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Financial analysis for investment and policy decisions in the renewable energy sector

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Abstract

The management and exploitation of renewable energy sources is now recognised as central to sustainable development. Environmental concerns, recurring oil crises and market weaknesses, combined with the availability of power from natural resources and resulting possibilities for job creation and energy independence, have all pushed developed and developing countries towards new energy strategies that include RES. This paper analyses the profitability of potential investments in small, medium and large RE electrical power facilities, applying a Net Present Value (NPV) methodology. The proposed financial analysis permits strategic selection of an energy portfolio from among available sources and plant sizes. The paper then discusses potential constraints, and where possible applies the NPV methodology for estimating the necessary changes in decision-making. It defines the role of government incentive schemes in the financial results and evaluates the impact of variation in critical variables (subsidies, sale price of electricity, investment cost, operating cost and equivalent operating hours) on the estimation of NPV. Finally, the paper analyses the environmental impact of all the energy sources examined, examines the links with the financial results and proposes socio-economic policy considerations based on the entirety of the research results. While the methodology is applied to the Italian case, it could be modified to serve in other nations by adapting the input parameters to reflect the different regulatory and market contexts.

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Abbreviations

AiFiT :

All-inclusive feed-in tariff for energy from Bi,Hy,Wi (€/kWh)

Bi :

Biomass source

Capex :

Total capital expenditure (€)

capex U :

Net capital expenditure per kW (€/kW)

C in :

Capacity of the installed facility (kW)

dE f :

Annual decrease in plant efficiency (%)

DT (PV) :

State duties on Net metered revenue from PV (€)

DT (Bi,Hy,Wi) :

State duties on Net metered revenue from Bi,Hy,Wi (€)

DT U :

Unit duty for Net metered kW (%)

E f :

Embodied energy by RE facility (kWh)

FiP CE :

Premium Feed-in Tariff per kW from PV (€)

FiP PV :

Total Premium Feed-in Tariff for PV(€)

FiT (Bi,Hy,Wi) :

Feed-in tariff for Bi, Hy, Wi (€)

h eq :

Equivalent hours of operation (h)

Hy :

Hydro source

Inf :

Inflation rate (%)

inf el :

Energy inflation rate (%)

K :

Constant for Green Certificate

L CS :

Loan capital share (%)

L IS :

Loan interest share (%)

N R :

Time for plant construction (years)

opex :

Total operating expenditure (€)

opex U :

Operating expenditure per kW (€/kW)

p GC :

Price of Green Certificate (€/kWh)

PV :

Photovoltaic source

r :

Opportunity cost (%)

SP el (Bi,Hy,Wi) :

Sales of electricity from Bi, Hy, Wi (€)

SP el (PV) :

Sales of electricity from PV (€)

SPu el :

Sale price per kWh of electrical energy (€/kWh)

Wi :

Wind source

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Authors and Affiliations

  1. Department of Industrial and Information Engineering and Economics, University of L’Aquila, Via G. Gronchi, 18, 67100, L’Aquila, Italy

    Federica Cucchiella, Idiano D’Adamo & Massimo Gastaldi

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  1. Federica Cucchiella
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  2. Idiano D’Adamo
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  3. Massimo Gastaldi
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Correspondence to Federica Cucchiella.

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Cucchiella, F., D’Adamo, I. & Gastaldi, M. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Techn Environ Policy 17, 887–904 (2015). https://doi.org/10.1007/s10098-014-0839-z

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