EEEP http://doi.org/br9v (2016)

Renewable energy (RE) has been insulated from market dynamics in most energy systems to stimulate investments and to offer an appropriate incentive, particularly for small and private investors. However, some decades since their first implementation, and considering the significant penetration of RE into the energy mix, instruments that are able to shift risk away from RE generators need to be reconsidered to give room for more efficient mechanisms. Now, Michael Pahle from the Potsdam Institute for Climate Impact Research and Henriette Schweizerhof from Allianz Climate Solutions study ways in which incremental risk exposure to RE generation in Germany can couple improved efficiency with reduced total costs.

Credit: WESTEND61 / GETTY

Using an approach that combines an auctioning framework with power purchasing agreements (PPAs), the researchers find that these two elements can improve market readiness for both private investors and risk-averse financial counterparts. The proposed business model creates incentives for RE generators to participate in the market by designing a cascading mechanism with a decreasing reserve price. This is coupled with price risk transfer guaranteed by a portfolio of PPA provisions, that partially offset price and/or volume risk. However, the proposed arrangement requires a credible regulatory environment able to provide a stable long-term vision, where carbon pricing and mitigation policies will define the upper limit on the potential risk transfer.