Time for Tough Love: Towards Gradual Risk Transfer to Renewables in Germany

Abstract

After more than a decade of supporting renewable energies (RE) through feed-in tariffs, Germany has set out to integrate RE into the power market. This requires RE investors to carry market risks, in particular the power price risk. But under the current financial structure higher risks would negatively impact the bankability of new projects, which could endanger the achievement of Germany's RE targets. The need to maintain a non-disruptive investment environment suggests a gradual risk transfer towards market integration in the spirit of what Ball (2012) calls "giving RE tough love". In this paper we will spell out how this could be done: in the first step we discuss the general case for market risks and find that past policy reforms have only marginally imposed risks on RE. Hence more ambitious steps are needed, for which we outline two elements in the second step: (a) a support framework that creates incentives for RE projects to increasingly take risks based on a "cascading risk auction", and (b) design options for power purchase agreements (PPAs) aimed to incentivize new products for risk management. This approach can inform the upcoming 2017 reform in Germany - and also other countries pursuing similar reforms.