Motivation: Decarbonizing electricity generation is crucial to combat climate change. Many Fortune 500 companies have been increasingly investing in renewable energy to reduce their carbon footprints. A common way to invest in renewable energy is to sign a power purchase agreement (PPA) with a renewable power producer.
The global renewable PPA volume has increased by around 6 fold from 2015 to 2021 and is estimated to grow even more in upcoming years. Despite the prominence of this investment tool in practice, there is no prior work that investigates the optimal design of corporate PPAs with a prospective renewable energy production facility. Our paper studies this topic.
Model: We analyze a setting where the company decides when to sign a long-term PPA with a renewable energy developer, considering the wholesale market dynamics over time. The company also chooses a transfer payment for the developer, which induces the capacity of a new renewable energy facility as well as a price for renewable energy generation. The company faces an uncertain electricity demand, and the developer’s renewable energy production quantity is random at any given time. The company’s objective is to maximize its expected total discounted benefit from the renewable power purchase agreement.
Main Results/Insights: We find that under the optimal PPA (for the company), although a decrease in renewable energy investment cost shortens the time to sign the PPA, it strictly reduces the renewable energy investment size. This result offers a key policy insight: Federal investment tax credit for renewable facilities can unintendedly reduce the sizes of new renewable energy projects when they are developed based on a PPA.
We also find that total renewable energy generation under the PPA is maximized when the renewable energy site has moderate efficiency (i.e., moderate capacity factor). Thus, in contrast to the common understanding in practice, restricting renewable energy development to most efficient sites benefits neither the company, nor the developer, nor the environment.
(Joint work with Zuguang Gao and John Birge)
Bio: Nur Sunar is an Associate Professor of Operations and Sarah Graham Kenan Scholar at the Kenan-Flagler Business School of the UNC at Chapel Hill. She received her Ph.D. from Stanford Graduate School of Business with a thesis titled “Management Problems in Energy and Sustainability.” Her current research interest is to study innovative business models, technologies, and policies, with a focus on energy, sustainability, and inclusion. A key theme of her recent research is doing good with operations research and management science.
Dr. Sunar is particularly interested in innovative business models and novel challenges related to renewable energy technologies (e.g., residential solar panels, large-scale renewable energy technologies, online solar marketplaces), sustainability practices of companies/organizations (e.g., voluntary carbon offsetting) and smart city technologies (e.g., the Internet of Things, smart meters, and residential batteries). She is also passionate about innovative business solutions for inclusive health. Her earlier work examines firms’ investment strategies under incomplete information and the design of service systems.
Dr. Sunar has collaborated with a variety of companies for research. She uses various methods, including machine learning methods (clustering, deep learning, and text mining), data-driven optimization, stochastic control, game theory and econometrics, in her research.
Dr. Sunar has published papers in leading journals such as Management Science, Operations Research and M&SOM. Her research received multiple prestigious awards, including the INFORMS Service Science Cluster Best Paper Award, the INFORMS Data Mining Best Paper Award, and the People’s Choice Award in the Early-Career Sustainable Operations Management Workshop.
Dr. Sunar has taught the core Operations Management course for the MBA and undergraduate programs at the Kenan-Flagler Business School. In recognition of her research and teaching achievements, she was named one of Best 40-under-40 MBA Professors by Poets & Quants in 2022. She has also been listed in the MBA All-Star Teaching List at the UNC Kenan-Flagler Business School.
Dr. Sunar currently serves as a Senior Editor at the Production and Operations Management journal. She also serves as a referee for leading journals, and received multiple Meritorious Service Awards from both Management Science and M&SOM. In the past, she served as the cluster chair for the MSOM-Sustainability track at the INFORMS Annual Meeting, and as a co-chair of the MSOM Sustainable Operations SIG Conference.