IDEAS home Printed from https://ideas.repec.org/p/dui/wpaper/1403.html
   My bibliography  Save this paper

Support mechanisms for renewables: How risk exposure influences investment incentives

Author

Listed:
  • Lena Kitzing

    ()

  • Christoph Weber

    () (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

Abstract

We analyse quantitatively how risk exposure from different support mechanisms, such as feed-in tariffs and premiums, can influence the investment incentives for private investors. We develop a net cash flow approach that takes systematic and unsystematic risks into account through cost of capital and the Capital Asset Pricing Model as well as through active liquidity management. Applying the model to a specific case, a German offshore wind park, we find that the support levels required to give adequate investment incentives are for a feed-in tariff scheme approximately 5-7% lower than for a feed-in premium scheme. The effect of differences in risk exposure from the support schemes is significant and cannot be neglected in policy making, especially when deciding between support instruments or when determining adequate support levels.

Suggested Citation

  • Lena Kitzing & Christoph Weber, "undated". "Support mechanisms for renewables: How risk exposure influences investment incentives," EWL Working Papers 1403, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Aug 2014.
  • Handle: RePEc:dui:wpaper:1403
    as

    Download full text from publisher

    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1403_SupportMechanismsForRenewablesHowRiskExposureInfluencesInvestmentIncentives.pdf
    File Function: First version, 2014
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kitzing, Lena, 2014. "Risk implications of renewable support instruments: Comparative analysis of feed-in tariffs and premiums using a mean–variance approach," Energy, Elsevier, vol. 64(C), pages 495-505.
    2. Klessmann, Corinna & Nabe, Christian & Burges, Karsten, 2008. "Pros and cons of exposing renewables to electricity market risks--A comparison of the market integration approaches in Germany, Spain, and the UK," Energy Policy, Elsevier, vol. 36(10), pages 3646-3661, October.
    3. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    4. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, June.
    5. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    6. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    7. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    8. Phillips, P C B, 1972. "The Structural Estimation of a Stochastic Differential Equation System," Econometrica, Econometric Society, vol. 40(6), pages 1021-1041, November.
    9. Kitzing, Lena & Mitchell, Catherine & Morthorst, Poul Erik, 2012. "Renewable energy policies in Europe: Converging or diverging?," Energy Policy, Elsevier, vol. 51(C), pages 192-201.
    10. Carta, José A. & Velázquez, Sergio, 2011. "A new probabilistic method to estimate the long-term wind speed characteristics at a potential wind energy conversion site," Energy, Elsevier, vol. 36(5), pages 2671-2685.
    11. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    12. Gross, Robert & Blyth, William & Heptonstall, Philip, 2010. "Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs," Energy Economics, Elsevier, vol. 32(4), pages 796-804, July.
    13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    14. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    15. Stephan Schaeffler & Christoph Weber, 2011. "The Cost of Equity of Network Operators - Empirical Evidence and Regulatory Practice," EWL Working Papers 1101, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2012.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    investment risk; support policies; unsystematic risk; liquidity management; offshore wind; feed-in tariffs;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dui:wpaper:1403. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andreas Fritz). General contact details of provider: http://edirc.repec.org/data/fwessde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.