The cost of capital for power generation in atypical capital market conditions

Paul Simshauser ()

Economic Analysis and Policy, 2014, vol. 44, issue 2, 184-201

Abstract: Determining the cost of capital in the energy sector requires considerable care. Whether being derived by firms, stock analysts, policymakers or regulators, the consequence of error is amplified because the energy sector is the worldùs most capital-intensive. No other cost variable has a greater impact on electricity price/cost estimates. Historically, the Capital Asset Pricing Model could be applied mechanistically and produce reliable estimates for equity costs. But the Global Financial Crisis produced atypical capital market conditions and a mechanistic application will produce results that are intuitively erroneous. The model is not broken, but inputs require professional judgement and adjustment.

Date: 2014
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