Corporate Risk Management with Power Purchase Agreements

Andreas Horsch and Steffen Hundt

Chapter 17 in Modern Finance and Risk Management:Festschrift in Honour of Hermann Locarek-Junge, 2022, pp 379-400 from World Scientific Publishing Co. Pte. Ltd.

Abstract: 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.

Keywords: Finance; Risk Management; Commodities; Energy Finance; Risk; Cryptocurrencies; Asset Management; Banking; Behavioral Finance; Behavioural Finance; Markowitz; Portfolio Selection; Asset Allocation; Crowdfunding; COVID; Pandemic; Corona; Investment Strategies; Low-Risk Investments; Social Banks; Excess Liquidity; Cost of Capital; Utilities; Network Industries; Private Equity; Small and Medium-Sized Enterprises; Black Swan; Statistical Inference; Maximum Likelihood; Bayesian Methods; Tail Risks; Conditional Value-at-Risk; Tail Nonlinearly Transformed Risk; Capital Constraints; Bank Regulation; Subjective Risk Assessment; Expert Knowledge; Model Risk; Risk Factors; Option Pricing; Volatility; Resilience; Supply Chains; Disruption; Systemic Risk; Oil; Renewable Energies; Corporate Risk Management; Power Purchase Agreements; Gold; Precious Metals; Dynamic Correlation; Mixed Data Sampling (search for similar items in EconPapers)
JEL-codes: G11 G3 G32 G4 (search for similar items in EconPapers)
Date: 2022
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