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Designing Contracts for the Energy Transition

Author

Listed:
  • Natalia Fabra

    (CEMFI, Centro de Estudios Monetarios y Financieros)

  • Gerard Llobet

    (CEMFI, Centro de Estudios Monetarios y Financieros)

Abstract

This paper examines the limitations of spot markets in providing adequate investment incentives to support zero-carbon investments in electricity markets. In contrast, properly designed long-term contracts have the potential to mitigate price volatility and facilitate the funding of the investments. A theoretical model is developed to analyze contract design under conditions of moral hazard and adverse selection, emphasizing the trade-offs that arise when exposing firms to price and quantity risk. The findings inform optimal contract design for nuclear and renewable energy projects, offering policy recommendations to enhance investment incentives while minimizing productive inefficiencies and excessive rents.

Suggested Citation

  • Natalia Fabra & Gerard Llobet, 2025. "Designing Contracts for the Energy Transition," Working Papers wp2025_2521, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2025_2521
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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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