The High Cost of Electricity Price Uncertainty

21 Pages Posted: 27 May 2020

See all articles by Anastasiya Ostrovnaya

Anastasiya Ostrovnaya

Imperial College London; Centre for Climate Finance & Investment

Iain Staffell

Imperial College London

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School

Robert Gross

affiliation not provided to SSRN

Date Written: February 9, 2020

Abstract

The rapid worldwide growth of renewable energy has been largely underpinned by government support over the past decade. The need for subsidy is fading as the cost of electricity from renewables converges with that from fossil fuels, but the withdrawal of support schemes will also remove the revenue stability offered by auction schemes and contracts for differences. Exposure to market risk (fluctuating wholesale electricity prices) raises the cost of capital for merchant renewable generators. Here we quantify the extent to which increased volatility in future power prices affects revenues by combining electricity market and stochastic discounted cash flow models. Renewable projects relying purely on merchant pricing may see cost of capital rise by two percentage points (e.g. from 7% to 9%). Unless new private or government actors provide hedging solutions, fewer developers will undertake new renewable energy projects, slowing the energy transition and increasing its cost to society.

Keywords: merchant risk, renewables, wind, solar, renewable energy, volatility, cost

JEL Classification: G10, Q4, Q42, Q48,

Suggested Citation

Ostrovnaya, Anastasiya and Staffell, Iain and Donovan, Charles and Gross, Robert, The High Cost of Electricity Price Uncertainty (February 9, 2020). Available at SSRN: https://ssrn.com/abstract=3588288 or http://dx.doi.org/10.2139/ssrn.3588288

Anastasiya Ostrovnaya (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Climate Finance & Investment ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Iain Staffell

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Robert Gross

affiliation not provided to SSRN

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