Optimal contracts for renewable electricity

Sarah Parlane and Lisa Ryan

Energy Economics, 2020, vol. 91, issue C

Abstract: Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. This paper characterizes the contracts that minimize the cost of procuring a given amount of renewable energy from two risk averse, energy generators who are inherently unreliable (such as wind and solar). We contrast outcomes arising when investments are set in centralized and decentralized settings, with the absence of reliability addressed by either issuing orders in excess of what is needed or by investing in improved reliability. Our results suggest that future contracts may be geared towards a greater reliance on order inflation and lower investments in reliability as the cost of renewable energy keeps falling. The implications of these results for grid congestion and electricity spot market prices should be of interest to regulators and transmission system operators.

Keywords: Renewable electricity contracts; Power purchase agreements; Newsvendor model; Risk aversion; Order inflation; Moral hazard (search for similar items in EconPapers)
JEL-codes: D81 D86 L14 L24 L94 Q21 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:91:y:2020:i:c:s0140988320302176

DOI: 10.1016/j.eneco.2020.104877

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