Optimal contracts for renewable electricity

Arbeitspapier

Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. In this paper we focus on contracts to procure electricity from renewable sources that are inherently unreliable (such as wind and solar). We determine the contracts that minimize the cost of procuring a given amount of renewable energy from two risk-averse generators. We contrast outcomes arising when investments are set in centralised and decentralised settings, with the absence of reliability addressed by either issuing orders in excess of what is needed or by investing in improved reliability. Our results suggest that future contracts may be geared towards a greater reliance on order inflation and lower investments in reliability as the cost of renewable energy keeps falling. The implications of these results for grid congestion and electricity spot market prices should be of interest to regulators and transmission system operators.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: UCD Centre for Economic Research Working Paper Series ; No. WP19/20

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Economics of Contract: Theory ; Transactional Relationships; Contracts and Reputation; Networks ; Contracting Out; Joint Ventures; Technology Licensing ; Electric Utilities ; Renewable Resources and Conservation: Demand and Supply; Prices
• Subject: Renewable electricity contracts ; Power purchase agreements ; Newsvendor model ; Risk aversion ; Order inflation ; Moral hazard

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Parlane, Sarah ; Ryan, Lisa
• Event: Veröffentlichung
• (who): University College Dublin, UCD Centre for Economic Research
• (where): Dublin
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/228168
• Last update: 10.03.2025, 11:43 AM CET