Investment risk and return under renewable decarbonisation of a power market
Journal
Climate Policy
Subject
Management Science and Operations
Publishing details
Authors / Editors
Munoz J;Bunn D W
Biographies
Publication Year
2013
Abstract
How does financial performance risk affect investments in low-carbon electricity-generating technologies to achieve climate policy targets? A detailed risk simulation of price formation in the Great Britain wholesale power market is used to show that the increasing replacement of fossil facilities with wind, ceteris paribus, may cause a deterioration of the financial risk–return performance metrics for incremental investments. Low-carbon investments appear to be high risk, low return, and as such may require a progressively higher level of support over time than envisaged by the conventional degression trajectories. The increasing riskiness of the wholesale market will to some extent offset the benefits of lower capital costs and operational efficiencies if investors need to satisfy cautious debt coverage ratios alongside positive expected returns. This increased risk is additional to the well-known ‘merit order effect’ of low-carbon investments progressively depressing wholesale prices and hence their expected investment returns.
Keywords
Coal; Financing; Incentives; Investment; Risk; Wind power
Available on ECCH
No
