Managing Volumetric Risk of Long-term Power Purchase Agreements

42 Pages Posted: 29 Nov 2018

See all articles by Bo Tranberg

Bo Tranberg

Department of Engineering; Danske Commodities

Rasmus Thrane Hansen

Jyske Bank A/S

Leopoldo Catania

Aarhus University - School of Business and Social Sciences; Aarhus University - CREATES

Date Written: November 5, 2018

Abstract

There exists a negative dependence between wind power production and electricity spot price. This is an important fact to consider for risk management of long-term power purchase agreements (PPAs). In this study we investigate this dependence by constructing a joint model using constant as well as time-varying copulas. We propose using a new generation of score-driven models as marginal model for the spot price of electricity as these are more robust to extreme events compared to ARMA-GARCH models. We apply the new model to pricing and risk management of PPAs and benchmark it against a previously published model of the ARMA-GARCH type. Our comparison shows that the score-driven model results in a statistically significant improvement of predicting the Value-at-Risk (VaR), which is of high importance for risk management of long-term PPAs. Further, comparing constant and time--varying copulas we find that all time-varying copulas are significantly better than their constant counterparts at predicting the VaR, hence time-varying copulas should be used in risk management of PPAs.

Keywords: Volumetric risk, Time-varying copula model, Score-driven model, Power purchase agreement, Electricity market

Suggested Citation

Tranberg, Bo and Thrane Hansen, Rasmus and Catania, Leopoldo, Managing Volumetric Risk of Long-term Power Purchase Agreements (November 5, 2018). Energy Economics, 2018. Available at SSRN: https://ssrn.com/abstract=3278789

Bo Tranberg (Contact Author)

Department of Engineering ( email )

Inge Lehmanns Gade 10
Aarhus C, 8000
Denmark

Danske Commodities ( email )

Vaerkmestergade 3
Aarhus C, DK 8000
Denmark

Rasmus Thrane Hansen

Jyske Bank A/S ( email )

Leopoldo Catania

Aarhus University - School of Business and Social Sciences ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark
+4587165536 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/leopoldo.catania@econ.au.dk

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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