Working Paper: NBER ID: w29154
Authors: Nicholas Ryan
Abstract: Green energy is produced by relationship-specific assets that are vulnerable to hold-up if contracts are not strictly enforced. I study the role of counterparty risk in the procurement of green energy using data on the universe of solar procurement auctions in India. The Indian context allows clean estimates of how risk affects procurement, because solar power plants set up in the same states, by the same firms, are procured in auctions variously intermediated by either risky states themselves or the central government. I find that: (i) the counterparty risk of an average state increases solar energy prices by 10%; (ii) the intermediation of the central government eliminates this risk premium; (iii) higher prices due to risk reduce investment, because state demand for green energy is elastic. The results suggest that the risk of hold-up places developing countries at a disadvantage in the procurement of green energy.
Keywords: green energy; counterparty risk; solar procurement; India
JEL Codes: L14; O13; Q42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Counterparty risk of an average state (G33) | Solar energy prices (Q41) |
| Central government intermediation (H77) | Risk premium (G19) |
| Central government intermediation (H77) | Solar bid prices (G13) |
| Counterparty risk premium (G19) | Investment in solar energy (Q42) |
| Counterparty risk (G33) | Investment in solar energy (Q42) |