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Accounting for and finance of generation investment

David M Newbery ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: State-owned electricity companies typically set prices that are too low to finance new investment when needed, and which create additional problems where private investment is sought. The paper asks to what extent this can be attributed to historic cost accounting, and finds that provided the required rate of return is appropriately set, this seems unlikely to be the main cause of under-pricing, although inflation in a period of excess capacity can amplify such under-pricing. It seems more likely that the main problem is a failure to charge an appropriate riskadjusted rate of return. The paper concludes by suggesting how such companies can move to a more efficient price structure, provided the correct cost of capital is recognised in the regulated pricing structure.

Keywords: Electricity investment; pricing; accounting; cost of capital (search for similar items in EconPapers)
JEL-codes: L32 L51 L94 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ene and nep-ppm
Date: 2008-07
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