Modelling Green PPAs in Power Markets - Pricing, Hedging and Risk Management of Green Power Purchase Agreements in Electricity Markets

Green Power Purchase Agreements (Green PPAs) are contracts that trade electricity from renewable sources for a fixed price. These contracts have gained importance over the last years and are increasingly traded because they facilitate investment in renewable energy assets in lieu of state financed schemes. We introduce a quantitative stochastic modelling framework for Green PPAs. Within this framework we use techniques from Financial Mathematics to derive closed-form solutions for the fair value of Green PPAs as well as corresponding hedge quantities. Furthermore, we present some empirical results and comment on key features of Green PPAs and their main risk drivers