Abstract
The concept of risk is well known in the energy sector. It is normally recognized when it comes to price and cost forecasting, annual production calculation, or evaluating project lifetime. Nevertheless, it should be pointed out that the quantitative evaluation of risk is usually difficult. The discount rate is the only parameter reflecting risk in the discounted cash flow analysis. Therefore, knowledge of the discount rate along with the major components affecting its level is of fundamental significance for making investment decisions, capital budgeting, and project management. By referring to the standard coal-fired power generation projects the authors of the paper tackle the analysis of the composition of discount rate for onshore wind farm technologies in the Polish conditions. The study was carried out on the basis of a typical (hypothetical) onshore wind farm project assessed at the feasibility stage. To enable comparisons and discussions, it was assumed that the best reference point for such purposes is the real risk-adjusted discount rate, RADR, after-tax, in all equity evaluations (the ‘bare bones’ assumption); that is because such a rate reflects the inherent characteristics of the project risk. The study methodology involves the a priori application of the discount rate level and subsequently—in an analytical way—calculation of its individual components. The starting point for the analysis of the RADR’s composition was the definition of risk, understood as the product of uncertainty and consequences. Then, the risk factors were adopted and level of uncertainty assessed. Subsequently, using the classical sensitivity analysis of IRR, the consequences (as slopes of sensitivity lines) were calculated. Consequently, risk portions in percentage forms were received. Eventually, relative risks and risk components within cost of equity were assessed. Apart from the characteristics of the discount rate at the feasibility stage, in the discussion section the study was supplemented with an analogous analysis of the project’s cost of equity at the operating stage.
Highlights
Due to the climate policy of highly developed countries around the world, including the European Union, investments in renewable energy sources are becoming an urgent necessity in Poland
In relation to the above, is there an emerging public awareness of off-shore farms as a potential zero-carbon source of electricity [1], and a number of low-carbon investments were implemented in Poland in the last decade, including the onshore wind farms [2]
According to that we propose methodology for the analysis of risk levels that estimates the constituent components of the cost of equity used in DCF calculations of onshore wind projects
Summary
Due to the climate policy of highly developed countries around the world, including the European Union, investments in renewable energy sources are becoming an urgent necessity in Poland. In relation to the above, is there an emerging public awareness of off-shore farms as a potential zero-carbon source of electricity [1], and a number of low-carbon investments were implemented in Poland in the last decade, including the onshore wind farms In spite of the fact that the development of wind power was, in Poland, temporarily halted by the introduction of the so-called ‘Distance Act’ and by the growing popularity of small photovoltaic panels technology among Polish citizens [6], yet the unwavering interest in wind farms—primarily on account of the pressure of climate policy of the European
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