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Cream-skimming through PPAs – Interactions between Private and Public Long-term Contracts for Renewable Energy

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  • Mats Kröger

Abstract

Public support systems and private investments in renewable energy are increasingly existing side-by-side and are both emphasized in policy proposals on the European and national levels. This paper assesses the interaction between the two approaches with respect to cream-skimming, i.e., the potential for low-cost projects to sign private contracts that increase the costs of publicly supported renewable energy. This paper uses a stylized microeconomic model and a numerical simulation to assess this question. It finds that the incentive to cream-skimming exists when governments employ any form of resource differentiation in their renewable energy contracts. The numerical analysis shows that, at current price levels, cream-skimming could increase power prices by 2-6% depending on the PPA’s mark-up. The effect is larger for a wider cost-distribution of renewable energy projects, which might occur as the energy transition proceeds.

Suggested Citation

  • Mats Kröger, 2024. "Cream-skimming through PPAs – Interactions between Private and Public Long-term Contracts for Renewable Energy," Discussion Papers of DIW Berlin 2092, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2092
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    More about this item

    Keywords

    Climate policy; renewable energy; distributional consequences; creamskimming; contracts for differences;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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