Pricing and hedging renewable power purchase agreement floors under stochastic generation

Abstract

Abstract Renewable power purchase agreements (PPAs) expose generators and offtakers to capture‐price risk because realised revenue depends on prices during renewable production hours. Downside protection written on the production‐weighted settlement price is economically relevant, but difficult to mark and hedge because the index is non‐tradable and depends jointly on power prices and renewable output. This article develops a futures‐anchored statistical mark‐to‐model and hedging framework for long‐dated Asian floors embedded in renewable PPAs when renewable generation remains stochastic. The framework is not interpreted as a unique arbitrage‐free price in a complete market. Instead, it isolates the hedgeable component through liquid German baseload futures and updates the remaining price‐generation exposure using deterministic seasonal profiles and a vector autoregression for deseasonalised German day‐ahead price and wind‐generation residuals. Moment matching and a delta‐method approximation yield a tractable Bachelier‐style floor mark and operational futures hedge ratios. In pre‐delivery backtests for the 2024 and 2025 delivery years, the stochastic hedge reduces daily residual variance by 94.7% and 89.0%, respectively compared with 69.1% and 47.9% for a deterministic‐generation hedge. The results show that stochastic renewable production is a first‐order input for practical risk management of renewable PPA optionality.