The insurance value of renewable energies

Abstract

Solar and wind power are energy sources which, by their very nature, give rise to a degree of uncertainty, considering their variability depending on weather conditions. However, unlike many phenomena in the energy field (geopolitical shocks, institutional changes, wars, etc.), the uncertainty generated by the deployment of renewable energies can be scientifically controlled and objectively predicted. Consequently, the penetration of renewable energies also provides forms of guarantee that need to be weighed against other types of energy supply strategies, such as long-term partnerships or diversification of hydrocarbon imports. The aim of this work is to assess and discuss how renewable capacity can serve as physical insurance for the electricity system, in particular against gas supply shocks, which we believe is appropriate in the aftermath of the 2022 crisis (and its extensions in the coming years). To this end, we define a framework for assessing the economic value of a capacity in a context of uncertainty, considering financial market incompleteness and imperfect information. When aggregating consumers’ and producers’ preferences, we find conditions under which the value of a capacity can be expressed as the sum of two components: one aligned with the spot market outcome and the other stemming from the willingness to pay for additional risk protection. Finally, we test this framework in a forward-looking model of the French electricity system in 2030, where a gas supply shock is taken into account. The numerical results show that solar and wind power are effective tools for managing gas-related risks, despite their variable output. In addition to the environmental benefits, this work suggests that there may be a new incentive for public intervention to support the development of renewable energies, based on this insurance value.