Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228168
Authors: 
Parlane, Sarah
Ryan, Lisa
Year of Publication: 
2019
Series/Report no.: 
Working Paper Series No. WP19/20
Abstract: 
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.
Subjects: 
Renewable electricity contracts
Power purchase agreements
Newsvendor model
Risk aversion
Order inflation
Moral hazard
JEL: 
D81
D86
L14
L24
L94
Q21
Document Type: 
Working Paper

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