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

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.

Evaluating Green Technology Strategies for the Sustainable Development of Solar Power Projects: Evidence from Pakistan

“…The IRR and NPV are used as fundamental approaches to measuring financial feasibility for solar power projects mentioned in Table 1. The decoupled NPV is a method used in the renewable energy field to quantify and identify the source of risk that can affect the anticipated cash flows of energy-producing projects [82]. The purpose of quantifying financial risk associated with selected solar energy projects is to secure financing in this study.…”

Análisis de opciones reales para la valoración financiera de proyectos de energía geotérmica en Colombia

“…A pesar de ser un criterio que se ha utilizado durante muchos años para decisiones de inversión en proyectos de energía, el VPN no es considerado un método apropiado para proyectos que son altamente inciertos, pues este trae consigo un gran supuesto relacionado con flujos de caja definidos (Kim et al, 2017). Desde el punto de vista de la viabilidad financiera de cualquier proyecto, los modelos o criterios de decisión tradicionales asumen un panorama estático en la ocurrencia de las magnitudes a lo largo de la vida útil de los proyectos, resultando insuficiente al momento de percibir características relevantes para la toma de decisiones en inversiones de alto riesgo (Martínez-Ruiz et al, 2020).…”

Development of Photovoltaic Energy in EU Countries as an Alternative to Fossil Fuels

“…However, the careful analysis of annual installations led to the conclusion that between 2011 and 2017 the EU countries' share was not only declining compared to the growing worldwide market; we could also observe a decrease in the annual installation figures. After a rise in the occurrence of installation in 2011 when the total photovoltaic capacities in EU counties reached 70% of the worldwide installation we observed a decreasing trend, and now the EU market consists of only 50% of the worldwide market [17][18][19][20]. The growth of the share of energy leading from photovoltaic cells in the energy mix in many EU countries gives them many benefits [28].…”