Economic Foundations of Energy Investments - Green Energy and Efficiency: An Economic Perspective - page 60

which may, among other things, result in increases in GDP, improvements in health
in the case of clean technologies, labor, technological development, taxes, security
of supply, etc. These welfare effects may, in some cases, justify investment pro-
motion policies: investment in renewables is a case in point. However, private

rms

act in accordance with the nancial characteristics of investment, including those

environment- and welfare-related elements that affect their cash ows. This is the

case, for example, of the cost of CO 2 emissions for rms subject to the European

Union s Emission Trading Scheme (EU ETS) and of investors in renewables for

which subsidies are available.
There are various frameworks currently available for promoting investment in
energy assets, most of them concerned with renewables. 2 They include:

'

(a) An initial, transitory subsidy (one-off);
(b) A constant feed-in tariff;
(c) Market price plus a xed premium;

(d) Market price plus a Renewables Obligation Certi

cates (ROC) price;
(e) Other incentive schemes, such as a subsidy on capital expenditure, a partial or
total subsidy on ( xed) interest rates, public support measures that impact on

credit ratings, decreasing the cost of borrowing, tax deductions on investments,
reductions in the tax rate, etc.
All these measures affect the yield from investments and should therefore be
taken into account in the valuation process.
The progressive deregulation of energy markets, and of the electricity market in
particular, has brought about a shift from a system in which margins were more or
less assured to one that is increasingly riskier and requires more complex tools to
value and manage energy investments and their associated risks. Market deregula-
tion has been accompanied by the development of more and more liquid derivatives
markets, where products are quoted over increasingly longer periods. These markets
(be they organized or OTC) provide ever greater scope for risk management, and can
serve as supports for making valuations consistently with risks when the complete
market hypothesis is reasonable.
There are numerous valuationmethods, some of which include impacts on welfare.
Menegaki [ 21 ] reviews the literature on the valuation/evaluation of renewable energy
resources and summarizes the methods used in them. He discerns four major
categories:

Economic welfare-based methods: these include stated preferences techniques
(e.g., contingent valuation, choice experiments) and revealed-preferences tech-
niques (e.g., travel cost, hedonic pricing). Menegaki states that this valuation
approach produces the most inclusive values for renewable energy because these
methods also take into account its nonuse value.

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2

Investment promotion policies should be internalized.