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Assessing the value and risk of renewable PPAs

Author

Listed:
  • Pombo-Romero, Julio
  • Rúas-Barrosa, Oliver
  • Vázquez, Carlos

Abstract

Renewable Energy Power Purchase Agreements (RE PPAs) are considered to be a key tool in order to foster RE deployment, as they allow for the reduction of uncertainty for all parties as well as facilitating access to the long term finance required for such projects. Nevertheless, RE PPA adoption is hampered by a number of barriers, including the high level of guarantees demanded from offtakers, a problem which is related to the shortcomings of existing assessment methodologies, in particular, determining the credit risk of the PPA itself. In this work, we propose an RE PPA assessment model focused on the main drivers of value and risk for the offtaker which are cost and volatility reductions, compared to the electricity market. By identifying and valuing the options for the offtaker embedded in the PPA, it is possible to determine the default probability at any given time and the expected loss for the producer, thus allowing for the estimation of the amount of guarantees needed to hedge the credit risk.

Suggested Citation

  • Pombo-Romero, Julio & Rúas-Barrosa, Oliver & Vázquez, Carlos, 2024. "Assessing the value and risk of renewable PPAs," Energy Economics, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:eneeco:v:139:y:2024:i:c:s0140988324005693
    DOI: 10.1016/j.eneco.2024.107861
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    More about this item

    Keywords

    Power purchase agreements (PPAs); Pricing; Credit risk; Renewable energy; Levelized cost of energy (LCOE);
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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