Postdoctoral Scholar: Konan Hara, University of Chicago

Renewable energy projects face substantial risk because they sell their electricity into volatile wholesale electricity markets. Policymakers looking to encourage renewable investment can choose between direct subsidies for renewable investment and power purchase agreements that assume the risk of future electricity sales. The relative value of these two approaches depends critically upon investors’ risk premium. This paper investigates this trade-off in the context of Brazilian wind energy actions that award winners purchase agreements for a share of their production. I develop and estimate a structural auction model that separately recovers the investors’ wholesale market belief (expected price and risk premium) and private costs. Policymakers seeking to avoid the wholesale market risk entirely are expected to pay $4.4 billion more with subsidies to entice investors to commit to installing wind turbines that cost $12.4 billion than full share purchase agreements that make policymakers bear all wholesale market risk over 20 years.