Nur Sunar is an Associate Professor of Operations and Sarah Graham Kenan Scholar at the Kenan-Flagler Business School of the UNC at Chapel Hill. She received her Ph.D. from Stanford Graduate School of Business with a thesis titled “Management Problems in Energy and Sustainability.” Her current research interest is to study innovative business models, technologies, and policies, with a focus on sustainability, energy, and inclusion. A key theme of her recent research is doing good with operations research and management science.
Abstract:
Motivation: Decarbonizing electricity generation is crucial to combat climate change. Many Fortune 500 companies have been increasingly investing in renewable energy to reduce their carbon footprints. A common way to invest in renewable energy is to sign a power purchase agreement (PPA) with a renewable power producer.
The global renewable PPA capacity has increased by around 15-fold since 2014 and is estimated to grow even more in upcoming years. Despite the prominence of this investment tool in practice, there is no prior work that investigates the optimal design of corporate PPAs with a prospective renewable energy generation facility. Our paper studies this topic.
Model: We analyze a setting where the company decides when to sign a long-term PPA with a renewable energy developer, considering the wholesale market dynamics over time. The company also chooses a transfer payment for the developer, which induces the capacity of a new renewable energy facility as well as a price for renewable energy generation. The company faces an uncertain electricity demand, and the developer’s renewable energy production quantity is random at any given time. The company’s objective is to maximize its expected total discounted benefit from the renewable power purchase agreement.
Main Results/Insights: We employ optimal stopping techniques in our analysis. We find that under the company’s optimal PPA, although a decrease in renewable energy investment cost shortens the time to sign the PPA, it strictly reduces the renewable energy investment size. This result offers a key policy insight: Federal investment tax credit for renewable energy technologies can unintendedly reduce the sizes of new renewable energy projects when those projects are developed based on a PPA.
We also find that total renewable energy generation under the PPA is maximized when the renewable energy site has moderate efficiency (i.e., moderate capacity factor). Thus, in contrast to the common understanding in practice, restricting renewable energy development to most efficient sites benefits neither the developer nor the environment.
