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Roles of discount rate, risk premium, and device performance in estimating the cost of energy for photovoltaics

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  • Sergei Manzhos

Abstract

We show that different rates should be used for borrowing and discount rates, and that the risk-free rate should be used for discounting when assessing and comparing the cost of energy accross diffferent producers and technologies, on the example of photovoltaics. Recent quantitative models using the same rate for borrowing and discounting lead to an underestimation of the cost for risky borrowers and to distorted sensitivities of the cost to financial and non-financial factors. Specifically, it is shown that they may lead to gross underestimation of the importance of solar-to-electricity conversion efficiency. The importance of device efficiency is re-established under the treatment of the discount rate proposed here. The effects on the cost of energy of the installation efficiency and degradation rate, on the discount rate and risk premium as well as on the project lifetime are estimated.

Suggested Citation

  • Sergei Manzhos, 2012. "Roles of discount rate, risk premium, and device performance in estimating the cost of energy for photovoltaics," Papers 1209.1903, arXiv.org.
  • Handle: RePEc:arx:papers:1209.1903
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    File URL: http://arxiv.org/pdf/1209.1903
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    1. Branker, K. & Pathak, M.J.M. & Pearce, J.M., 2011. "A review of solar photovoltaic levelized cost of electricity," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4470-4482.
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