Optimizing Price Markup: The Impact of Power Purchase Agreements and Energy Production Uncertainty on the Economic Performance of Onshore and Offshore Wind Farms

Abstract

Wind energy is rapidly expanding its capacity as part of the global energy transition. To ensure economic viability, wind energy projects increasingly rely on risk mitigation strategies. While Power Purchase Agreements (PPAs) manage spot market price variability, wind farms still face energy production uncertainty, directly impacting the quantity of energy generated. This study presents a comprehensive analysis of the price markup for onshore and offshore wind farms, considering energy production uncertainty under PPA and non-PPA scenarios. The study examines key metrics such as equilibrium prices, price markups, Internal Rate of Return (IRR), Net Present Value (NPV), and their correlation to energy production risk. Results demonstrate that PPAs significantly alter the relationship between price markup and variability. Offshore wind farms can potentially benefit more from PPAs compared to onshore, especially at lower levels of wind energy variability. However, as variability increases, the risk mitigation provided by PPAs diminishes, and both onshore and offshore wind farms may require higher price markups for financial viability. These findings highlight the necessity of carefully designed PPA structures and pricing strategies to ensure long-term competitiveness and sustainability of wind energy projects.