The Renewable Energy Paradox: Second-Generation Economic Challenges in the Global Energy Transition

Rafal Cieslik

European Research Studies Journal, 2025, vol. XXVIII, issue 3, 971-991

Abstract: Purpose: This paper analyzes the "second-generation challenges" of the global energy transition, moving beyond the initial success of cost reduction. It investigates the interconnected problems of market value erosion due to price cannibalization, the widening investment gap in developing economies, the evolution of policy towards active market shaping, and the critical need for electricity market redesign to ensure stability in high-renewable systems. Design/Methodology/Approach: This paper, based on a systematic review and comparative analysis of data from leading international agencies, analyzes the complex interplay between market value erosion, investment risk in developing economies, and the evolution of policy instruments. Findings: The results indicate that: (1) price cannibalization, resulting from the merit-order effect, poses a fundamental threat to the profitability of renewable energy (RE) projects, necessitating a shift from the LCOE metric to a more holistic value-adjusted indicator (VALCOE); (2) the global capital divide is primarily driven by a differentiated weighted average cost of capital (WACC), and the effectiveness of de-risking instruments is highly dependent on regional context; (3) policy instru-ments, such as auctions with Contracts for Difference (CfDs) and non-price crite-ria (NPCs), are transforming the role of the state from a passive subsidizer to an active market architect; and (4) systems with high penetration of variable renew-able energy (VRE) require a fundamental market redesign toward a service-based model that explicitly remunerates flexibility and firm capacity. Practicaal implementations: Originality/Value: The global energy transition has entered a new, more complex phase. While rec-ord-breaking deployments and declining levelized costs of energy (LCOE) signal the successful conclusion of the first phase of the transition, a new set of "second-generation challenges" has emerged.

Keywords: Renewable energy; energy transition; price cannibalization; derisking; electricity market design; RE auctions; contracts for difference; energy policy. (search for similar items in EconPapers)
JEL-codes: Q48 Q51 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ers:journl:v:xxviii:y:2025:i:3:p:971-991

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