Open AccessDiscounting and the Green Transition: District Heating in Denmark
Author(s) -
Mark Freeman,
Frikk Nesje,
Daniel Møller Sneum,
Emilie Rosenlund Soysal
Publication year - 2021
Publication title -
danish utility regulator's anthology project series on better regulation in the energy sector
Language(s) - English
Resource type - Journals
ISSN - 2597-3053
DOI - 10.51138/bzyb4621
Subject(s) - discounting , economics , present value , net present value , actuarial science , cost–benefit analysis , capital (architecture) , welfare , microeconomics , finance , ecology , production (economics) , biology , market economy , history , archaeology
Taking Aalborg as the basis for a case study, we consider the discount rates, annuity rates and costs of capital that were used in recent socio-economic and financial Net Present Value (NPV) analyses of a proposed geothermal district heating plant. While the core NPV analysis applied a real social discount rate of 4 percent, in keeping with Danish government guidance, emissions and electricity prices were based on costs of capital that differed from this rate, as did the annuity rate applied in the financial analysis of the project. While the different rates are carefully justified in each setting, we question whether there is consistency in the approach taken to intergenerational welfare across different steps of the analysis. The use of high corporate rates in some contexts potentially makes it more difficult for Green Transition projects to meet the legal requirement of being evaluated as socio-economically optimal.