A New Perspective
Loyola de Palacio Series on European Energy Policy
Edited by Jean-Michel Glachant, Dominique Finon and Adrien de Hauteclocque
Chapter 2: Long-term Contracts and Technology Choices in Electricity Markets
1 Fabien A. Roques INTRODUCTION 1 The liberalization of the power and gas industries exposes investors to greater risks than under the pre-liberalization regulatory regime. The most fundamental change affecting the value of investments is the uncertainty about electricity prices, and its interaction with fossil fuel price risk – and carbon dioxide (CO2) emission permits in Europe. Such market risks affect technologies differently, and their impact on new investment choices will depend on the ability of investors to manage or shift part of these risks on to other stakeholders. This in turn depends on the contractual arrangements underpinning investment projects and the degree of integration downstream of the investor. The objective of this chapter is to explore how contractual arrangements for fuel inputs and power output affect technology choices in liberalized electricity markets. A power plant investor’s exposure to electricity and fuel price risk depends on the sensitivity of plant profits to electricity and fossil fuel price risks and the variability of the fuel and power prices. This chapter focuses on how the allocation of electricity and fuel price risks between the power plant investor and other parties through long-term contracts and the ability of the investor to mitigate the risk to which it is exposed affect technology choices. Gas, coal and nuclear fuel prices all have volatile spot prices, but are often secured through long-term contracts. Power generation technologies such as gas plant have a greater exposure to market risks (electricity price, fuel price, CO2 price), while others are more...
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