Risk reduction under production-independent renewable contracts

Determine how much risk reduction is lost when financial contracts for difference or other renewable-energy contracts use a contracted reference volume that does not track the supported plant’s own production, while preserving incentives to curtail at negative electricity prices.

Background

The paper contrasts production-based renewable support, such as per-megawatt-hour subsidies and conventional contracts for difference, with production-independent arrangements such as fixed capacity payments, contracts for difference settled against a reference volume, or financially settled forward contracts. Production-independent settlement preserves the plant’s marginal exposure to wholesale prices and therefore maintains an undistorted curtailment threshold, while also hedging investors against price risk.

The unresolved issue is the trade-off between maintaining effective price signals for wind and solar generators and providing sufficient protection against electricity-price risk. The question is particularly relevant because two-sided contracts for difference are expected to become the European default for new plants from 2027, making the design of the settlement volume an active policy issue.

References

The open question is how much of the risk reduction is lost when the contracted volume no longer tracks the plant's own production (Schlecht et al., 2024; Sánchez Canales and Hirth, 2026).

— Do wind and solar curtail at negative electricity prices? Incentives and evidence across two decades of German renewable support schemes  (2609.10053 - Hirth, 9 Sep 2026) in Section 3.2, “Subsidies distort the curtailment threshold”