Pricing termination risk of power purchase agreements for renewable energy projects in emerging markets

Our paper focuses on the renewable energy sector, specifically on onshore and offshore wind farms in emerging markets and develops a model to value termination risk. We develop a real options model to quantify termination risk from policy and regulatory changes in emerging markets. Our model assesses the risk that a state-owned entity might switch from buying electricity at a fixed price from a wind farm to a cheaper alternative, like crude oil. Our results show that key factors influencing termination risk include the fixed tariff, corporate tax rate, oil price volatility, and reputational costs, while interest rates and tenor are less significant. • Real-options framework for valuing PPA termination risk in emerging markets. • Model tailored to non-liberalized electricity systems without market prices. • Crude oil used as transparent proxy for alternative energy cost incentives. • Least-Squares Monte Carlo applied to quantify offtaker termination behavior. • Key drivers identified: tariffs, tax rate, oil volatility, and reputational costs.