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Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market

Author

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  • Gohdes, N.
  • Simshauser, P.
Abstract
The cost of capital is among the most important variables determining the feasibility of investment in renewable energy projects. In Australia’s National Electricity Market, the ability of new variable renewable energy (VRE) plant to arrange requisite project finance at favourable rates largely determines project viability. Such financings are typically only achieved when VRE projects are underpinned by long-dated Power Purchase Agreements (PPA), under which prices are guaranteed by an investment-grade counterparty. In this article, we quantify the relationship between PPAs, counterparty credit quality and the cost of capital in the context of Australia’s energy-only wholesale market under conditions of policy uncertainty. Our analysis benefits from the application of confidential data from Australia’s capital markets. We find higher credit quality drives higher gearing, and somewhat counterintuitively, lower expected returns to equity. This in turn produces a lower cost of capital and by implication, higher post-construction VRE plant valuations – an outcome seemingly at odds with Modigliani and Miller’s classic 1958 article. In practice, risk has been repackaged and reallocated.

Suggested Citation

  • Gohdes, N. & Simshauser, P., 2022. "Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market," Cambridge Working Papers in Economics 2206, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2206
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    References listed on IDEAS

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    5. H. Qi & C. K. Woo & K. H. Cao & J. Zarnikau & R. Li, 2024. "Price responsiveness of solar and wind capacity demands," Post-Print hal-04597188, HAL.
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    8. Victor Aguilar & Freddy Naula & Fanny Cabrera, 2024. "Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy," Energies, MDPI, vol. 17(19), pages 1-19, September.
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    More about this item

    Keywords

    Renewable Energy; PPAs; Project Finance; Counterparty Credit; Cost of Capital;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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