quant research // summarizing the paperLOADING
Nicola Bartolini, Silvia Romagnoli, Amia Santini · 2026-07-06
The paper builds a mathematical framework to price wind Power Purchase Agreements (PPAs) — long-term contracts to buy renewable electricity — while accounting for the risk that the other party defaults. It models electricity prices and variable wind output together, folds in default probabilities, and computes Credit and Debit Valuation Adjustments (CVA/DVA) to reflect the fair value of that bilateral credit risk.
Why it matters: Anyone financing, underwriting, or offtaking renewable power deals could use this to put a transparent number on counterparty credit risk in PPAs, which are otherwise opaque OTC contracts. It highlights that even with external guarantee schemes, internal credit assessment stays necessary — a practical reminder for lenders and energy-project investors.
⚠ This is a modeling framework relying on assumptions about price/output dynamics and default probabilities, not a validated live-trading result, and it targets specialist energy-finance participants rather than everyday investors.
Power Purchase Agreements (PPAs) are bilateral over-the-counter contracts central to renewable energy financing. While their capacity to stabilise revenues and hedge price risk is well recognised, their OTC structure exposes both parties to counterparty credit risk. This is a dimension yet to be explored in the literature, particularly given the dual price and volumetric uncertainty inherent in renewable sources. This paper develops a framework for the pricing and valuation of wind power PPAs and for quantifying this risk through Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA). We model the joint dynamics of electricity spot prices and renewable output, incorporate default probabilities, and compute valuation adjustments that reflect the fair value of bilateral credit risk. The framework provides market participants with a transparent metric for PPA valuation under counterparty risk. While initiatives such as the European Investment Bank's pilot guarantee scheme aim to mitigate credit risk for certain offtakers, such interventions do not cover all PPA transactions. Rigorous internal credit risk assessment therefore remains indispensable for lenders, producers, and offtakers alike.
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AI summary generated from the paper’s public abstract via arXiv; it may miss nuance — read the source before relying on it. Thank you to arXiv for its open-access interoperability; StockTools is not affiliated with arXiv, and all rights remain with the authors. Educational only, not financial advice.