Estimating the Cost of Capital for Renewable Energy Projects

40 Pages Posted: 17 Apr 2019

See all articles by Bjarne Steffen

Bjarne Steffen

ETH Zurich - Department of Humanities, Social and Political Sciences

Date Written: April 17, 2019

Abstract

Many models in energy economics assess the cost of alternative power generation technologies. As an input, the models require well calibrated assumptions for the cost of capital or discount rates to be used, especially for renewable energy for which the cost of capital differs widely across countries and technologies. In this article, we review the spectrum of estimation methods for the private cost of capital for renewable energy projects and discuss appropriate use of the methods to yield unbiased results. We then evaluate the empirical evidence from 46 countries for the period 2009–2017. We find a globally consistent rank order among technologies, with the cost of capital increasing from solar PV to onshore wind to offshore wind power. On average, the cost of capital in developing countries is significantly higher than in industrialized countries, with large heterogeneity also within the groups of industrialized or developing countries.

Keywords: Climate finance, sustainable investment, discount rate,

JEL Classification: G12, G31, G32, L94, Q42, Q48

Suggested Citation

Steffen, Bjarne, Estimating the Cost of Capital for Renewable Energy Projects (April 17, 2019). USAEE Working Paper No. 19-399. Available at SSRN: https://ssrn.com/abstract=3373905 or http://dx.doi.org/10.2139/ssrn.3373905

Bjarne Steffen (Contact Author)

ETH Zurich - Department of Humanities, Social and Political Sciences ( email )

Haldeneggsteig 4
Zurich, Zurich 8006
Switzerland

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