Economics Methods

Rosalie Ruegg

National Institute of Standards and Technology

Walter Short

National Renewable Energy Laboratory

3.1 Introduction 3 -1

3.2 Making Economically Efficient Choices 3-2

3.3 Economic-Evaluation Methods 3-4

Life-Cycle Cost Method . Levelized Cost of Energy . Net Present Value or Net Benefits Method . Benefit-to-Cost

Ratio or Savings-to-Investment Ratio Method . Internal Rate-of-Return Method . Overall Rate-of-Return Method . Discounted Payback Method . Other Economic-Evaluation Methods

3.4 Risk Assessment 3-8

Expected Value Analysis . Mean-Variance Criterion and Coefficient of Variation . Risk-Adjusted Discount Rate Technique . Certainty Equivalent Technique . Monte Carlo Simulation . Decision Analysis . Real Options

Analysis . Sensitivity Analysis

3.5 Building Blocks of Evaluation 3-16

Structuring the Evaluation Process and Selecting a Method of Evaluation . Discounting . Discount Rate . Inflation . Analysis Period . Taxes and Subsidies . Financing . Residual Values

3.6 Summary 3-23

Glossary 3-23

References 3-24

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