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Using DNPV for valuing investments in the energy sector: A solar project case study

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  • Espinoza, R. David
  • Rojo, Javier

Abstract

In this paper, a practical application of a valuation method that decouples the time value of money from the risk associated with the project is used to value an investment on a solar project. The proposed method is termed decoupled net present value (DNPV). A simple investment renewable energy project is presented using both the traditional NPV techniques and the proposed DNPV. The proposed methodology provides a consistent valuation method free from the problems typically associated with the application of traditional NPV and, more importantly, it allows a seamless integration of project risk assessment performed by technical experts and risk management implemented by business executives into the financial evaluation of the project.

Suggested Citation

  • Espinoza, R. David & Rojo, Javier, 2015. "Using DNPV for valuing investments in the energy sector: A solar project case study," Renewable Energy, Elsevier, vol. 75(C), pages 44-49.
    • Handle: RePEc:eee:renene:v:75:y:2015:i:c:p:44-49
    DOI: 10.1016/j.renene.2014.09.011
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    References listed on IDEAS

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    1. Adam Borison, 2005. "Real Options Analysis: Where Are the Emperor's Clothes?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 17-31, March.
    2. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
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    Cited by:

    1. Espinoza, R. David & Rojo, Javier, 2017. "Towards sustainable mining (Part I): Valuing investment opportunities in the mining sector," Resources Policy, Elsevier, vol. 52(C), pages 7-18.
    2. Dou, Shi-quan & Liu, Jiang-yi & Xiao, Jian-zhong & Pan, Wen, 2020. "Economic feasibility valuing of deep mineral resources based on risk analysis: Songtao manganese ore - China case study," Resources Policy, Elsevier, vol. 66(C).
    3. Sahoo, Nihar R. & Mohapatra, Pratap K.J. & Mahanty, Biswajit, 2017. "Compliance choice analysis for India's thermal power sector in the market-based energy efficiency regime," Energy Policy, Elsevier, vol. 108(C), pages 624-633.
    4. Inmaculada Guaita-Pradas & Ana Blasco-Ruiz, 2020. "Analyzing Profitability and Discount Rates for Solar PV Plants. A Spanish Case," Sustainability, MDPI, vol. 12(8), pages 1-13, April.
    5. D. Espinoza & J. Morris & H. Baroud & M. Bisogno & A. Cifuentes & A. Gentzoglanis & L. Luccioni & J. Rojo & F. Vahedifard, 2020. "The role of traditional discounted cash flows in the tragedy of the horizon: another inconvenient truth," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 25(4), pages 643-660, April.
    6. Teschner, Benjamin & Holley, Elizabeth, 2021. "The cost of mine suspension from social conflict: A decision tree model," Resources Policy, Elsevier, vol. 74(C).
    7. Wenjiao Zai & Yuying He & Huazhang Wang, 2023. "Risk Prediction Method for Renewable Energy Investments Abroad Based on Cloud-DBN," Sustainability, MDPI, vol. 15(14), pages 1-18, July.
    8. Josefa López-Marín & Amparo Gálvez & Francisco M. del Amor & Jose M. Brotons, 2020. "The Financial Valuation Risk in Pepper Production: The Use of Decoupled Net Present Value," Mathematics, MDPI, vol. 9(1), pages 1-19, December.

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