As the agent for the distributed users participating in the electricity market

electricity retailer(ER)is facing risks caused by double uncertainties from the spot market price and electricity consumption. The risks will also gradually increase with the penetration of distributed generator

energy storage system(ESS)

and other smart equipment. In transactive energy(TE)systems

ER could avoid the market risks by timely controlling ESS under special trading mechanisms. Therefore

a novel capacity contract mechanism for ESS is designed and an optimal trading strategy for ER is also discussed. With the capacity contract

ER is able to gain control rights by timely renting an ESS. Firstly

the capacity contract mechanism is elaborated and the process is introduced in detail. Secondly

a profit-maximum model for ER is formulated considering expected return and risk aversion based on cost benefit analysis

and an effective linearization method is proposed to handle the complex model. Then

the trading strategy for ER on capacity contract is discussed

and a quantitative reference index based on “cost function of ESS” and “constant yield curve of ER” is given. Finally

case study is performed to verify the proposed model and method.