Designing Contracts for the Energy Transition

Natalia Fabra and Gerard Llobet

No 20328, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines the limitations of spot markets in providing adequate investment incentives to support zero-carbon investments in electricity markets. In contrast, properly designed long-term contracts have the potential to mitigate price volatility and facilitate the funding of the investments. A theoretical model is developed to analyze contract design under conditions of moral hazard and adverse selection, emphasizing the trade-offs that arise when exposing firms to price and quantity risk. The findings inform optimal contract design for nuclear and renewable energy projects, offering policy recommendations to enhance investment incentives while minimizing productive inefficiencies and excessive rents.

JEL-codes: L13 L94 (search for similar items in EconPapers)
Date: 2025-06
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