An Off-Site Power Purchase Agreement (PPA) as a Tool to Protect against Electricity Price Spikes: Developing a Framework for Risk Assessment and Mitigation

Karolina Kapral, Kobe Soetaert and Rui Castro ()
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Karolina Kapral: Instituto Superior Técnico, University of Lisbon, Av. Rovisco Pais, 1049-001 Lisbon, Portugal
Kobe Soetaert: E&C Consultants, Spinnerijkaai 43, 8500 Kortrijk, Belgium
Rui Castro: INESC-ID/IST, University of Lisbon, Rua Alves Redol, 9, 1000-029 Lisbon, Portugal

Energies, 2024, vol. 17, issue 9, 1-19

Abstract: Significant price spikes occurred as early as 2021, initially driven by low gas storage levels, a post-pandemic economic rebound and then exacerbated by the Russian invasion of Ukraine. The situation had a range of wide-ranging consequences, from rising inflation, increasing energy poverty, food insecurity, business bankruptcies and recession. A well-known tool to protect energy consumers from energy price spikes, while at the same time contributing to the development of sustainable technologies, is Power Purchase Agreements. PPAs are long-term bilateral contracts for the purchase and sale of a certain amount of electricity, usually generated from renewable sources. The primary goal of this paper is to assess how the risk associated with PPAs has evolved between 2020 and 2023. It aims to examine whether, after the events in 2022, PPAs remain a robust solution that protects the off-taker from energy price spikes, ensures greater energy budget stability and enables savings. To achieve this, the probability of PPA prices being higher than market prices is evaluated, considering the changing market landscape. Furthermore, this paper intends to gain a thorough understanding of each risk related to PPAs and the best strategies for mitigating it, to maximize the protection of the off-taker.

Keywords: Power Purchase Agreement; risk assessment; Monte Carlo simulation; energy crisis (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2024
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