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Optimal Contracts for Renewable Electricity

Sarah Parlane and Lisa Ryan

No 201920, Working Papers from School of Economics, University College Dublin

Abstract: Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. In this paper we focus on contracts to procure electricity from renewable sources that are inherently unreliable (such as wind and solar). We determine the contracts that minimize the cost of procuring a given amount of renewable energy from two risk-averse generators. We contrast outcomes arising when investments are set in centralised and decentralised 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)
Pages: 36 pages
Date: 2019-09
New Economics Papers: this item is included in nep-cta, nep-ene, nep-reg and nep-upt
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http://hdl.handle.net/10197/11087 First version, 2019 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201920

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