Virtual Power Contracts and Seller Default Risk
Virtual power contracts - financial instruments that settle against electricity-market outcomes - are increasingly being used by corporate buyers and governments to hedge electricity price risk and support efficient investments in new energy technologies. Because electricity sellers are subject to production and congestion uncertainty in the underlying commodity network, settlement losses can exceed spot-revenues. Under limited liability, this creates counterparty default risk for the buyer. We study the optimal design of virtual power contracts when a buyer procures from privately informed sellers subject to quantity and price-separation risk. The optimal contract conditions payments on generation and transmission outcomes, providing production and locational insurance. Common designs, such as fixed-price contracts-for-differences, provide price-stability but may expose the buyer to seller default risk. More flexible designs, such as adaptive-price contracts with a floor, improve the buyer's ability to screen generators with heterogeneous default risk but introduce greater price volatility. Our results highlight a trade-off between screening counterparty risk and price stability, and provide guidance for the design of long-term electricity procurement auctions.
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- 141 Warren St
- New Jersey Institute of Technology
- Newark, New Jersey
- United States 07103
- Building: ECE
- Room Number: 202
- Starts 17 April 2026 12:00 PM UTC
- Ends 12 May 2026 02:00 PM UTC
- No Admission Charge
Speakers
Felipe Verastegui of Columbia University
Virtual Power Contracts and Seller Default Risk
Virtual power contracts - financial instruments that settle against electricity-market outcomes - are increasingly being used by corporate buyers and governments to hedge electricity price risk and support efficient investments in new energy technologies. Because electricity sellers are subject to production and congestion uncertainty in the underlying commodity network, settlement losses can exceed spot-revenues. Under limited liability, this creates counterparty default risk for the buyer. We study the optimal design of virtual power contracts when a buyer procures from privately informed sellers subject to quantity and price-separation risk. The optimal contract conditions payments on generation and transmission outcomes, providing production and locational insurance. Common designs, such as fixed-price contracts-for-differences, provide price-stability but may expose the buyer to seller default risk. More flexible designs, such as adaptive-price contracts with a floor, improve the buyer's ability to screen generators with heterogeneous default risk but introduce greater price volatility. Our results highlight a trade-off between screening counterparty risk and price stability, and provide guidance for the design of long-term electricity procurement auctions.
Biography:
Felipe Verastegui is a fourth year Ph.D. student in the Department of Industrial Engineering and Operations Research at Columbia University in the City of New York co-advised by Agostino Capponi and Jay Sethuraman. His research examines market design and optimization algorithms in power and energy systems, as well as the structure and organization of financial markets for real assets. He is a research affiliate at Columbia's Center for Digital Finance and Technologies and was an inaugural Global Energy Fellow at Columbia's Center on Global Energy Policy. Before joining Columbia, Felipe held an adjunct position at PUC Chile and worked with the Chilean government in the design and rollout of policies for the energy transition.
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