Hedging renewable power purchase agreements

Abstract

This paper uses closed-form and copula models to analyze short-term and medium-term financial instruments' hedging effectiveness and tail risk reduction in long-term renewable Power Purchase Agreements (PPAs). Using monthly and yearly exchange-traded electricity futures, we study PPA contracts from California, Germany, France, Italy, and Spain. The overall low or negative hedging effectiveness and inconsistent tail risk reductions indicate that traditional linear hedging strategies may not consistently achieve the desired risk mitigation. Monthly contracts are generally more effective in California, Germany, and France, while yearly contracts are preferable in Italy and Spain, highlighting the need for market-specific hedging strategies.