Mutually beneficial pricing strategies for corporate power purchase agreements

Renewable power plant owners require new business models as governments phase out subsidy schemes. Meanwhile, the interest of corporations in renewable power procurement to reduce their carbon footprint and hedge against electricity price volatility increases. Corporate power purchase agreements (CPPAs), as direct agreements between producers and consumers, can conciliate both interests and are thus growing in number. This paper provides a formal framework to analyze the price and volumetric conditions under which a CPPA is mutually beneficial for a wind power plant (WPP) owner and a large electricity consumer considering the uncertainty of the spot market electricity prices and the wind generation. We show that although the players’ cash flows in a CPPA constitute a zero-sum game, the cash flows’ variances can be reduced mutually. This variance reduction is valuable as it can be translated into bonuses for each contracting party. To quantify these bonuses we consider either a reduced capital costs for the upfront investment on the WPP side or a reduced liquid capital need for covering the market risk on the consumer side. We use historic electricity market and wind availability data to evaluate different price-volume configurations of an exemplary CPPA with the proposed framework. We conclude that the mutually beneficial pricing strategies for CPPAs are enabled and determined by the risk aversion behavior of third parties such as shareholders and lenders.