Corporate Risk Management with Power Purchase Agreements

Power purchase agreements (PPAs) are a new way of purchasing (esp. green) electricity by directly linking institutional electricity consumers to the owners of renewable energy assets. Since these contracts fix electricity prices for a long-term tenor, they enable both contractual parties, buyers and sellers, to hedge against market price risk. However, PPAs may also induce new risk exposures which strongly depend on the specific price mechanism negotiated in a PPA. This chapter shows the gain and risk structure of major PPA types and evaluates the performance of the largest PPA closed in continental Europe during the COVID-19 crisis. Our results indicate that buyers should carefully match their risk appetite and price expectation with the available PPA price mechanism to negotiate the optimal solution.