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Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market

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  • Nicholas Gohdes

    (Queensland University of Technology)

  • Paul Simshauser

    (Griffith Business School, Griffith University)

Abstract

The cost of capital is among the most important variables determining the feasibility of investment in renewable energy projects. In Australia's National Electricity Market, the ability of new variable renewable energy (VRE) plant to arrange requisite project finance at favourable rates largely determines project viability. Such financings are typically only achieved when VRE projects are underpinned by long-dated Power Purchase Agreements (PPA), under which prices are guaranteed by an investment-grade counterparty. In this article, we quantify the relationship between PPAs, counterparty credit quality and the cost of capital in the context of Australia's energy-only wholesale market under conditions of policy uncertainty. Our analysis benefits from the application of confidential data from Australia's capital markets. We find higher credit quality drives higher gearing, and somewhat counterintuitively, lower expected returns to equity. This in turn produces a lower cost of capital and by implication, higher post-construction VRE plant valuations. This outcome may appear to be at odds with Modigliani and Miller's classic 1958 article but of course it is not, risk has merely been repackaged and reallocated.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Nicholas Gohdes & Paul Simshauser, 2022. "Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market," Working Papers EPRG2204, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg2204
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    References listed on IDEAS

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    Cited by:

    1. Rangarajan, Arvind & Foley, Sean & Trück, Stefan, 2023. "Assessing the impact of battery storage on Australian electricity markets," Energy Economics, Elsevier, vol. 120(C).
    2. Marios Stanitsas & Konstantinos Kirytopoulos, 2023. "Sustainable Energy Strategies for Power Purchase Agreements (PPAs)," Sustainability, MDPI, vol. 15(8), pages 1-19, April.
    3. Flottmann, Jonty H. & Akimov, Alexandr & Simshauser, Paul, 2022. "Firming merchant renewable generators in Australia’s National Electricity Market," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 262-276.
    4. Farhad Billimoria & Paul Simshauser, 2023. "Contract design for storage in hybrid electricity markets," Working Papers EPRG2304, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

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    More about this item

    Keywords

    Renewable Energy; PPAs; Project Finance; Counterparty Credit; Cost of Capital;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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