Renewable Energy Policy in the Age of Falling Technology Costs

24 Pages Posted: 8 Aug 2018

See all articles by Karsten Neuhoff

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Nils May

German Institute for Economic Research (DIW Berlin)

Joern Constantin Richstein

German Institute for Economic Research (DIW Berlin)

Date Written: July 2018

Abstract

Cost of renewable energies have dropped, approaching wholesale power price levels. As a result, the role of renewable energy policy design is shifting – from covering incremental costs towards facilitating risk-hedging. An analytical model of the financing structure of renewable investment projects is developed to assess this effect und used to compare different policy design choices: contracts for differences, sliding premia, fixed premia and a setting without dedicated remuneration mechanism. The expected benefit for electricity consumers from reduced risk and financing costs is approximated at the example of a 2030 scenario for Germany. Policies like sliding premia, previously evaluated as providing low-risk investment environments, provide for less risks hedging, when technology costs approach wholesale power prices. Contracts for differences provide in all scenarios the most effective hedge for investors against power prices uncertainty, enabling low-cost financing and reducing costs for consumers, while also hedging electricity consumers against high power prices.

Keywords: Investments under uncertainty, financing costs, renewable energy policy, contracts for difference

JEL Classification: Q42,Q55,O38

Suggested Citation

Neuhoff, Karsten and May, Nils and Richstein, Joern Constantin, Renewable Energy Policy in the Age of Falling Technology Costs (July 2018). DIW Berlin Discussion Paper No. 1746, Available at SSRN: https://ssrn.com/abstract=3227734

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Nils May (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Joern Constantin Richstein

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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