Financing strategies for coal-electricity supply chain under yield uncertainty

The financing strategies for a coal-electricity supply chain in which the coal company has capital constraint and faces yield uncertainty were studied. We propose an advance payment mechanism: in the coal company's initial production period, the electricity company provides advance payment to the coal company, and the coal company pays interest to the electricity company as the risk compensation. The optimal operation strategies for the coal company and the electricity company under the advance payment mechanism are derived and compared with those under the bank loan financing case. We find that, the expected profit functions of the coal company and the electricity company under the advance payment mechanism are the same with those under the case that the coal company has enough capital; under the advance payment mechanism, the profits of the coal company and the electricity company are higher than those under the bank financing case. We also discuss the compensation interest rate of the advance payment and the ordering and production quantities under the advance payment mechanism.