🤖 AI Summary
This study addresses the valuation and risk quantification challenges inherent in renewable energy power purchase agreements (PPAs), which are exposed to counterparty credit risk due to their over-the-counter structure and subject to dual uncertainties in electricity prices and generation output. The work proposes a novel framework that, for the first time, incorporates bilateral credit risk adjustments into PPA valuation by modeling the joint stochastic dynamics of electricity prices and wind power generation. Integrating default probabilities with this coupled uncertainty, the approach employs Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA) to derive a fair value estimate. By coherently accounting for both price and production volatility, the method provides generators, off-takers, and lenders with an endogenous, transparent tool for risk measurement and informed decision-making.
📝 Abstract
Power Purchase Agreements (PPAs) are bilateral over-the-counter contracts central to renewable energy financing. While their capacity to stabilise revenues and hedge price risk is well recognised, their OTC structure exposes both parties to counterparty credit risk. This is a dimension yet to be explored in the literature, particularly given the dual price and volumetric uncertainty inherent in renewable sources. This paper develops a framework for the pricing and valuation of wind power PPAs and for quantifying this risk through Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA). We model the joint dynamics of electricity spot prices and renewable output, incorporate default probabilities, and compute valuation adjustments that reflect the fair value of bilateral credit risk. The framework provides market participants with a transparent metric for PPA valuation under counterparty risk. While initiatives such as the European Investment Bank's pilot guarantee scheme aim to mitigate credit risk for certain offtakers, such interventions do not cover all PPA transactions. Rigorous internal credit risk assessment therefore remains indispensable for lenders, producers, and offtakers alike.