Abstract
Abstract To combat climate change, many countries all around the world currently foster the development of renewable energy sources (RES). However, in contrast to traditional energy systems that relied on few central power plants, RES are typically highly decentral and spread all over a country. Against this backdrop, the promotion of a decentralization of the energy system by fostering a regional balance of energy demand and supply with a corresponding increase in energy democracy is seen as a promising approach. However, energy democracy driven by an increasing involvement of consumers requires adequate investments of consumers in their own local RES in order to become active players, usually called prosumers. Risk associated with uncertain long-term electricity price developments is generally seen as a barrier to investments. In contrast, we describe that an investment in distributed energy resources (DERs) may actually serve as a consumer's insurance against price risk. Our results set out that the consideration of risk-aversion may actually positively shift an investment decision in renewable DERs. This is due to the prosumer becoming more self-sufficient and less dependent on uncertain price developments. To analyze such an insurance effect, we create a formal decision model considering the prosumer's risk-aversion and derive the prosumer's optimal investment in renewable DERs. However, our results also indicate that under some circumstances the insurance effect disappears: When a prosumer turns into a predominant producer, the prosumer is again exposed to risk in terms of uncertain revenues. Ultimately, our work highlights the importance of a consideration of the insurance effect when assessing an investment in renewable DERs.
Highlights
The energy transition challenges existing energy systems worldwide
Fridgen et al / Energy Economics 91 (2020) 104887 consumers to decide on the installation of new renewable distributed energy resources (DERs) and in this way to turn into a prosumer (Kitzing and Weber, 2015)
Investing in renewable DERs, the consumer is able to satisfy a share of its electricity demand through its own production and in this way turns into a prosumer
Summary
The energy transition challenges existing energy systems worldwide. In particular, renewable energy sources, playing the most important role in the energy transition, are characterized by high fluctuations and hard predictabilities of their generation. There are various possibilities for hedging against uncertainties, e.g., resulting from uncertain future electricity price developments, such as financial hedging strategies or an investment in a conventional diesel generator (Roques et al, 2008) Another approach focuses on the consideration of uncertainties in the assessment of investments in renewable DERs. In this paper we focus on the latter approach. Some of the approaches existing in literature include uncertainties in the assessment of an investment decision in renewable DERs, many of these consider uncertainties in terms of weather volatilities that lead to an uncertain level of production (Mavromatidis et al, 2018; Coniglio et al, 2019). In the following we introduce our research methodology before we apply it and develop our formal model
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