When evaluating power generation investments, two key metrics come into play - WACC and WARA. Understanding the difference is crucial:
WACC (Weighted Average Cost of Capital) measures a project's blended cost of raising funds through debt and equity.
WARA (Weighted Average Revenue of Alternatives) estimates the revenue required for a project to meet its cost of capital.
While WACC focuses on costs, WARA looks at revenue requirements. In regulated markets, WARA serves as a benchmark for setting electricity tariffs that allow the utility to recover costs and earn a fair return.
Estimating WARA involves complex modeling of capital and operating costs, depreciation schedules, tax assumptions, and target returns. WACC is a key input but must be adapted to the project context.
For generators bidding into dynamic wholesale markets, WARA provides the competitive price needed to justify new investments. WACC remains relevant for investment decisions.
In summary, WACC evaluates the cost, while WARA examines revenue needs. Getting both right is key to viable power generation in today's changing landscape. Let me know if you need help navigating these concepts!
