On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy

On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy

The levelized cost of energy (LCOE) approach has become popular, especially in the field of renewable energy. We argue that when assessing levelized cost of energy, different rates should be used for borrowing and discount rates. We further argue that the risk-free rate should be used for discountin...

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Bibliographic Details
Main Author: Sergei Manzhos
Format: Article
Language:English
Published: MDPI AG 2013-07-01
Series:International Journal of Financial Studies
Subjects:
discount rate
risk
levelized cost of energy
photovoltaics
Online Access:http://www.mdpi.com/2227-7072/1/3/54
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spelling doaj-678157f5083349babcc094ea216dacc22020-11-24T22:38:56ZengMDPI AGInternational Journal of Financial Studies2227-70722013-07-0113546110.3390/ijfs1030054On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of EnergySergei ManzhosThe levelized cost of energy (LCOE) approach has become popular, especially in the field of renewable energy. We argue that when assessing levelized cost of energy, different rates should be used for borrowing and discount rates. We further argue that the risk-free rate should be used for discounting when assessing and comparing the cost of energy across different producers and technologies. Recent analyses used the same rate for borrowing and discounting, which leads to underestimation of the cost for risky borrowers and to distorted sensitivities of the cost to financial and non-financial factors. Specifically, it is shown that they may lead to gross underestimation of the importance of solar-to-electricity conversion efficiency when applied to photovoltaics. The importance of device efficiency is re-established under the treatment of the discount rate proposed here.http://www.mdpi.com/2227-7072/1/3/54discount raterisklevelized cost of energyphotovoltaics
collection DOAJ
language English
format Article
sources DOAJ
author Sergei Manzhos
spellingShingle Sergei Manzhos
On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
International Journal of Financial Studies
discount rate
risk
levelized cost of energy
photovoltaics
author_facet Sergei Manzhos
author_sort Sergei Manzhos
title On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
title_short On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
title_full On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
title_fullStr On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
title_full_unstemmed On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy
title_sort on the choice of the discount rate and the role of financial variables and physical parameters in estimating the levelized cost of energy
publisher MDPI AG
series International Journal of Financial Studies
issn 2227-7072
publishDate 2013-07-01
description The levelized cost of energy (LCOE) approach has become popular, especially in the field of renewable energy. We argue that when assessing levelized cost of energy, different rates should be used for borrowing and discount rates. We further argue that the risk-free rate should be used for discounting when assessing and comparing the cost of energy across different producers and technologies. Recent analyses used the same rate for borrowing and discounting, which leads to underestimation of the cost for risky borrowers and to distorted sensitivities of the cost to financial and non-financial factors. Specifically, it is shown that they may lead to gross underestimation of the importance of solar-to-electricity conversion efficiency when applied to photovoltaics. The importance of device efficiency is re-established under the treatment of the discount rate proposed here.
topic discount rate
risk
levelized cost of energy
photovoltaics
url http://www.mdpi.com/2227-7072/1/3/54
work_keys_str_mv AT sergeimanzhos onthechoiceofthediscountrateandtheroleoffinancialvariablesandphysicalparametersinestimatingthelevelizedcostofenergy
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