Renewable investments, hybridised markets and the energy crisis: Optimising the CfD-merchant revenue mix

Nicholas Gohdes, Paul Simshauser () and Clevo Wilson

Energy Economics, 2023, vol. 125, issue C

Abstract: Energy markets were designed to maximise productive, allocative and dynamic efficiency. Although renewables have become the dominant investment in deregulated energy markets, decarbonisation may not proceed at a pace consistent with the aspirations of policymakers. This has led governments in a number of jurisdictions to prime markets through ‘Contracts-for-Differences’ (CfDs) or Power Purchase Agreements (PPAs), thus bringing forward investment and decarbonisation efforts. The war in Ukraine and the resulting energy market crisis only served to emphasise a sense of urgency from a security dimension. Variable Renewable Energy (VRE) projects in Australia are typically underpinned by run-of-plant PPAs, but an emerging trend has been rising number of semi-merchant projects whereby some level of spot market exposure is retained. In this article, we examine how and why the semi-merchant investment model has arisen along with the minimum contracted coverage for a bankable project financing. Results reveal for investors with a target of 60–65% debt within the capital structure, a revenue mix comprising 73–78% PPA coverage (and 22–27% merchant plant exposure) is viable and a tractable project financing. For policymakers seeking to elicit 5000 MW of VRE plant capacity, the auction need only offer ∼3800 MW of CfD's capacity, which has the benefit of reducing taxpayer exposures (cf. on-market transactions).

Keywords: PPAs; Renewable energy; Counterparty credit; Project finance; Cost of capital; Energy market crisis (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:125:y:2023:i:c:s0140988323003225

DOI: 10.1016/j.eneco.2023.106824

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