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

Piotr W. Saługa, Katarzyna Szczepańska-Woszczyna, Radosław Miśkiewicz and Mateusz Chłąd
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Piotr W. Saługa: Department of Management, Faculty of Applied Sciences, WSB University, 41-300 Dąbrowa Górnicza, Poland
Katarzyna Szczepańska-Woszczyna: Department of Management, Faculty of Applied Sciences, WSB University, 41-300 Dąbrowa Górnicza, Poland
Radosław Miśkiewicz: Faculty of Organisation and Management, Silesian University of Technology, 44-100 Gliwice, Poland
Mateusz Chłąd: The Management Faculty, Częstochowa University of Technology, 42-201 Częstochowa, Poland

Energies, 2020, vol. 13, issue 18, 1-11

Abstract: 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.

Keywords: coal-fired power generation; investments; economic evaluation; cash-flows; discount rate; cost of capital (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
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