Discounted cash flow (DCF) and revenue requirement (RR) methodologies in energy cost analysis

Technical Report · Fri Sep 01 00:00:00 EDT 1978

OSTI ID:6353407

Phung, D L

Of the many cost analysis methods employed, two are most frequently used for the comparison of alternative energy technologies: these are the discounted cash flow (DCF) method and the revenue requirement (RR) method. The former is more favored by unregulated industries which do not know but must estimate in advance how much revenue their products can generate in the competitive marketplace. The latter is favored by regulated industries which know with some certainty the maximum allowable return on their invested capital. This paper shows that the two methods are based on the same financial principles and that one can lead to the other consistently. Furthermore, the discount rates to be used in various forms of their formulation are interrelated and depend only on the cash flow streams that are included in the formulation. In the comparison of energy costs between alternative future technologies, the RR method is almost universally used even though the DCF method is often claimed. The paper shows that a consistent pricing policy can be arrived at by any of the formulations when the proper cash flows, discount rate, and escalation rate of the prices are properly accounted for.

• Research Organization: Institute for Energy Analysis, Oak Ridge, TN (USA)
• DOE Contract Number: EY-76-C-05-0033
• OSTI ID: 6353407
• Report Number(s): ORAU/IEA-78-18(R)
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING
POLICY AND ECONOMY
APPROPRIATE TECHNOLOGY
ECONOMIC ANALYSIS
ENERGY SOURCE DEVELOPMENT
CAPITAL
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COMPETITION
INDUSTRY
INFLATION
INVESTMENT
MARKET
ECONOMICS
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