Trimming the hedge? Quantifying revenue risks under renewable energy support schemes

Investments in volatile renewable energy (RE) plants are risky due to weather variability and uncertain market developments. This revenue risk is a key driver for financing costs, which make up a large share of the costs of RE projects. Thus, the key function of modern support schemes for RE is to hedge plant operators against revenue risks. In this paper, we quantitatively assess the revenue risk under four different contracts for difference (CfD) designs for over 3000 wind turbines in Germany. We find that two-way CfDs that include a clawback obligation at high prices provide significantly higher revenue stability than one-sided schemes. Among different two-way CfDs, the Financial CfD hedges plant operators best against revenue risks overall, but may come with risks of deviating from the reference generation depending on the chosen reference profile. These results are highly relevant for the current policy debate surrounding the introduction of two-way CfDs.