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Evaluation of Investment Projects in Photovoltaic Solar Energy using the DNPV Methodology

Author

Listed:
  • Yessenia Mart nez-Ruiz

    (School of Industrial Engineering, Universidad del Valle, Cali, Colombia)

  • Diego Fernando Manotas-Duque

    (School of Industrial Engineering, Universidad del Valle, Cali, Colombia)

  • Howard Ram rez-Malule

    (School of Chemical Engineering, Universidad del Valle, Cali, Colombia.)

Abstract

The evaluation of investment projects has been carried out mainly through the analysis of Discounted Cash Flow (DCF), whose financial feasibility measures have been based fundamentally on approaches such as the Net Present Value (NPV) and the Internal Rate of Return (IRR), which are widely discussed in the field of energy project valuation. Despite this, the classical methods have a limitation when perceiving relevant characteristics for decision-making in high-risk investments, such as the uncertainty of the cash flows and the quantification of risk. An alternative to the use of these methods is the technique known as Decoupled Net Present Value (DNPV), which decouples the risk associated with the project from the value of money over time. This valuation methodology was applied to a photovoltaic solar energy self-generation project in Colombia. In this study, the results obtained through the DNPV was equivalent to 2.3-fold the value obtained by means of NPV. Thus, many renewable energy projects can become undervalued since traditional methods mistakenly associated a discount rate that includes a very high risk premium and that in many occasions it is more related to the sources of financing of the project instead of representing the risk component that it has.

Suggested Citation

  • Yessenia Mart nez-Ruiz & Diego Fernando Manotas-Duque & Howard Ram rez-Malule, 2021. "Evaluation of Investment Projects in Photovoltaic Solar Energy using the DNPV Methodology," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 180-185.
    • Handle: RePEc:eco:journ2:2021-01-23
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    Citations

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    Cited by:

    1. William Niebles-Nunez & Leonardo Niebles-Nunez & Lorena Hoyos Babilonia, 2022. "Energy Financing in Colombia: A Bibliometric Review," International Journal of Energy Economics and Policy, Econjournals, vol. 12(2), pages 459-466, March.
    2. Martínez-Ruiz, Yessenia & Manotas-Duque, Diego Fernando & Ramírez-Malule, Howard, 2023. "Financial risk assessment of a district cooling system," Energy, Elsevier, vol. 278(PA).
    3. Shao Sheng & Sorourkhah Ali, 2024. "A Novel Perspective on Prioritizing Investment Projects under Future Uncertainty: Integrating Robustness Analysis with the Net Present Value Model," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 18(1), pages 1-16.
    4. Yessenia Martínez-Ruiz & Diego Fernando Manotas-Duque & Juan Carlos Osorio-Gómez & Howard Ramírez-Malule, 2022. "Evaluation of Energy Potential from Coffee Pulp in a Hydrothermal Power Market through System Dynamics: The Case of Colombia," Sustainability, MDPI, vol. 14(10), pages 1-19, May.

    More about this item

    Keywords

    Decoupled net present value (DNPV); Renewable energy projects; Solar energy investments;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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