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RENERGI-Fremtidens rene energisystemer

Discount rates for energy investments

Awarded: NOK 1.9 mill.

Project Manager:

Project Number:

174210

Project Period:

2006 - 2012

Location:

The Ministry of Finance recently released new guidelines for cost-benefit project evaluation. The guidelines require owners of public investments >500 Mkr to conduct a thorough analysis of systematic risk factors in order to determine the appropriate disc ount rate. For investments <500 Mkr a simplified analysis is required. The guidelines have significant repercussions for the power sector, where most large real investments are carried out by publicly owned firms and/or in dialogue with public authorities . More generally firms may lift their risk-reward frontier by analysing the systematic risk factors influencing their portfolio of real assets. This project helps firms understand the systematic risk factors influencing their investments. We develop and test a decision tool that associates the "beta" of a real investment with underlying features of the power market. We develop strategic insights for management of risk and time in power and energy settings. There are great uncertainties, but we estimate that the economic value of the innovation may reach at least 330 times the cost of the project. Our innovation consists of estimating the linkage between beta known from financial analysis on the one hand, and structural models of supply, demand, transmi ssion capacity etc. in the power market on the other. The outome is beta=beta(a,b,c), with a,b,c being systematic risk factors and beta varying between projects. We discuss and solve methodological challenges that arise, and develop a broad knowledge base for risk and time management in participating firms/institutions. The project has six participating institutions in a consortium: ECON Analysis, Enova, Møreforsking, Resources for the Future (RFF) USA, Statnett and Senter for statlig økonomistyring SSØ. The project accesses the European and international network of RFF, ECON, Møreforsking. It includes a PhD at ECON/RFF.

Funding scheme:

RENERGI-Fremtidens rene energisystemer