World Bank’s Innovative Valuation of Renewable Assets for a Sustainable Future

The World Bank’s 2024 report advances global wealth assessments by incorporating hydroelectric assets, using a new valuation method to balance renewable and non-renewable resources. This framework addresses prior imbalances, aiming for more accurate, sustainable economic insights.

The World Bank report, produced with contributions from various experts including Robert Smith, Zuzana Dobrotkova, Christophe de Gouvello, Grzegorz Peszko, and Stefanie Onder, represents a critical step in global economic accounting, incorporating renewable assets, such as hydroelectric resources, into the assessment of national wealth. This move aligns with the World Bank's commitment to comprehensive wealth accounting, recognizing the need to balance renewable and non-renewable resources in wealth estimations. Previously, fossil fuel assets were the primary focus of these evaluations, creating a significant gap that potentially skewed the understanding of economic value. This new approach addresses this disparity, extending the valuation framework for hydroelectric assets globally, despite some data limitations that restricted the inclusion of other renewables like solar and wind. The foundation for this report builds on a 2021 pilot study that demonstrated a method for evaluating renewable energy assets, and the 2024 report expands on this methodology to create the first-ever global estimates for hydroelectric assets.

A Methodology for Fair Resource Valuation

Central to this report is the use of a valuation methodology called the net present value-residual value method (NPV-RVM), in which the hydroelectric resource rent, defined as the difference between revenue from electricity sales and production costs, serves as a measure of the economic value of hydroelectric resources. This method, widely recognized for its consistency with international standards, aligns with the United Nations' System of Environmental-Economic Accounts and the World Bank's efforts to standardize natural resource valuation practices. In essence, NPV-RVM evaluates asset values by calculating the future flow of revenue minus operational and maintenance expenses, while accounting for the return on capital and depreciation costs. However, as the report highlights, accurately assessing hydroelectric asset value is complicated by market inconsistencies, particularly in countries where government subsidies, production costs, and fluctuating pricing models impact competitive market assumptions. In many developing nations, government subsidies play a role in artificially lowering electricity prices, creating further challenges in estimating accurate values.

Economic Viability as the Core Requirement

The report delineates specific criteria for recognizing hydroelectric resources as assets. Only projects deemed economically viable, meaning those capable of generating electricity consistently under current technological and economic conditions, qualify as assets. This qualification framework filters out undeveloped sites that, despite potential hydroelectric capacity, lack immediate commercial feasibility. The methodology to estimate resource rent includes a multi-step process to evaluate electricity generation revenue, production costs, and the anticipated future flow of rents, which represent the monetary value that these resources bring to the national wealth pool. To estimate the hydroelectric generation revenue accurately, researchers leveraged the International Energy Agency's residential electricity prices database, adjusting these values to approximate the prices hydroelectric producers would receive. This approximation, while pragmatic, faced limitations due to regional variations and lack of granular producer price data. For production costs, regional estimates from organizations like the International Renewable Energy Agency were used. In the absence of direct data, operational and maintenance costs were generalized across regions, assuming they would amount to a fixed percentage of capital investment.

Addressing the Challenge of Subsidies

An important aspect of this report is its consideration of government subsidies, which were generally excluded from the valuation to maintain methodological consistency across various asset classes. This omission, while consistent with international statistical practices, introduces potential limitations. In reality, subsidies can greatly influence the resource rent that governments earn from hydroelectric production, as they often support energy production, artificially influencing market prices. The report also touches on other income-generating functions of reservoirs, such as flood control, irrigation, and recreation, but excludes these from the hydroelectric asset valuation to focus exclusively on electricity-related income. Consequently, while the valuation model captures most revenue directly associated with hydroelectric energy production, it may underestimate the broader economic value of multi-purpose reservoirs.

Future Validation Through Comparative Methods

The World Bank acknowledges that, despite the robustness of the NPV-RVM method, the application to hydroelectric assets would benefit from further testing. A suggested direction for future research is the validation of this model through the "least-cost alternative" approach, which some studies have used to value hydroelectric resources by comparing costs with other potential energy sources. Additionally, the report recommends that future work on valuation accuracy should consider refining the inclusion of subsidies and building a global database of producer prices, particularly for countries with varied electricity market structures. An enhanced focus on subsidies is crucial since they affect production costs and, by extension, the accurate measurement of resource rent. Similarly, price data improvements would assist in reflecting true producer revenue, addressing a gap noted in this report. Compiling a global database of annual wholesale electricity prices could further bolster accuracy, especially in competitive markets. However, since many hydroelectric producers have fixed-price agreements, further studies are necessary to capture these cases.

A Step Toward Balanced Wealth Accounting

Overall, this report provides a landmark advancement in the economic assessment of renewable resources, advocating for a balanced approach to valuing renewable and non-renewable resources in national wealth. Through this rigorous methodology, the World Bank aims to offer more accurate valuations that can better inform policy decisions on energy resource management, climate change mitigation, and sustainable development. The inclusion of hydroelectric assets in this framework not only addresses longstanding gaps in economic assessments of wealth but also sets a foundation for more comprehensive studies in future iterations of wealth accounting.