Financial parameters significantly influence investment decisions in the model.

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Discount rate (Social Discount Rate - SDR)

The discount rate used here is the social discount rate (SDR), which reflects society’s valuation of costs and benefits over time. Unlike private discount rates such as the weighted average cost of capital (WACC), which reflect investor returns, the SDR takes a broader view, incorporating long-term social and environmental impacts. It is used to convert future costs and benefits into present-day values, enabling consistent comparison of scenarios with different timelines. The choice of SDR can strongly influence model results: a lower SDR places more value on future outcomes and tends to favour long-term investments, while a higher SDR gives more weight to short-term benefits.

Data sourcing standards for discount rates are detailed below.

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Data sourcing standards – discount rates

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Weighted Average Cost of Capital (WACC)

WACC represents the average rate of return a project must offer to satisfy its investors, covering both debt and equity, and reflects the perceived investment risk for a given technology or project. It is used as the discount rate when calculating the net present value (NPV) of lifetime project costs. Differences in WACC between technologies can significantly affect their relative competitiveness. It is expressed as a percentage and is often held constant over the model period for simplicity, though in reality it may vary by technology and over time.

Data sourcing standards for WACC are detailed below.

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Data sourcing standards – WACC