Mitigating financial risk of corporate power purchase agreements via portfolio optimization

Abstract

In a world where corporate sustainability commitments are increasing, and governments are starting to phase out of renewable energy subsidy schemes, renewable power purchase agreements (PPAs) can act as a substitute to the governmental support. The combination of renewable energy projects placed in multiple locations (multi-location) and based on different technologies (multi-technology) has the potential to offset the volatility of single renewable energy projects and the risk associated with them. This paper presents a stochastic optimization framework to maximize the expected financial performance of multi-location and multi-technology PPAs while minimizing the financial risk associated with them, which is defined as the likelihood of having low financial performance, from the corporate off-taker perspective. This is achieved through the assessment and optimization of multi-location and multi-technology PPA portfolios. Conditional value at risk is applied to reduce the risk of low financial performance while preserving high expected financial gains. The developed framework enables the identification of the optimal trade-offs between expected financial performance and financial risk, and of the corresponding optimal configurations of PPA portfolios. The benefits of multi-technology and multi-location on portfolio risk reduction are demonstrated via the application to two PPAs portfolios, namely, one compounding projects with different technologies located in the same country, and one compounding different technologies across different countries. Results show that higher expected financial gains are obtained by investing in the single, most-convenient PPA project, whereas combining projects reduces the overall financial risk and allows to meet the off-taker energy demand profile with higher expected financial performance.