PPA Investments of Minimal Variability

We analyse how to use power purchase agreements (PPA) as a spatial hedge to reduce the variability of production less demand from intermittent power sources such as wind and solar. An idealised continuous spatial hedging problem is used as benchmark, providing the minimal possible variability that can be achieved by spreading production locations geographically. It is demonstrated that the variability is reduced with the number of locations included in the portfolio. The analysis rests on modelling capacity factors, which describes the possible production from a power plant of 1MW installed capacity of renewable solar or wind, as a square-integrable random field in Hilbert space with an associated covariance operator. A case study of a PPA portfolio of solar power plants in Germany illustrates how the variability of production less demand can be reduced significantly by a geographical hedge. The analysis in this chapter also has applications to energy systems planning.