Selection of discount rates in energy cost analysis using discounted-cash-flow (DCF) and revenue-requirement (RR) methodologies
The discounted cash flow (DCF) and revenue requirement (RR) methods are commonly used to analyze the cost of energy technologies. This paper shows that they are rigorously equivalent. The significance of and relationship between several rates of discount are explored under both noninflationary and inflationary economic conditions. For comparing energy costs between alternative future technologies, the RR method is almost universally used even though the DCF method is often claimed. Three rates of discount are studied. These are the before-tax discount rate; the nominal after-tax discount rate; and the effective, tax-adjusted discount rate. It is shown that any of these rates can be used in cost analysis, provided the right cash flow streams are considered. A general formula is developed that permits the calculation of unit energy cost on the basis of known and simple cost information. The general formulation for the DCF and RR methods is valid under both constant-dollar and inflationary conditions. It is also shown that a pricing policy can be designed to reflect noneconomic purposes and still satisfy financial requirements. Three pricing policies are explored: level price, inflation-adjusted price, and cost-of-money adjusted price. 16 references.
- Research Organization:
- Inst. for Energy Analysis, Oak Ridge, TN
- OSTI ID:
- 5621462
- Journal Information:
- Energy Syst. Policy; (United States), Journal Name: Energy Syst. Policy; (United States) Vol. 3:2; ISSN ESYPB
- Country of Publication:
- United States
- Language:
- English
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