Econonomics of Energy and Environmental Policy

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What Models Tell us about Long-term Contracts in Times of the Energy Transition

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Uncertainty is a major hindrance to attracting investment for the energy transition. Yet European market design is mainly discussed with a focus on short-term efficiency. Based on computational results from market models for gas and power we derive lessons on the importance of contracts and the implications of incomplete markets. Specifically, we show that short-term efficiency is not sufficient to guarantee a well-functioning long-term market, whether expressed in standard welfare-maximization terms or with respect to the EU criteria (security of supply, sustainability or affordability). The end result can drastically depend on the extent to which one can deal with risk. This result is in line with economic theory.
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JEL Codes:Q42: Alternative Energy Sources, Q58: Environmental Economics: Government Policy, L51: Economics of Regulation

Keywords: Investment, Risk allocation, Long-term contracts

DOI: 10.5547/2160-5890.8.1.iaba

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Published in Volume 8, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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