Transition risk: Investment signals in a decarbonising electricity system

Will Blyth, Robert Gross, Jamie Rickman, Callum MacIver and Keith Bell

Applied Energy, 2023, vol. 352, issue C, No S0306261923013028

Abstract: Zero‑carbon electricity is a pre-requisite for decarbonisation of the wider economy and many scenarios envisage rapid expansion of renewables. IEA estimates a need to double the annual rate of investment to 2030. A rapid transition to low carbon electricity creates a risk to investors because projects being financed now will generate their revenue in a zero‑carbon electricity system for which there is no track record of price formation. Although the cost of renewable power has fallen greatly, future revenues from renewables are still affected by market price risks that are often outside the control of generators. If risks are difficult to quantify, they may be mis-priced, leading to inefficient premiums being added to the cost of capital, which could increase the overall cost of the transition. In this context many countries around the world provide support for low carbon energy, such as the UK Contracts for Difference. In this paper we investigate exposure to price risk caused by uncertainty over the mix of technologies used to achieve decarbonisation, which we term ‘transition risk’, and how this varies under different technology mixes, and for different policy regimes. We show that exposing investors to transition risk could increase the cost of delivering the renewables needed for a zero‑carbon electricity system by around 25% or £7bn/year compared to policy options that reduce exposure to wholesale market price risk. The paper concludes that as long as transition risks remain high, de-risking policy mechanisms can help to minimise the overall cost of achieving net-zero.

Keywords: Risk; Investment; Renewables; Energy transition; Wind power; Contracts for difference; Cost of capital (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0306261923013028
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:appene:v:352:y:2023:i:c:s0306261923013028

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/bibliographic
http://www.elsevier. ... 405891/bibliographic

DOI: 10.1016/j.apenergy.2023.121938

Access Statistics for this article

Applied Energy is currently edited by J. Yan

More articles in Applied Energy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().