Discount rates in energy system analysis
The current status of existing options and the use of discount rates in energy efficiency policy modelling, with a specific focus on buildings in different countries.
Discount rates reflect the capital cost and expected rate of return of investments, and are thus paramount to assess the costs and long-term benefits of different policy scenarios. The harmonisation of present and future values within an economic assessment of investment opportunities or within economic systems requires discounting of payment and income streams. This allows a conversion of future outcomes into annualised costs at present value. Thus, outcomes such as overall (social) costs of different policy options or the economic assessment of energy efficiency potentials are highly influenced by the choice of discount rate.
This paper summarises the role of discount rates in energy system analysis with two perspectives:
- Social discount rates are applied for evaluating total costs and benefits of energy systems from a societal perspective;
- Individual discount rates are applied to model investment decision-making reflecting the expected return of an investor.
Moreover, the risks to consider as well as the different approaches taken in energy system analysis and policy evaluation are described. Based on the examined case studies, conclusions are drawn for a future definition of discount rates, according to the two analysed perspectives.