Discounting Approaches in Multi-Year Investment Modelling for Energy Systems

TL;DR

The paper addresses the challenge of discounting long-horizon energy investments by comparing total cost (overnight) and annualised cost representations, clarifying the roles of $R$ (societal discount) and $WACC$ (technology-specific discount) and their relationship $WACC \ge R$. It introduces salvage value to handle horizons shorter than asset lifetimes and milestone-year weights to approximate non-modelled periods, providing explicit equations that link the two cost formulations. The key contributions include a structured, equation-backed analysis of how horizon effects and milestone modelling impact investment costing, along with practical strategies to maintain consistency between representations. The methods are implemented in the open-source TulipaEnergyModel, enabling transparent, tractable long-term energy system planning with attention to data availability and computational considerations.

Abstract

This paper reviews discounting approaches for modeling multi-year energy investments, focusing on total versus annualised cost formulations. We discuss how time value of money is handled, and how salvage value and milestone-year weighting can address mismatches between asset lifetimes and model horizons. These methods are implemented in the open-source TulipaEnergyModel to support transparent and tractable long-term energy system planning.