Valuation of Renewable Energy Assets under Power Price Uncertainty: The Impact of Merchant Tail Risk on the Cost of Capital and Debt Capacity: A Stochastic Valuation and Debt-Sizing Approach for Solar Projects in Denmark
Translated title
Valuation of Renewable Energy Assets under Power Price Uncertainty: The Impact of Merchant Tail Risk on the Cost of Capital and Debt Capacity
Author
Wulff, Sarah Kathrine Quist
Term
4. semester
Publication year
2026
Submitted on
2026-06-01
Pages
67
Abstract
This thesis examines how to value and finance renewable energy projects in Denmark as they move from fixed-price Power Purchase Agreements (PPAs) to merchant, market-based revenues. Without subsidies and fixed contracts, the risk profile changes fundamentally: from relatively stable, bond-like cash flows to more volatile, equity-like exposure to power prices. While industry practice often applies a single weighted average cost of capital (WACC) to all cash flows, the thesis argues that a flat rate misses how risk changes over time. The transition to merchant exposure is modeled as a structural increase in beta (the asset’s sensitivity to market movements), and a segmented cost of capital is used—lower during contracted years and higher during the merchant phase. The study uses a quantitative, deductive approach. An Augmented Dickey-Fuller (ADF) test on de-seasonalised monthly DK1 day-ahead electricity prices provides indicative evidence of mean reversion, supporting a stochastic forecasting setup. Monte Carlo simulations (10,000 price paths) based on an Ornstein-Uhlenbeck process are used to model prices that fluctuate around a long-run level. The model includes a dynamic renewable cannibalisation coefficient to estimate capture prices—the prices a project actually realises when high renewable output suppresses market prices. The empirical analysis shows that using a uniform discount rate misallocates risk across cash-flow phases. The cost of capital rises in the merchant phase, and price uncertainty changes both valuation and debt capacity. Using debt sculpting and conservative P90/P99 stress tests, the study estimates maximum sustainable leverage and identifies a borrowing gap, implying a need for tighter financial covenants and deleveraging mechanisms. Overall, a segmented cost of capital better aligns risk between contracted and merchant phases in post-subsidy markets. For lenders and developers, sustainable investment in the energy transition calls for moving from static point estimates to probabilistic risk assessments.
Denne afhandling undersøger, hvordan man værdiansætter og finansierer vedvarende energianlæg i Danmark, når de går fra faste el-salgskontrakter (Power Purchase Agreements, PPAs) til markedsbaserede indtægter (merchant). Uden tilskud og faste priser skifter risikoen grundlæggende: fra relativt stabile, obligationslignende pengestrømme til mere volatile, aktielignende indtægter. Branchen bruger ofte én samlet kapitalkost (WACC) til at diskontere alle pengestrømme, men afhandlingen argumenterer for, at en flad sats overser, at risikoen ændrer sig over tid. Skiftet til merchant modelleres derfor som et strukturelt spring i beta (aktivets følsomhed over for markedsudsving), og der anvendes en segmenteret kapitalkost med lavere sats i kontraktperioden og højere sats i merchant-fasen. Metodisk anvendes en kvantitativ, deduktiv tilgang. En Augmented Dickey-Fuller-test (ADF) på deseasonaliserede månedlige DK1 day-ahead elpriser giver indikation for middeltilbagevenden, hvilket understøtter en stokastisk prognosemodel. Der gennemføres Monte Carlo-simuleringer (10.000 prisforløb) baseret på en Ornstein-Uhlenbeck-proces, som beskriver priser, der svinger omkring et langsigtet niveau. Modellen inkluderer en dynamisk kanibalisationskoefficient for vedvarende energi for at beregne capture prices – de faktiske priser, et anlæg typisk opnår, når høj VE-produktion presser markedsprisen ned. Analysen viser, at en ens diskonteringsrente misallokerer risiko på tværs af pengestrømsfaser. Kapitalkosten stiger i merchant-fasen, og prisusikkerhed påvirker både værdi og låneevne. Ved hjælp af gældsskulpturering og konservative P90/P99-stresstest estimeres maksimal bæredygtig gæld og et lånegab identificeres, hvilket peger på behov for strammere finansielle covenants og mekanismer til nedbringelse af gæld over tid. Resultaterne indikerer, at en segmenteret kapitalkost giver en mere konsistent risikofordeling mellem kontrakt- og merchant-faser i et post-tilskudsmiljø. For långivere og udviklere betyder det, at bæredygtige investeringer i den grønne omstilling kræver et skifte fra statiske punktestimater til probabilistiske risikovurderinger.
[This apstract has been rewritten with the help of AI based on the project's original abstract]