New discussion paper on discount rates

The Buildings Performance Institute Europe (BPIE) commissioned Fraunhofer ISI to investigate the current use of discount rates in energy efficiency policy modelling, with a specific focus put on the building sector. Discount rates are paramount to assess the costs and long-term benefits of different policy scenarios. In any policy discussion in the European Union, there is always there is always a big debate over the social perspective and the individual perspective. This is why, as EU directives on energy efficiency will be revised in upcoming years that an airing of the different views is presented.

The discussion paper, entitled Discount rates in energy system analysis, summarises their use in a number of major reports and concludes that:

• Social discount rates should be between 1 and 7% in the EU;
• Individual discount rates should be decided according to the investor; and
• Discount rates for private households should be based on the market price for capital.

Based on these studies, the paper argues that the use of high discount rates to map non-economic barriers and bounded rationality is not suitable. In order to simulate real-world investment decisions, it is rather recommended to apply behavioural models that consider individual decision criteria as well as barriers to energy efficiency explicitly.

The discussion paper can be downloaded here.

Now, let the discussion begin.