Designing Risk-free Service for Renewable Wind and Solar Resources

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, which the renewable resource can offer in the day-ahead market. 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. 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. Hence, 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 metric 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 has comparable characteristics to the risk-free benchmark in terms of its risk-return trade-off. 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 to price setters in the power markets