Determinants of power purchase agreements and levelized cost of electricity in renewable energy projects

Abstract

Similar to the concept of concessions, governments worldwide encourage investment in renewable energy by providing a fixed price under the power purchase agreement (PPA) to the renewable energy developers. Depending on each renewable energy technology, the PPA usually corresponds to the levelized costs of electricity (LCOE) or the average lifetime costs of electricity produced by a power plant. Hence, these two parameters play an important role in boosting renewable energy development. Little is however known about the determinants of the PPA and LCOE. Therefore, the paper tries to shed some light on the determinants of the PPA and LCOE of wind and solar technologies with a global (totaling 26 countries) panel data over the period of 2015 to 2019 using a fixed-effects and a system generalized method of moments (sys-GMM) estimation model. We mainly find that the trend of PPA in a more mature wind technology has tapered off but still driven mainly by the technological costs and how risky the banks view the wind projects. Meanwhile, the trend of PPA in a less mature solar technology is still declining and affected by the additional demand shifted from conventional energy such as oil, natural gas, and coal towards renewable energy and the environmental pressure from high CO2 emissions. The LCOE’s of wind and solar energy are both in a downward trend and driven mainly by the reduction in technological costs, the additional demand from conventional energy players and the pressure from high CO2 emissions with the solar LCOE also depending on the bank’s perspective. Lastly, the investment environment through the FDI, inflation, and long-term interest rates can also affect the PPA and LCOE. Implications of our results are also mentioned.