Energy Economics, Policy, Regulation and Carbon Management
Domain 6 tests the economics and policy framework around an energy project, plus carbon accounting. You need to discount cash flows correctly, identify the relevant tariff or scheme, and avoid claiming carbon reductions that do not exist.
Core rules
- Appraisal uses incremental cash flows: capital cost, annual savings, maintenance, replacement, residual value and tax. NPV = Σ CF_t/(1+r)^t − capex. IRR is the discount rate at which NPV = 0. Simple payback ignores time value and should be labelled as such.
- Use a nominal discount rate with nominal cash flows or a real rate with real cash flows, not a mixture. Sensitivity analysis on tariff, utilisation and capital cost is expected for an investment-grade case.
- Hong Kong’s electricity market is shaped by the Scheme of Control Agreements with CLP and HK Electric, which set permitted returns and tariff structures. The Feed-in Tariff, Renewable Energy Certificates and the Building Energy Code are separate instruments with different eligibility rules.
- Carbon accounting separates Scope 1 (direct fuel), Scope 2 (purchased electricity/heat) and Scope 3 (value chain). Report the emission factor, its year and whether it is location-based or market-based. Avoid double counting between generator and consumer.
- Policy targets are not project baselines. Additionality, leakage and persistence must be tested before a saving is credited.
Worked example
A HK$500,000 retrofit saves HK$120,000/year for 10 years. At a 5% discount rate, the annuity factor is [1 − 1.05^−10]/0.05 = 7.722. PV of savings = 120,000 × 7.722 = HK$926,600. NPV = 926,600 − 500,000 = HK$426,600. The IRR is about 20%, well above 5%. If the equipment needs a HK$60,000 replacement in year 6, discount that cost and reduce NPV by about HK$44,800. For carbon, 100 MWh of grid electricity at 0.7 kgCO2e/kWh = 70 tCO2e; at HK$500/t, the notional carbon value is HK$35,000.
Traps
Discounting undiscounted savings; mixing real and nominal rates; omitting maintenance and replacement; using a market-based factor to claim grid reductions; ignoring rebound; and treating a policy target as evidence of project additionality.