When markets don't deliver : bilateral hedging by means of PPAs in managing intertemporal price risks in power generation investments

Managing intertemporal price risk in the long term is essential to make investments in renewable power generation bankable. When the derivative markets don't delivery enough price hedging products nor market liquidity, many rely on bilateral hedging by means of Power Purchase Agreements (PPAs). With the fast pace of change in power system fundamentals that Europe is now facing, effective PPA markets can play a key role in enabling a smoother transition to renewables. This paper aims to describe the price discovery process in bilateral hedging in the Nordic PPA markets, as well as their most important terms and conditions to understand how the markets can respond to challenges in the changing business environment. The paper finds that there is a need for stronger price references and more transparent price discovery processes in PPA markets, e.g. by means of standardized and more short-term contracts to reduce transaction costs and improve market access.
QC 20230613