Abstract
The evaluation of investment projects has been carried out mainly through the analysis of Discounted Cash Flow (DCF), whose financial feasibility measures have been based fundamentally on approaches such as the Net Present Value (NPV) and the Internal Rate of Return (IRR), which are widely discussed in the field of energy project valuation. Despite this, the classical methods have a limitation when perceiving relevant characteristics for decision-making in high-risk investments, such as the uncertainty of the cash flows and the quantification of risk. An alternative to the use of these methods is the technique known as Decoupled Net Present Value (DNPV), which decouples the risk associated with the project from the value of money over time. This valuation methodology was applied to a photovoltaic solar energy self-generation project in Colombia. In this study, the results obtained through the DNPV was equivalent to 2.3-fold the value obtained by means of NPV. Thus, many renewable energy projects can become undervalued since traditional methods mistakenly associated a discount rate that includes a very high risk premium and that in many occasions it is more related to the sources of financing of the project instead of representing the risk component that it has. Keywords: Decoupled net present value (DNPV), Renewable energy projects, Solar energy investments JEL Classifications: Q2, Q4 DOI: https://doi.org/10.32479/ijeep.10577
Highlights
In the valuation of energy projects, different traditional techniques have been used such as the net present value (NPV), the internal rate of return (IRR) and the levelized cost of energy (LCOE) (Santos et al, 2014)
The main objective of this study is to evaluate the financial viability of a photovoltaic solar energy self-generation project in a Colombian home, by using decoupled net present value (DNPV)
This case study was presented as an example for the application of the DNPV approach to solar energy self-generation projects, one of the most developed technologies in the field of renewable energies
Summary
In the valuation of energy projects, different traditional techniques have been used such as the net present value (NPV), the internal rate of return (IRR) and the levelized cost of energy (LCOE) (Santos et al, 2014). (Zhang et al, 2016a), which makes it vitally important to take these aspects into account when carrying out a financial feasibility analysis of a project of this nature. Under this premise, and besides of the classical methods, in financial feasibility of energy projects have been consider more sophisticated techniques such as real options (e.g., Shun, 2011; Zhang et al, 2016b; Agaton et al, 2020), which consider the uncertainty of the projects and the flexibility of investment decisions within the valuation analysis (Menegaki, 2008). As discussed in Ho and Liao (2011); the application of methods such as the NPV to high-risk projects can underestimate the value of these and even their rejection, if higher discount rates are adopted for the valuation
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