Aparna Gupta

Designing Risk-free Service for Renewable Wind and Solar Resources

Speakers: Aparna Gupta and Sai Palepu, Lally School of Management, RPI.

Abstract: Renewable generation is inherently stochastic. We develop a risk mitigation strategy by applying principles of securitization to the stochastic generation of wind and solar resources. We demonstrate the design of a risk-free tranche for the renewable assets as a risk-free service the renewable resource can offer in the day-ahead market. The risk-free tranche needs to be comparably risk-free relative to a benchmark for the power markets, against which we evaluate the tranche’s risk-reward performance. Analyzing the risk profiles of renewable power generation on different days of a year, we identify the critical determinants of the risk-free tranche and develop a valuation framework to determine the renewable resources’ bidding strategy in the day-ahead market. Analogous to a risk-free instrument in the financial markets, we create a risk-free benchmark for power markets in terms of a combined-cycle natural gas generator. The risk-return of the risk-free benchmark is used to evaluate the performance of the designed risk-free tranche. We find that our risk-free tranche for renewable wind and solar assets outperforms the risk-free benchmark in terms of their respective risk-return trade-offs. Hence renewable energy producers can leverage the designed risk-free tranche to place competitive bids and participate in the day-ahead market at par with the conventional generators. Adoption of such risk management strategies can help renewable producers to graduate from being mere price takers in the power markets.