Right and Duty: Investment Risk Under Different Renewable Energy Support Policies

Peio Alcorta (), Maria Paz Espinosa and Cristina Pizarro-Irizar
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Peio Alcorta: University of the Basque Country (UPV/EHU)
Maria Paz Espinosa: University of the Basque Country (UPV/EHU)
Cristina Pizarro-Irizar: University of the Basque Country (UPV/EHU)

Environmental & Resource Economics, 2024, vol. 87, issue 12, No 4, 3163-3204

Abstract: Abstract Renewable energy projects are subject to risk due to the uncertainty of future electricity prices and the amount of energy produced. Public support usually consists of some form of guarantee, either on the price received per MWh supplied or the return on investment per MW installed. This support reduces the investor’s risk, which is then assumed by the regulator. However, most of these policies do not only grant the investor the right to receive a guaranteed payment but also limit its potential benefits (i.e., impose an obligation). We propose a model with analytical solutions in which, considering the randomness of the market price, as well as that of the energy production, we quantify the risk removed under different types of regulations and assign a value to both the rights and the obligations that each policy entails. Finally, we apply the model to the case of Spain, which has undergone several changes in its green energy support system in recent years. Our results indicate that in the context of low electricity prices, the obligations imposed by most of these policies are negligible compared to the rights received. By contrast, in the context of high electricity prices and increasingly competitive renewable energy sources, the assumed obligations become more notable to the point of the support policy becoming a liability. Nevertheless, a sufficiently risk-averse investor may be incentivized by a policy with negative expected regulatory costs.

Keywords: Energy investment; Green energy; Policy modeling; Support policies; Investment risk; Risk aversion (search for similar items in EconPapers)
JEL-codes: D04 L51 Q48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10640-024-00909-3

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