Abstract
The transition of the energy system in Poland has a long time horizon and demands a substantial investment effort supported by proper economic evaluation. It requires a precise Social Discount Rate (SDR) estimation as discounting makes the present value of long-term effects extremely sensitive to the discount rate level. However, Polish policymakers have little information on SDR: the predominant practice applies a priori fixed 5% discount rate, while studies devoted only to Poland are quite rare. To eliminate this research gap, our paper aims at estimating SDR for Poland, applicable in energy transition policies. We derive SDR for three datasets varying in length, twofold: using market rates via Consumption Rate of Interest (CRI) and Social Opportunity Cost (SOC) of capital, and prescriptive Ramsey and Gollier approaches based on Social Welfare Function (SWF). The results indicate that the rates based on CRI and SOC deviate substantially with changing data timeframes and market conditions, while prescriptive methods show much higher time stability. Due to long-term planning horizons for energy policies, we argue for adopting, as SDR in Poland, the longest dataset’s Ramsey-based rate of 4.72% which can be reduced to 4.39% by Gollier’s precautionary term (reflecting the uncertainty over future consumption growth), which are our main findings.
Highlights
This paper concentrates on the problems of economic evaluation of investment projects, whose implementation is in line with the priorities of Poland’s long-term energy policy, and the issue of discount rate estimation that should be adopted to improve the appraisal process of such investments
The following section presents the results obtained for all approaches for three time horizons reflecting the range of data gathered. This is followed by the discussion including a recommendation of the Social Discount Rate (SDR) values that we find the most appropriate to use for energy policy investments
The discrepancy between prescriptive and descriptive approaches to SDR has reverberated for a long time in academic discourse
Summary
Due to longterm planning horizons for energy policies, we argue for adopting, as SDR in Poland, the longest dataset’s Ramsey-based rate of 4.72% which can be reduced to 4.39% by Gollier’s precautionary term (reflecting the uncertainty over future consumption growth), which are our main findings. This paper concentrates on the problems of economic evaluation of investment projects, whose implementation is in line with the priorities of Poland’s long-term energy policy, and the issue of discount rate estimation that should be adopted to improve the appraisal process of such investments. The commonly used method of discount rate estimation is the investor’s cost of capital. This method in regard to the analysed projects cannot be effectively applied for at least two reasons
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
