Assessing the value and risk of renewable PPAs

Renewable Energy Power Purchase Agreements (RE PPAs) are considered to be a key tool in order to foster RE deployment, as they allow for the reduction of uncertainty for all parties as well as facilitating access to the long term finance required for such projects. Nevertheless, RE PPA adoption is hampered by a number of barriers, including the high level of guarantees demanded from offtakers, a problem which is related to the shortcomings of existing assessment methodologies, in particular, determining the credit risk of the PPA itself. In this work, we propose an RE PPA assessment model focused on the main drivers of value and risk for the offtaker which are cost and volatility reductions, compared to the electricity market. By identifying and valuing the options for the offtaker embedded in the PPA, it is possible to determine the default probability at any given time and the expected loss for the producer, thus allowing for the estimation of the amount of guarantees needed to hedge the credit risk. • RE PPAs contribute to foster green energy projects, but they are difficult to assess. • A new methodology to assess the value and risk of RE PPAs is proposed. • The model provides offtaker’s default probabilities and producer’s expected loss. • Offtaker’s collateral requirements are estimated, with a high reduction of guarantees.