Power Purchase Agreements with Renewables: Optimal Timing and Design

In this paper, we design a power purchase agreement (PPA) where the firm agrees to make a certain transfer payment to the renewable generator, and the generator invests that payment to build new renewable energy facilities. The firm will then have access to all electricity generation from the new facilities for a long-term period. The firm dynamically decides when to start the PPA and the transfer payment based on the evolving market conditions. The firm's objective is to maximize its long-term discounted benefit (total savings) from signing the PPA. We mathematically formulate the firm's decision problem as an optimal stopping problem and provide analytical solutions. We also provide insights into how the firm's optimal investment capacity, expected savings, and the expected total new generation change with respect to different problem parameters.