The impact of auctions on financing conditions and cost of capital for wind energy projects

Mak Đukan*, Lena Kitzing

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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Abstract

The recent rise of auctions to allocate support payments for renewable energy projects creates new uncertainties during project development and causes a decrease in support levels. We investigate the effects of the shift to auctioning on costs of capital (CoC) and financing conditions through semi-structured and focus group interviews with 40 experts in onshore and offshore wind project development and financing in Europe. We find that auctions create a competitive environment that pressures the industry into accepting higher risks and lower returns. Banks have reduced debt margins, while large investors decreased hurdle rates and equity returns, despite additional risks from auctions, such as uncertainty about future award prices, allocation and qualification risks. The risk of being awarded support and incurring sunk costs makes smaller bidders averse to participating in auctions. Competitive bidding may also decrease secured revenues and increase offtaker risks, especially when combined with sliding premiums. Despite increased price risk, the competitive pressure driven by project sponsors, seems to lower financing costs and hurdle rates, thus decreasing CoC for offshore projects. To reduce negative impacts on CoC and financing, policymakers can minimise additional risks, by adopting remuneration schemes that stabilise revenues, and supporting smaller actors through removing participation hurdles.
Original languageEnglish
Article number112197
JournalEnergy Policy
Volume152
Number of pages18
ISSN0301-4215
DOIs
Publication statusPublished - 2021

Keywords

  • Renewable energy auctions
  • Cost of capital
  • Financing conditions
  • Investor risk
  • Auctions design

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