Report about the the crucial role of discount rates in European Commission energy system modelling, by Andreas H. Hermelink & David de Jager, Ecofys.
Discount rates are a crucial factor in energy and climate modelling and associated impact assessments. Why is that?
Energy efficiency measures (e.g. in buildings) typically have relatively high upfront costs, which need to be recovered by savings over longer periods. Discount rates are thus used to attribute a value to future cash flows. The higher the discount rate, the lower the value we assign to future savings in today’s decisions. Consequently, high discount rates make energy efficiency measures and supporting policies look less attractive.