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Estimating the cost of capital for renewable energy projects

Bjarne Steffen

Energy Economics, 2020, vol. 88, issue C

Abstract: Many models in energy economics assess the cost of alternative power generation technologies. As an input, the models require well-calibrated assumptions for the cost of capital or discount rates to be used, especially for renewable energy for which the cost of capital differs widely across countries and technologies. In this article, we review the spectrum of estimation methods for the private cost of capital for renewable energy projects and discuss appropriate use of the methods to yield unbiased results. We then evaluate the empirical evidence from 46 countries for the period 2009–2017. We find a globally consistent rank order among technologies, with the cost of capital increasing from solar PV to onshore wind to offshore wind power. On average, the cost of capital in developing countries is significantly higher than in industrialized countries, with large heterogeneity also within the groups of industrialized or developing countries.

Keywords: Investment; Discount rate; Financing cost; Debt; Equity; CAPM (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 L94 Q42 Q48 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.eneco.2020.104783

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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