Holding Up Green Energy

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. ∗Thank you to Rahul Banerjee, Sushanta Chatterjee, Jose Miguel Abito, Phil Haile, Bård Harstad, Jonas Hjort, Paul Joskow, Michael Kremer, Benjamin Olken, Katja Seim and Joe Shapiro for helpful comments and discussions. Thank you to seminar and conference participants at Berkeley/Harvard/Yale EEE, Colorado, Chicago, HKUST, NBER DEV, the Northeast Workshop on Energy Policy and the Zurich Conference on Public Finance in Developing Countries for comments. Thanks to Yashaswi Mohanty, Marie-Rose Tonguino, Andrew Wei and Tracy Zhou for excellent Research Assistance. All views and errors are my own. †Department of Economics, Yale University, Box 208269, New Haven, CT 06520-8269 (e-mail: nicholas.ryan@yale.edu.)