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Abstract:
Wind and solar generation requires large upfront investment but has very low running costs. As a result, the cost of clean electricity depends heavily on financing conditions, since lower borrowing costs translate directly into lower power costs. Low borrowing costs in turn require stable and predictable revenues, which volatile wholesale markets do not provide, and private markets cannot hedge price risk over the 25 to 35 year horizons that renewable projects require. For this reason, governments support renewables through long-term public contracts such as contracts-for-difference (CfDs). These contracts are usually treated as subsidies, but they serve a second function that is equally important: by reducing investors’ exposure to price risk, they make projects easier to finance and lower their cost of capital.
This analysis examines how the design of such contracts affects investor risk and, through it, the cost of financing renewables. It compares three contract families: two-sided CfDs, one-sided CfDs (Germany’s current “market premium”), and the recently proposed “financial CfD”. The comparison draws on a dataset of hourly, turbine-level output from 63 onshore wind parks in Germany over the period 2014 to 2023, and traces the effect of each contract through a project-finance model to the final cost of electricity. The sample is an existing fleet, to which we apply today's costs. The results are informative about the ordering of contracts and the mechanisms behind it; the levels themselves should not be read as a cost forecast for new onshore wind.
