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The insurance effect of renewable distributed energy resources against uncertain electricity price developments

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  • Fridgen, Gilbert
  • Halbrügge, Stephanie
  • Olenberger, Christian
  • Weibelzahl, Martin

Abstract

To combat climate change, many countries all around the world currently foster the development of renewable energy sources (RES). However, in contrast to traditional energy systems that relied on few central power plants, RES are typically highly decentral and spread all over a country. Against this backdrop, the promotion of a decentralization of the energy system by fostering a regional balance of energy demand and supply with a corresponding increase in energy democracy is seen as a promising approach. However, energy democracy driven by an increasing involvement of consumers requires adequate investments of consumers in their own local RES in order to become active players, usually called prosumers. Risk associated with uncertain long-term electricity price developments is generally seen as a barrier to investments. In contrast, we describe that an investment in distributed energy resources (DERs) may actually serve as a consumer's insurance against price risk. Our results set out that the consideration of risk-aversion may actually positively shift an investment decision in renewable DERs. This is due to the prosumer becoming more self-sufficient and less dependent on uncertain price developments. To analyze such an insurance effect, we create a formal decision model considering the prosumer's risk-aversion and derive the prosumer's optimal investment in renewable DERs. However, our results also indicate that under some circumstances the insurance effect disappears: When a prosumer turns into a predominant producer, the prosumer is again exposed to risk in terms of uncertain revenues. Ultimately, our work highlights the importance of a consideration of the insurance effect when assessing an investment in renewable DERs.

Suggested Citation

  • Fridgen, Gilbert & Halbrügge, Stephanie & Olenberger, Christian & Weibelzahl, Martin, 2020. "The insurance effect of renewable distributed energy resources against uncertain electricity price developments," Energy Economics, Elsevier, vol. 91(C).
  • Handle: RePEc:eee:eneeco:v:91:y:2020:i:c:s0140988320302279
    DOI: 10.1016/j.eneco.2020.104887
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    1. Lu-Miao Li, Peng Zhou, and Wen Wen, 2023. "Distributed Renewable Energy Investment: The Effect of Time-of-Use Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).

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