Int. J. Financial Stud. 2013, 1(3), 54-61; doi:10.3390/ijfs1030054
Communication

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

Department of Mechanical Engineering, National University of Singapore, Block EA #07-08, 9 Engineering Drive 1, 117576, Singapore
Received: 14 June 2013; in revised form: 3 July 2013 / Accepted: 12 July 2013 / Published: 18 July 2013
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Abstract: 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.
Keywords: discount rate; risk; levelized cost of energy; photovoltaics

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MDPI and ACS Style

Manzhos, S. On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy. Int. J. Financial Stud. 2013, 1, 54-61.

AMA Style

Manzhos S. 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. 2013; 1(3):54-61.

Chicago/Turabian Style

Manzhos, Sergei. 2013. "On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy." Int. J. Financial Stud. 1, no. 3: 54-61.

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