Nalin Kulatilaka: Financing Distributed Energy

Despite technological innovations and significant government subsidies, we are yet to see the [...]widespread adoption of clean energy technologies. This slow adoption has been attributed to current institutional features that introduce large transactions costs and unattractive risk profiles, which dissuade investments. In this paper we explore ways in which new types of energy intermediaries, which we call Green Energy Service Companies (GESCO), can reduce transactions costs, modify risk profiles, and provide financing for distributed clean energy investments. We first describe current GESCOs that absorb the various subsidies, act as system integrators and project contactors, bear the up-front investment, and offer long-term power purchase agreements (PPAs) to end consumers. Our work on this section is based on interactions with several companies involved in various stages of the solar PV value chain: Schott Solar (Manufacturer), Sun Run and Solar City (service companies), Boston Community Capital and Bank of America (Financing). We find that the value proposition of current PPAs to consumers is based on forecasted price increases and does not provide adequate protection against key sources of uncertainty. In the rest of the paper we propose modifications to current PPAs that offer a more compelling risk profile to consumers while retaining the financial viability of the GESCO. We provide a valuation model to compare alternative contract structures. We then examine the effects of pooling across many consumers to transfer risk to wholesale markets. With the advent of the smart grid, GESCOs can enrich their offerings by bundling a wide array of distributed resources.

Tags: boston university, smg, School of Management, energy, faculty research day, clean tech, clean technology

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