Capital budgeting practice can impede a sustainable transformation ...

nordicenergyperspectives.org

Capital budgeting practice can impede a sustainable transformation ...

NEP – September 2006

Anders Sandoff

School of Business, Economics and Law

Göteborg University

Interpretation of financial requirements

- An impediment to environmentally

sound investments?


NEP – September 2006

CO2 emissions from the Nordic energy system

at three different levels of discount rates

300

250

200

Mton CO 2

150

100

2%

7%

12%

50

0

2000 2010 2020 2030 2040 2050 2060

Year


NEP – September 2006

Change in Nordic electricity supply at different

discount rates

50

40

Lower discount

rate

Higher discount

rate

Difference in elec supply (TWh)

30

20

10

0

-10

-20

-30

-40

Nuclear

Wind

Biofuel

Coal+oil

Gas

-50

From 7% to 2% From 7% to 12%

Change in discount rate


NEP – September 2006

The triad-like foundation of publicly owned

energy companies

Value-driven

ownership

For-profit

organization

Infrastructural

business logic


NEP – September 2006

The impact of hurdle rates on the Net Present Value

Initial outlay: 300 mSEK

Yearly net cash flow 20 mSEK

300

200

100

0

Net Present Value

mSEK

-100

-200

-300

1

23456789

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

Year

7 % hurdle rate

5 % hurdle rate

3 % hurdle rate


Nominal hurdle rates used for investments

in energy production

NEP – September 2006

35%

30%

25%

20%

15%

10%

5%

0%

4% 5% 6% 7% 8% 9% 10% 11%

Observations for 44 Swedish utilities

Average hurdle rate 6,7 %

50 % use pay back time as a decision criteria


NEP – September 2006

Pay-back time and hurdle rate as

a decision criteria

80%

70%

Implicit rate avkastningskrav of return (%) %

60%

50%

40%

30%

20%

10%

0%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Hurdle rate

25 %

20 %

15 %

10 %

5 %

0 %

Återbetalningstid (år)

Required pay-back time (years)


Motives for municipalities to own

an energy company

NEP – September 2006

90%

90%

80%

80%

70%

70%

60%

50%

40%

30%

20%

10%

0%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

84%

82% 80%

77%

69%

66%

37%

31%

Chairman CEO of the board

of directors

51%

29%

23% 22% 22%

24%

19% 18%

14%

8% 10%

6% 4%

0% 2% 2%

1 2 3 4 5 6 7 8 9 10 11 12

70%

84%

72%

44%

Chairman of the municipal

executive committee

35%

12% 12%

49%

21%

7%

2%

0%

1 2 3 4 5 6 7 8 9 10 11 12

1. Influence the local energy system

2. Influence local environment

3. Low price district heating

4. Lower price distribution

5. Increase regional attraction

6. Financing other municipal activities

7. Increases quality in other activities

8. More profitable than selling

9. Gives financial stability

10. Heritage/historical reasons

11. Unclear motives

12. Other than above


NEP – September 2006

Major differences between an infrastructural

and a market business logic

Infrastructure logic

Market logic

Primary focus Function Form

Product quality Homogenous Differentiated

Necessary market

conditions Stable Volatile

Investors expect Satisfactory profitability High profitability

Preferred planning

horizons Long Short

Focus in capital

structure Loan Equity

Corporate governance

regime Active owners Institutional investors

Suitable method of Investment and Artificial market

intervention production support mechanisms


NEP – September 2006

Interpretation of financial requirements

Capital budgeting techniques

• Valuation of business objectives

• Impact of business logic

Many circumstances pulling in the same direction…

May impede environmentally sound investments


NEP – September 2006

Thank you!

www.NordicEnergyPerspectives.org

More magazines by this user
Similar magazines