IDEAS home Printed from https://ideas.repec.org/p/tse/wpaper/131967.html

Discounting along the merit order, with an application to the electricity market

Author

Listed:
  • Gollier, Christian

Abstract

Within the same sector, technologies yielding larger variable costs are more sensitive to disruptions during a recession. For this reason, assets lower in the merit order should be valued using a larger risk-adjusted discount rate. We characterize the efficient discount rates along the technological merit order in a standard CCAPM framework, and we link them to their option values. We apply our results to the electricity sector in France, showing that the CCAPM beta of fossil electricity is more than twice that of renewable or nuclear electricity. This fossil beta is increasing with the carbon price. We also propose a methodology to measure the value creation of different generation technologies in a given electricity mix by comparing their levelized costs and prices of electricity that take risks and intermittency into account.

Suggested Citation

  • Gollier, Christian, 2026. "Discounting along the merit order, with an application to the electricity market," TSE Working Papers 26-1762, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:131967
    as

    Download full text from publisher

    File URL: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2026/wp_tse_1762.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nicolas Astier & Frank A. Wolak, 2026. "Nuclear Operations with a High Penetration of Renewables: The Case of France," NBER Working Papers 34662, National Bureau of Economic Research, Inc.
    2. Mar Reguant, 2019. "The Efficiency and Sectoral Distributional Impacts of Large-Scale Renewable Energy Policies," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(S1), pages 129-168.
    3. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
    4. Breeden, Douglas T, 1980. "Consumption Risk in Futures Markets," Journal of Finance, American Finance Association, vol. 35(2), pages 503-520, May.
    5. Stefan Ambec & Claude Crampes & Stefan Lamp, 2025. "Pricing Intermittent Renewable Energy," CESifo Working Paper Series 11977, CESifo.
    6. Frederic Cherbonnier & Christian Gollier, 2022. "Risk-adjusted Social Discount Rates," The Energy Journal, , vol. 43(4), pages 45-68, May.
    7. repec:aen:journl:ej43-4-cherbonnier is not listed on IDEAS
    8. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    9. repec:bla:jfinan:v:44:y:1989:i:2:p:231-62 is not listed on IDEAS
    10. Christian Gollier & James K. Hammitt, 2014. "The Long-Run Discount Rate Controversy," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 273-295, October.
    11. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    13. Paul L. Joskow, 2011. "Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies," American Economic Review, American Economic Association, vol. 101(3), pages 238-241, May.
    14. Philipp Krüger & Augustin Landier & David Thesmar, 2015. "The WACC Fallacy: The Real Effects of Using a Unique Discount Rate," Journal of Finance, American Finance Association, vol. 70(3), pages 1253-1285, June.
    15. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    16. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
    17. repec:nas:journl:v:115:y:2018:p:5409-5414 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Miguel Cantillo Simon, 2019. "Asset Pricing with Heterogeneous Agents and Non-Tradeable Assets," Working Papers 201907, Universidad de Costa Rica, revised Dec 2019.
    2. Ravi Jagannathan & Yong Wang, 2005. "Consumption Risk and the Cost of Equity Capital," NBER Working Papers 11026, National Bureau of Economic Research, Inc.
    3. Gollier, Christian & van der Ploeg, Frederick & Zheng, Jiakun, 2023. "The discounting premium puzzle: Survey evidence from professional economists," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    4. Liu, Weimin & Luo, Di & Zhao, Huainan, 2016. "Transaction costs, liquidity risk, and the CCAPM," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 126-145.
    5. Hardouvelis, Gikas A. & Kim, Dongcheol & Wizman, Thierry A., 1996. "Asset pricing models with and without consumption data: An empirical evaluation," Journal of Empirical Finance, Elsevier, vol. 3(3), pages 267-301, September.
    6. Xiao, Yuchao & Faff, Robert & Gharghori, Philip & Min, Byoung-Kyu, 2013. "Pricing innovations in consumption growth: A re-evaluation of the recursive utility model," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4465-4475.
    7. Smith, David C., 1999. "Finite sample properties of tests of the Epstein-Zin asset pricing model," Journal of Econometrics, Elsevier, vol. 93(1), pages 113-148, November.
    8. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    9. Robert Faff, 2014. "Alpha," Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 13(4), pages 607-622, December.
    10. Ricardo M. Sousa, 2011. "Asset Returns Under Model Uncertainty: Evidence from the euro area, the U.K. and the U.S," Working Papers w201119, Banco de Portugal, Economics and Research Department.
    11. Shi, Lei, 2016. "Consumption-based CAPM with belief heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 30-46.
    12. Daria Pignalosa, 2021. "The Euler Equation Approach: Critical Implications of Recent Developments in the Theory of Intertemporal Choice," Bulletin of Political Economy, Bulletin of Political Economy, vol. 15(1), pages 1-43, June.
    13. Clarke, Charles, 2022. "The level, slope, and curve factor model for stocks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 159-187.
    14. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    15. repec:hal:journl:hal-04981354 is not listed on IDEAS
    16. Lee, Kiryoung & Kim, Minki & Lam, Sing-Sen, 2024. "Chinese consumption shocks and U.S. equity returns," International Review of Economics & Finance, Elsevier, vol. 96(PA).
    17. Anisha Ghosh & Christian Julliard & Alex P. Taylor, 2017. "What Is the Consumption-CAPM Missing? An Information-Theoretic Framework for the Analysis of Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 30(2), pages 442-504.
    18. Bin Li & Benjamin Liu & Eduardo Roca, 2011. "Stock returns and consumption factors in the Australian market: Cross-sectional tests," Australian Journal of Management, Australian School of Business, vol. 36(2), pages 247-266, August.
    19. repec:ers:journl:v:xxiv:y:2021:i:4:p:370-395 is not listed on IDEAS
    20. Ashley Lim & Yihui Lan & Sirimon Treepongkaruna, 2020. "Asset pricing and energy consumption risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3813-3850, December.
    21. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    22. Stuart Hyde & Mohamed Sherif, 2004. "Don't break the habit: structural stability tests of consumption models in the UK," Money Macro and Finance (MMF) Research Group Conference 2003 49, Money Macro and Finance Research Group.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tse:wpaper:131967. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/tsetofr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.