Roles of discount rate, risk premium, and device performance in estimating the cost of energy for photovoltaics

TL;DR

This paper emphasizes the importance of using appropriate discount and risk rates in estimating photovoltaic energy costs, highlighting how previous models may underestimate costs and the significance of device efficiency.

Contribution

It introduces a revised approach for discounting in PV cost analysis, correcting underestimations caused by uniform rate assumptions in prior models.

Findings

Using different borrowing and discount rates affects cost estimates.

Proper discounting reveals the true importance of device efficiency.

Financial and non-financial factors influence PV energy costs significantly.

Abstract

We show that different rates should be used for borrowing and discount rates, and that the risk-free rate should be used for discounting when assessing and comparing the cost of energy accross diffferent producers and technologies, on the example of photovoltaics. Recent quantitative models using the same rate for borrowing and discounting lead to an underestimation of the cost for risky borrowers and to distorted sensitivities of the cost to financial and non-financial factors. Specifically, it is shown that they may lead to gross underestimation of the importance of solar-to-electricity conversion efficiency. The importance of device efficiency is re-established under the treatment of the discount rate proposed here. The effects on the cost of energy of the installation efficiency and degradation rate, on the discount rate and risk premium as well as on the project lifetime are estimated.