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Renewable Energy Policy in the Age of Falling Technology Costs

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  • Karsten Neuhoff
  • Nils May
  • Jörn C. Richstein

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.

Suggested Citation

  • Karsten Neuhoff & Nils May & Jörn C. Richstein, 2018. "Renewable Energy Policy in the Age of Falling Technology Costs," Discussion Papers of DIW Berlin 1746, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1746
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    References listed on IDEAS

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    Cited by:

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    2. Steffen, Bjarne, 2020. "Estimating the cost of capital for renewable energy projects," Energy Economics, Elsevier, vol. 88(C).
    3. Meus, Jelle & De Vits, Sarah & S'heeren, Nele & Delarue, Erik & Proost, Stef, 2021. "Renewable electricity support in perfect markets: Economic incentives under diverse subsidy instruments," Energy Economics, Elsevier, vol. 94(C).
    4. Chiappinelli, Olga & Giuffrida, Leonardo M. & Spagnolo, Giancarlo, 2023. "Public procurement as an innovation policy: Where do we stand?," ZEW Discussion Papers 23-002, ZEW - Leibniz Centre for European Economic Research.
    5. Newbery, D., 2021. "Designing an incentive-compatible efficient Renewable Electricity Support Scheme," Cambridge Working Papers in Economics 2128, Faculty of Economics, University of Cambridge.
    6. Ulrich J. Frey & Martin Klein & Kristina Nienhaus & Christoph Schimeczek, 2020. "Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme," Energies, MDPI, vol. 13(20), pages 1-19, October.
    7. Hastings-Simon, Sara & Leach, Andrew & Shaffer, Blake & Weis, Tim, 2022. "Alberta's Renewable Electricity Program: Design, results, and lessons learned," Energy Policy, Elsevier, vol. 171(C).

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    More about this item

    Keywords

    Investments under uncertainty; financing costs; renewable energy policy; contracts for difference;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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