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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| Format: | Article |
| Language: | English |
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MDPI AG
2013-07-01
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| Series: | International Journal of Financial Studies |
| Subjects: | |
| Online Access: | http://www.mdpi.com/2227-7072/1/3/54 |
| _version_ | 1819155106767044608 |
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| author | Sergei Manzhos |
| author_facet | Sergei Manzhos |
| author_sort | Sergei Manzhos |
| collection | DOAJ |
| 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. |
| first_indexed | 2024-12-22T15:31:42Z |
| format | Article |
| id | doaj.art-678157f5083349babcc094ea216dacc2 |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-12-22T15:31:42Z |
| publishDate | 2013-07-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-678157f5083349babcc094ea216dacc22022-12-21T18:21:21ZengMDPI 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 |
| 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 |
| 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_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_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_sort | on the choice of the discount rate and the role of financial variables and physical parameters in estimating the levelized cost of energy |
| 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 |