to both available energy and spot price, with the coefficients of determination for each month mostly greater than 0.5; and (3) the refined operating rules and contract effectively improved the annual hydropower revenue by 3.65% ($14.15 million) compared to that of the conventional operating rules. The proposed method to jointly derive forward contract and operating rules is helpful for gaining more revenue under long-term hydropower operations.

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