Costs or benefits? Assessing the economy-wide effects of the electricity sector's low carbon transition – The role of capital costs, divergent risk perceptions and premiums

Bachner, Gabriel; Mayer, Jakob; Steininger, Karl W.

doi:10.1016/j.esr.2019.100373

Cited by 30 publications

(25 citation statements)

References 52 publications

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“…However, most decarbonisation pathway modelling exercises, including those by the International Energy Agency or the International Renewable Energy Agency, do not properly reflect differential financing conditions in their analyses 9 , 31 . Instead, a (quasi-) uniform cost of capital in the form of hurdle rates is assumed 9 .…”

Section: Introductionmentioning

confidence: 99%

“…Instead, a (quasi-) uniform cost of capital in the form of hurdle rates is assumed 9 . When more accurate financing costs are used, modelling suggests that the transition to a low-carbon economy in developing economies is more expensive than is usually assumed, while in developed economies the opposite is true 9 , 31 . Therefore, it is clear that different financing conditions can substantially affect the attractiveness of low-carbon investment in different countries, influencing the pace and the overall cost of the transition in different geographies 14 , 15 , 20 , 27 , 32 , 33 .…”

Section: Introductionmentioning

confidence: 99%

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Higher cost of finance exacerbates a climate investment trap in developing economies

et al. 2021

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Finance is vital for the green energy transition, but access to low cost finance is uneven as the cost of capital differs substantially between regions. This study shows how modelled decarbonisation pathways for developing economies are disproportionately impacted by different weighted average cost of capital (WACC) assumptions. For example, representing regionally-specific WACC values indicates 35% lower green electricity production in Africa for a cost-optimal 2 °C pathway than when regional considerations are ignored. Moreover, policy interventions lowering WACC values for low-carbon and high-carbon technologies by 2050 would allow Africa to reach net-zero emissions approximately 10 years earlier than when the cost of capital reduction is not considered. A climate investment trap arises for developing economies when climate-related investments remain chronically insufficient. Current finance frameworks present barriers to these finance flows and radical changes are needed so that capital is more equitably distributed.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Higher cost of finance exacerbates a climate investment trap in developing economies

et al. 2021

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“…for Tauron Polska Energia (TPE) (hard coal) and 5.33% for PGE (Polska Grupa Energetyczna) (lignite)-probably in nominal values; it is worth mentioning that both these companies have geological-mining assets in their portfolios, in addition to power generation assets; − Bachner, Mayer, and Steininger [33] estimated the cost of capital for investments in coal-fired units in Eastern Europe at just over 10% (approximately 10.3%), in nominal terms.…”

Section: Methods and Datamentioning

confidence: 99%

Cost of Equity of Coal-Fired Power Generation Projects in Poland: Its Importance for the Management of Decision-Making Process

Saługa

Szczepańska-Woszczyna

Miśkiewicz

et al. 2020

Energies

103

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Our knowledge of discount rates plays an important role both in the discounted cash flow decision-making process and in the later phases of a project’s lifetime. It is useful than both for management and cash-flow monitoring purposes at operating stages. Investors putting money into power generation projects expect an appropriate rate of return to compensate them for a minimum acceptable real return available in the market (risk-free rate of interest) and the project’s specific risk. Due to its essential nature in the financial and economic evaluation of projects (it is the only parameter that reflects the risk), it is reasonable to assume that investors would also be interested in constituent components of that indicator. The discount rate is one parameter in the discounted cash flow analysis that takes into account the risk of a venture. Further, the previous research in this area has focused mainly on the dimension of this variable, and the structure of this parameter has not been dealt with any other studies. The proposed idea of this study met the expectations of the industry—it aimed to present a typical project implemented in the energy industry, a relatively simple methodology that allowed estimating the components within the cost of equity capital of the enterprise. In the power generation sector, one can find various types of discount rates—assessed for multiple technologies, at different development stages, and expressed differently. Owing to the know-how and decades-long experience, coal-fired power projects’ remarks may be a good benchmark for alternative low carbon technologies. That is why, in this work, a discount rate for valuing investment in new coal-fired power projects was evaluated. This assessment was made on the “bare-bones” assumption, meaning evaluations at 100% equity, after-tax, in constant (real) currency units. The analysis of the discount rate structure was performed by applying the procedure of the classical sensitivity analysis having the accuracy of key input parameters. Finally, the risk factors within the risk-adjusted discount rate were calculated. The obtained results showed the importance of individual risk factors within the risk-adjusted discount rate used in coal energy projects, which would enable a more pragmatic approach to controlling this parameter by decision-makers and understanding the risk.

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“…The scientific literature on financing investment to mitigate climate change was limited and fragmented for a long period (Gupta et al 2014) but has rapidly expanded in recent years (Steckel et al 2017;Polzin et al 2017;Mazzucato and Semieniuk 2018). The deployment of renewable power generation technologies to mitigate carbon emissions typically requires high upfront investment (Schmidt 2014;Tietjen et al 2016;Bachner et al 2019). In the absence of fuel costs, costs of capital account for a much higher share of total costs compared to incumbent fossil fuel technologies like gas and coal (Schmidt 2014;Fragkos et al 2017;Krey et al 2019), requiring substantial upfront financing.…”

Section: Conceptual Background: Financing Conditions For Energy Technologiesmentioning

confidence: 99%

“…To answer our research questions, we make two empirical and one conceptual contribution to an emerging literature that calls for differentiated data on WACCs for modelling the energy transition in a more realistic way (Gupta et al 2014;Egli et al 2019;Bachner et al 2019). First, we develop a comprehensive dataset on real-world WACCs for all electricity production technologies and all EU countries using new data from a variety of sources and a novel empirical approach.…”

Section: Introductionmentioning

confidence: 99%

The effect of differentiating costs of capital by country and technology on the European energy transition

et al. 2021

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Cost of capital is an important driver of investment decisions, including the large investments needed to execute the low-carbon energy transition. Most models, however, abstract from country or technology differences in cost of capital and use uniform assumptions. These might lead to biased results regarding the transition of certain countries towards renewables in the power mix and potentially to a sub-optimal use of public resources. In this paper, we differentiate the cost of capital per country and technology for European Union (EU) countries to more accurately reflect real-world market conditions. Using empirical data from the EU, we find significant differences in the cost of capital across countries and energy technologies. Implementing these differentiated costs of capital in an energy model, we show large implications for the technology mix, deployment, carbon emissions and electricity system costs. Cost-reducing effects stemming from financing experience are observed in all EU countries and their impact is larger in the presence of high carbon prices. In sum, we contribute to the development of energy system models with a method to differentiate the cost of capital for incumbent fossil fuel technologies as well as novel renewable technologies. The increasingly accurate projections of such models can help policymakers engineer a more effective and efficient energy transition.

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Costs or benefits? Assessing the economy-wide effects of the electricity sector's low carbon transition – The role of capital costs, divergent risk perceptions and premiums

Cited by 30 publications

References 52 publications

Higher cost of finance exacerbates a climate investment trap in developing economies

Higher cost of finance exacerbates a climate investment trap in developing economies

Cost of Equity of Coal-Fired Power Generation Projects in Poland: Its Importance for the Management of Decision-Making Process

The effect of differentiating costs of capital by country and technology on the European energy transition

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