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Time for Tough Love: Towards Gradual Risk Transfer to Renewables in Germany

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  • M. Pahle and H. Schweizerhof

Abstract

After more than a decade of supporting renewable energies (RE) through feed-in tariffs, Germany has set out to integrate RE into the power market. This requires RE investors to carry market risks, in particular the power price risk. But under the current financial structure higher risks would negatively impact the bankability of new projects, which could endanger the achievement of Germany's RE targets. The need to maintain a non-disruptive investment environment suggests a gradual risk transfer towards market integration in the spirit of what Ball (2012) calls "giving RE tough love". In this paper we will spell out how this could be done: in the first step we discuss the general case for market risks and find that past policy reforms have only marginally imposed risks on RE. Hence more ambitious steps are needed, for which we outline two elements in the second step: (a) a support framework that creates incentives for RE projects to increasingly take risks based on a "cascading risk auction", and (b) design options for power purchase agreements (PPAs) aimed to incentivize new products for risk management. This approach can inform the upcoming 2017 reform in Germany - and also other countries pursuing similar reforms.

Suggested Citation

  • M. Pahle and H. Schweizerhof, 2016. "Time for Tough Love: Towards Gradual Risk Transfer to Renewables in Germany," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:eeepjl:eeep5-2-pahle
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    Cited by:

    1. Melliger, Marc & Chappin, Emile, 2022. "Phasing out support schemes for renewables in neighbouring countries: An agent-based model with investment preferences," Applied Energy, Elsevier, vol. 305(C).
    2. Michael Pahle, Wolf-Peter Schill, Christian Gambardella, and Oliver Tietjen, 2016. "Renewable Energy Support, Negative Prices, and Real-time Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Sustainab).
    3. Đukan, Mak & Kitzing, Lena, 2021. "The impact of auctions on financing conditions and cost of capital for wind energy projects," Energy Policy, Elsevier, vol. 152(C).
    4. Neuhoff, Karsten & May, Nils & Richstein, Jörn C., 2022. "Financing renewables in the age of falling technology costs," Resource and Energy Economics, Elsevier, vol. 70(C).
    5. Elie, Luc & Granier, Caroline & Rigot, Sandra, 2021. "The different types of renewable energy finance: A Bibliometric analysis," Energy Economics, Elsevier, vol. 93(C).
    6. Polzin, Friedemann & Egli, Florian & Steffen, Bjarne & Schmidt, Tobias S., 2019. "How do policies mobilize private finance for renewable energy?—A systematic review with an investor perspective," Applied Energy, Elsevier, vol. 236(C), pages 1249-1268.
    7. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.
    8. Michael Pahle, Wolf-Peter Schill, Christian Gambardella, and Oliver Tietjen, 2016. "Renewable Energy Support, Negative Prices, and Real-time Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Sustainab).
    9. Steffen, Bjarne, 2018. "The importance of project finance for renewable energy projects," Energy Economics, Elsevier, vol. 69(C), pages 280-294.
    10. Pahle, Michael & Schaeffer, Roberto & Pachauri, Shonali & Eom, Jiyong & Awasthy, Aayushi & Chen, Wenying & Di Maria, Corrado & Jiang, Kejun & He, Chenmin & Portugal-Pereira, Joana & Safonov, George & , 2021. "The crucial role of complementarity, transparency and adaptability for designing energy policies for sustainable development," Energy Policy, Elsevier, vol. 159(C).
    11. Egli, Florian, 2020. "Renewable energy investment risk: An investigation of changes over time and the underlying drivers," Energy Policy, Elsevier, vol. 140(C).

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    JEL classification:

    • F0 - International Economics - - General

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