Quantifying and Managing Wind Energy Drought Risk Under Physical Power Purchase Agreements in ERCOT

Wind energy droughts — sustained periods of below-expected generation driven by weather conditions rather than operational failure — pose material financial risks to producers operating under physical power purchase agreements (PPAs), yet remain understudied in the United States context. This study applies the United  Nations Office for Disaster Risk Reduction’s National Disaster Risk Assessment framework to quantify and manage wind energy drought risk in ERCOT, the deregulated Texas electricity market, across three analytical dimensions: hazard, exposure, and vulnerability. Drawing on 75 years of ERA5 climate reanalysis data, the hazard analysis demonstrates that prolonged wind energy droughts are a recurring and foreseeable feature of the ERCOT wind resource rather than exceptional tail events, with near-certain annual probabilities of multi day generation shortfalls in the West and South load zones. The exposure analysis maps 128 grid cells with installed onshore wind capacity and develops a composite alignment score quantifying the degree to which localized generation shortfalls co-occur with zone-wide drought conditions. The vulnerability analysis uses real-time settlement price data from 2020 to 2024 to demonstrate that drought hours are associated with statistically significantly elevated electricity prices across multiple price thresholds, with the relationship most pronounced for intermediate-duration, high-severity events. PPA simulations across 48 grid cells reveal that while mean annual debt service coverage ratios remain comfortably above lender minimums, monthly tail risk is material, with 6.7% of months falling below the critical 1.0 threshold under baseline conditions. Among several risk management strategies evaluated, geographic diversification combined with targeted parametric insurance emerges as the most cost-effective approach, achieving the greatest tail risk reduction per dollar of annual cost. These findings suggest that layered, multi-instrument risk management frameworks are essential to improving the bankability of wind energy projects and sustaining investment in the renewable energy transition under increasing physical and financial uncertainty.