Economics of green/renewable energy projects

Abstract

Governments and industry are taking actions to reduce Green House Gases (GHGs) which could lessen global warming. A major effort is underway to generate energy using renewable sources such as solar, wind, wave and other technologies that eliminate or minimize GHGs. Nevertheless, progress in employing these technologies has been slow because of the high capital costs required. Financial leverage is used to increase the economic attractiveness of capital intensive projects. However, as debt increases so does financial risk. Combining it with the risk from using emerging technologies tends to make renewable energy projects economically unattractive. Risk Adjusted Discount Rates (RADRs) are introduced as a means to account for these risks. To illustrate this problem a case study for the use of hydrogen in buses is examined. Sensitivity analysis showed the importance of capital for this project's economics. While financial leverage improved the Internal Rate of Return (IRR) applying the RADRs indicated that the project was not economical without very high leverage (>90% debt).