Financial analysis for investment and policy decisions in the renewable energy sector

The management and exploitation of renewable energy sources is now recognised as central to sustainable development. Environmental concerns, recurring oil crises and market weaknesses, combined with the availability of power from natural resources and resulting possibilities for job creation and energy independence, have all pushed developed and developing countries towards new energy strategies that include RES. This paper analyses the profitability of potential investments in small, medium and large RE electrical power facilities, applying a Net Present Value (NPV) methodology. The proposed financial analysis permits strategic selection of an energy portfolio from among available sources and plant sizes. The paper then discusses potential constraints, and where possible applies the NPV methodology for estimating the necessary changes in decision-making. It defines the role of government incentive schemes in the financial results and evaluates the impact of variation in critical variables (subsidies, sale price of electricity, investment cost, operating cost and equivalent operating hours) on the estimation of NPV. Finally, the paper analyses the environmental impact of all the energy sources examined, examines the links with the financial results and proposes socio-economic policy considerations based on the entirety of the research results. While the methodology is applied to the Italian case, it could be modified to serve in other nations by adapting the input parameters to reflect the different regulatory and market contexts.