– how are we assessing investment proposals?

 Recently I was advised that a proposal to install solar generation to replace existing power just didn’t stack up economically, and the question posed was how will renewable energies ever replace current technologies for power generation when they aren’t economical?

My initial response was that the business model we are using to assess these proposals needs to be questioned. The two alternatives were assessed as if the outcomes were considered identical (i.e. a certain number of kilowatt hours of power generated for a certain cost).

 However the outcomes aren’t the same.

 Power acquired from the existing technology and purchased from an electricity retailer was being assessed at the current cost, with no accounting for the carbon effect of the generation.

 The solar generation was assessed at the cost of panels, installation, etc., a recognition that it was likely some power would still be acquired from a retailer, and yet there was no assessment of the cost of carbon in the equation.

 The way some businesses are making this decision now is that they are choosing the solar option because they feel it is the “right” option from an environmental point of view, there may be the opportunity to generate renewable credits either in a formal or informal market, and there may be a further range of positive impacts created from looking at innovative alternate sources of energy. These intangible benefits are then assessed as offering sufficient benefit to outweigh the economic cost.

The point is that if there was some form of emissions trading scheme (ETS) in place, these intangible benefits could be assessed as an “offsetting” renewable benefit, and matched with the carbon cost of traditional methods, and potentially the economic argument would start to match the environmental argument.

I have previously said that innovative businesses I have met with are acting and investing ahead of legislation, and while this is true, the majority of businesses won’t act unless there is some economic advantage or compliance regime where they are obliged to consider the cost of carbon in their investment decisions.

 In December 2009 there was significant momentum in place in Australia as businesses were preparing for the introduction of an ETS.

It seems that lack of political will has stalled this momentum significantly, and many businesses are now waiting for a signal from government (of whatever persuasion that may now be) before acting.

 We shouldn’t forget that NGER is in place, and there is already a form of carbon reporting happening.

 I understand that there is still bipartisan support to reduce carbon emissions by 5% of 2000 emissions by 2020.

 It is generally accepted that the only way to achieve this agreed target is to have a pricing mechanism for the cost of carbon (and arguably the most effective mechanism is some form of ETS).

 The current level of delay will make the cost of achieving the target in a delayed timeframe much higher than if we began taking action today.

 I suspect the innovators and the early adopters will be in a much better position both environmentally and economically in the next three years.

 What do you think?

 Thanks to those who attended the presentation in Melbourne yesterday. The copy of the presentation is here:

 Web version Climate_Project CPA – Centering on Excellence Melbourne 9 June 2010

 The code for the software offer is “CPA Melbourne”. Talk soon.