Renewable entry costs, project finance and the role of revenue quality in Australia's National Electricity Market

Nicholas Gohdes, Paul Simshauser () and Clevo Wilson

Energy Economics, 2022, vol. 114, issue C

Abstract: The cost of capital is among the most important variables determining the feasibility of investment in renewable energy projects. In Australia's National Electricity Market, the ability of new variable renewable energy (VRE) plant to arrange requisite project finance at favourable rates largely determines project viability. Such financings are typically only achieved when VRE projects are underpinned by long-dated Power Purchase Agreements (PPA), under which prices are guaranteed by an investment-grade counterparty. In this article, we quantify the relationship between PPAs, counterparty credit quality and the cost of capital in the context of Australia's energy-only wholesale market under conditions of policy uncertainty. Our analysis benefits from the application of confidential data from Australia's capital markets. We find higher credit quality drives higher gearing, and somewhat counterintuitively, lower expected returns to equity. This in turn produces a lower cost of capital and by implication, higher post-construction VRE plant valuations. This outcome may appear to be at odds with Modigliani and Miller's classic 1958 article but of course it is not, risk has merely been repackaged and reallocated.

Keywords: Renewable energy; PPAs; Project finance; Counterparty credit; Cost of capital (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Renewable entry costs, project finance and the role of revenue quality in Australia's National Electricity Market (2022)
Working Paper: Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:114:y:2022:i:c:s0140988322004418

DOI: 10.1016/j.eneco.2022.106312

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