Journal article
The impact of auctions on financing conditions and cost of capital for wind energy projects
Energy Economics and System Analysis, Sustainability, Society and Economics, Department of Technology, Management and Economics, Technical University of Denmark1
Society, Market and Policy, Wind Energy Systems Division, Department of Wind Energy, Technical University of Denmark2
Sustainability, Department of Technology, Management and Economics, Technical University of Denmark3
Department of Technology, Management and Economics, Technical University of Denmark4
Department of Wind Energy, Technical University of Denmark5
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.
Language: | English |
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Year: | 2021 |
Pages: | 112197 |
ISSN: | 18736777 and 03014215 |
Types: | Journal article |
DOI: | 10.1016/j.enpol.2021.112197 |
ORCIDs: | Kitzing, Lena and Đukan, Mak |