Topic: Discounted vs Real CostsSubscribe | Previous | Next
Matthew Davis 1/26/2017
Hi,
When viewing cost of production in results, we have the option to either view the real costs or the discounted costs. If viewing discounted costs, future costs should be discounted back to the the base year, based on the specified discount rate and monetary year set in the basic parameters. Shouldn't the "base year real cost" = "base year discounted cost" ? My base year cost will change when viewing discounted costs.
Thank you,
Matt
Taylor Binnington 1/31/2017
1 Like Hi Matt,
This is a good question, and deserves some careful explanation. In LEAP, different types of costs are assumed to be incurred at different times during a year, and are discounted back to the *beginning* of the Monetary Year (they are not discounted back to the Base Year, as you suggested in your post). These differences affect the number of periods (n) over which the cost discounting takes place. The discounted cost C_d for a cost C_n incurred in period n is given by:
C_d = C_n / (1 + d)^n
...where d is the model discount rate.
Here are the different categories of social costs in LEAP, and the point in the year at which they are incurred:
- Demand costs are incurred in the middle of the year
- Transformation Capital costs are incurred at the end of the year
- Transformation Fixed and Variable O&M costs are incurred in the middle of the year
- Transformation Module costs are incurred in the middle of the year
- Fuel Production, Imports, Exports, Unmet Requirements costs are incurred in the middle of the year
- Environmental Externalities are incurred in the middle of the year
- Non Energy Sector costs are incurred in the middle of the year
This means that all social cost categories except Transformation Capital Costs are then discounted over n = 0.5, 1.5, 2.5... periods, while Transformation Capital Costs are discounted over n = 1, 2, 3... periods. No costs are discounted over n = 0 periods, even if they are incurred in the Monetary Year, because costs are discounted all the way back to the beginning of the Monetary Year.
Finally, costs incurred *before* the Monetary Year are not inflated. This means that the real and discounted costs before the Monetary Year will be equivalent.
Hope this is useful,
Taylor
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One final note which is important to understand: Annualized costs (either using LEAP's AnnualizedCost() function, or Transformation Capital Costs using the Capital Recovery Factor method) always include at least one year of interest payments, even if they are annualized over a single year.