Efficient Frontiers for Short-term Sales of Spot and Forward Wind Energy in Texas

Abstract

Texas’s windfarm construction continues unabated, despite wind energy’s cannibalization effect on wind generation’s investment incentive and the rising popularity of short-term wind power purchase agreements (PPAs). Using ERCOT’s monthly data for Jan-2011 to Dec-2021, we develop spot energy price forecasts by time of day (TOD) and their standard deviations to derive the efficient frontiers (EFs) for spot and forward energy sales of a risk-averse windfarm developer under a short-term wind PPA of not more than ten years. These EFs reveal a windfarm’s operating revenue forecast tends to increase with the PPA’s forward energy prices. Further, the windfarm’s revenue risk and forecast move in tandem, akin to the risk-return relationship rooted in Markowitz’s portfolio theory. Hence, the developer tends to sell one hundred percent (<100%) of the windfarm’s energy output at forward energy prices that are above (below) spot energy price forecasts by TOD for recovering wind generation’s levelized cost of energy.

JEL Classification: Q41, Q42, Q47, Q48

Keywords

wind energy development efficient frontiers short-term power purchase agreements spot energy sale forward energy sale Texas

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