The role of the discount rates in energy systems optimisation models

Abstract

The selection of the social discount rate and the consideration of hurdle rates in energy systems optimisation models affect the creation of sound and comprehensive scenarios useful for energy modellers. Due to the lack of studies about the use of different discounting options in energy optimisation models, the goal of this paper is to fill that gap by establishing the foundations for a debate among energy modellers, policy-makers and stakeholders in this regard. So firstly, we introduced the concept of discount rates both social and technology-specific including a thorough literature review concerning figures, scopes and approaches. Secondly, two models, ETSAP-TIAM and TIMES-Norway, were used to assess the behaviour of the energy systems at different regionalisation levels, Europe and Norway respectively. Thirdly, we analysed the evolution of the electricity production mixes and system costs for both models and considering several values for the discount rates. Finally, results showed that the energy system is strongly affected by changes in the social discount rate. The lower the social discount rate is, the higher the renewable contribution. The social discounting exerts influence on capital intensive investments so it is quite important to look at the energy carriers pathways (fossil-renewable transition). This is what happens in the case of ETSAP-TIAM for Europe. Reversely, in the case of TIMES-Norway, as the electricity system is almost 100% renewable, it is important to take into account the hurdle rates of the technologies to enrich the competition by including their particular risks and barriers. In summary, we recommend using a value not higher than 4-5% for the social discount rate for the European countries as well as to include an exhaustive portfolio of hurdle rates for all the technologies included in the energy optimisation model.