Methodology of minimal price

LOGIC:

• Price of production (MU/unit of production) that will assure rate of return on capital invested required by the investor, or

• Price of production that is adequate for given type of business activity and its risk (e.g. natural monopoly regulated by some authority – e.g. fee for distribution services)

TASKS:

• Supply side point of view for the production – What price do I need as investor to have desired level of return on capital invested? Basis for comparison market price with “my price” – C_min > C_market => either to decrease cost or find another business (invest or not to invest decision)

• Basis for support system of some type of production – e.g. the case of renewable energy sources utilization, combination of:

  • supply side point of view – minimal price of production C­_min

  • demand side point of view – market price C_market

difference between C_min and C_market (assuming that C_min > C_market) should be covered

• Calculation calculation of fees for assuring long term financial balance of given system (e.g. public services)

  • Entrance fee for museum

  • Study fee

  • Fee for transmission and distribution systems (natural monopoly case)

  • Price of heat regulation

  • Fee for radioactive waste disposal

MINIMAL PRICE OF PRODUCTION METHODOLOGY – BASIS

• Net present value (NPV) methodology

• NPV is calculated from relevant cashflows – i.e. money earnings and expenses caused (induced) by given project (or system existence)

• NPV is calculated with use of economic model of given project (system)

• Minimal price of production is calculated from the condition NPV=0 => investor gains rate of return equal to discount

Economic model of given system (project) – main rules for creation

• should be based on financial inflows and outflows (cash flows)

• should reflect “right point of view” (investor, system, bank) – cutting a pie problem

• should reflect full lifetime cycle

• should include all relevant activities

• should respects opportunity cost (“nothing is free of charge”)

• should respect time value of money and adequate level of risk

  • “classical” investment tasks: higher risk – higher discount

Result of economic model: cashflow for individual year of project (system) lifetime

BASIC EQUATIONS:

(1)

(2)

(3)

METHODOLOGY USED FOR FEES CALCULATION OF RADIOACTIVE WASTE DISPOSAL

• “Polluter pays principle” application

• Financial balance of waste management system

• Reflection of adequate level of risk (specific task, very long time horizons)

Basic principles of economic effectiveness of projects – methodology of npv

• But major concern is placed to financial balance of system instead of value of NPV

• “unit price of production” for adequate risk level and rate of return (opportunity cost, discount)