Journal of Economic Literature (JEL) Code(s)
L14, O13, Q42
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.
Ryan, Nicholas, "Holding Up Green Energy" (2021). Cowles Foundation Discussion Papers. 2633.