Accounting for and finance of generation investment
AbstractState-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.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0830.
Date of creation: Jul 2008
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Web page: http://www.econ.cam.ac.uk/index.htm
Electricity investment; pricing; accounting; cost of capital;
Find related papers by JEL classification:
- L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-09-05 (Accounting & Auditing)
- NEP-ALL-2008-09-05 (All new papers)
- NEP-ENE-2008-09-05 (Energy Economics)
- NEP-PPM-2008-09-05 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Newbery, D., 2006. "Power sector reform, private investment and regional co-operation," Cambridge Working Papers in Economics 0647, Faculty of Economics, University of Cambridge.
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