Equilibrium and hurdle rates
#3
Dear Antti-L,

Thanks for your reply.

After having some discussions and readings, I found that this issue is indeed true and described in a paper titled 'Risk adjusted discounted cash flows in capacity expansion models' of Ehrenmann and Smeers in Math Programming journal.

Unless you would revert to using mixed complementarity problems or solving the model iteratively, there is no exact solution to this problem.

What I conclude is that:
- the hurdle rate (technology specific discount rate) in TIMES cannot be directly be interpreted as such, but it remains a way of increasing the capital cost.
- the deviations between the IRR you would calculate ex-post and the hurdle rate you specified ex-ante are likely to be small unless:
- your revenues are strongly decreasing over the lifetime of the technology (e.g., an investment in solar PV or batteries where investment costs will drop significantly in the later
years). In this case, the hurdle rate you specify in the model should be lower than the one you effectively want to implement
- your revenues are strongly increasing over the lifetime of the technology (e.g., an investment in a wind turbine in a scenario with a stringent target for renewables, but the
potential of wind turbines quickly becomes depleted.
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Messages In This Thread
Equilibrium and hurdle rates - by K_Poncelet - 02-03-2017, 04:29 PM
RE: Equilibrium and hurdle rates - by Antti-L - 29-04-2017, 04:37 AM
RE: Equilibrium and hurdle rates - by K_Poncelet - 29-04-2017, 12:01 PM
RE: Equilibrium and hurdle rates - by Antti-L - 29-04-2017, 08:48 PM
RE: Equilibrium and hurdle rates - by sld - 01-05-2017, 10:19 AM

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