Prudent Electricity Procurement by a Load Serving Entity

Kang Hua Cao, Han Steffan Qi, Chi-Keung Woo, Jay William Zarnikau () and Raymond Li
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Kang Hua Cao: Department of Accountancy, Economics and Finance, Hong Kong Baptist University, Hong Kong, China
Han Steffan Qi: Shenzhen Audencia Financial Technology Institute, Shenzhen University, Shenzhen 518060, China
Chi-Keung Woo: Centre for Sustainable Development Studies, Hong Kong Baptist University, Hong Kong, China
Jay William Zarnikau: Department of Economics, The University of Texas at Austin, Austin, TX 78712, USA

Energies, 2025, vol. 18, issue 3, 1-16

Abstract: Motivated by the projected solar and wind capacity additions around the world, we model the energy procurement decision of a load serving entity (LSE) faced with alternatives of solar power purchase agreements (PPAs), wind PPAs, non-renewable energy forward contracts, and spot energy purchases in a wholesale electricity market with uncertain prices. Using a pseudo-data sample of over one million observations, we estimate a translog cost function to find that the LSE’s own-price elasticity estimates range from −1.87 for nighttime spot MWh demands to −13.1 for forward MWh demands. MWh demands are influenced by solar and wind capacity factors, daytime and nighttime retail sales, and spot energy price forecasts. The LSE’s optimal procurement of solar capacity is roughly twice the wind capacity, corroborating the ratios of projected solar and wind capacity additions in regions around the world. If the LSE’s existing energy mix is nearly all renewable, it becomes carbon-free when solar and wind power purchase agreements have declining energy prices or when forward energy price and spot energy price forecasts increase over time. These results imply that piecemeal policy measures can have conflicting outcomes, calling for integrated resource planning under wholesale market competition and price uncertainty.

Keywords: MWh demands; risk-adjusted budget minimisation; variable renewable energy; wholesale price uncertainty (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: 2025
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