Physical vs Virtual corporate power purchase agreements: Meeting renewable targets amid demand and price uncertainty

Seyed Danial Mohseni Taheri, Selvaprabu Nadarajah and Alessio Trivella

European Journal of Operational Research, 2025, vol. 320, issue 1, 256-270

Abstract: Power purchase agreements (PPAs) have become an important corporate procurement vehicle for renewable power, especially among companies that have committed to targets requiring a certain fraction of their power demand be met by renewables. PPAs are long-term contracts that provide renewable energy certificates (RECs) to the corporate buyer and take two main forms: Physical vs Virtual. Physical PPAs deliver power in addition to RECs, while virtual PPAs are financial contracts that hedge (at least partially) power price uncertainty. We compare procurement portfolios that sign physical PPAs with ones that sign virtual PPAs, focusing on fixed-volume contracts and emphasizing uncertainties in power demand and the prices of power and RECs. In particular, we first analyze a two-stage stochastic model to understand the behavior of procurement quantities and costs when using physical and virtual PPAs as well as variants that limit risk. We subsequently formulate a Markov decision process (MDP) that optimizes the multi-stage procurement of power to reach and sustain a renewable procurement target. By leveraging state-of-the-art reoptimization techniques, we solve this MDP on realistic instances to near optimality, and highlight the relative benefits of using PPA types to meet a renewable target. We underscore a trade-off between expected cost and cash flow variance that buyers should consider when choosing between physical and virtual PPAs. Moreover, advanced reoptimization techniques significantly impact the ability to manage this trade-off.

Keywords: Decision analysis; Renewable energy targets; Procurement; Power purchase agreements; Markov decision processes (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:320:y:2025:i:1:p:256-270

DOI: 10.1016/j.ejor.2024.08.002

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