In the context of energy-saving projects, what interest rate is used for project evaluation?

The interest rate used for project evaluation in energy-saving projects often reflects the opportunity cost of capital, which is influenced by the rate of return expected from alternative investments. In this context, the choice of 6% represents a common benchmark that balances a realistic assessment of capital costs with the need to be competitive in evaluating energy efficiency and savings measures.

Choosing 6% allows project evaluators to incorporate factors like the risk associated with energy saving initiatives, the time value of money, and the long-term benefits of energy efficiency investments. This rate is typically compatible with various financial analyses, such as Net Present Value (NPV) and Internal Rate of Return (IRR), allowing for an effective comparison of costs and benefits over the life of the project.

An interest rate of 6% reflects a reasonable expectation aligned with historical long-term interest rates and typical corporate finance practices, making it a sensible choice in the context of project evaluation for energy-saving initiatives.