ModifiedDecoupled Net Present Value: The Intersection of Valuation and Time scaling of Risk in Energy Sector

Although the practical importance of investment analysis in longterm energy investments is well understood, choosing the proper method has always been a dilemma. In this regard, classic evaluation methods, with a history of almost a century, are mostly favored, but using them in the valuation of longlasting energy projects has particular shortcomings, nevertheless. The drawbacks mainly stem from two structural problems: a) reflecting risk in rate of return instead of cash flow thus summing up risk and time value of money in a single parameter, b) generalizing the predefined rate of return to all project life time regardless of changing nature of risk. To overcome such drawbacks, a new easy-to-implement method termed ModifiedDecoupled Net Present Value (M-DNPV) is proposed that intercepts coupling of risk and time value of money by deducting the risky portion of expected cash flows. To cover the dynamic nature of risk and as a buffer against uncertainty, it is suggested to attribute measured risks to investment lifespan using an uncertainty coefficient”. Finally, the ability of the new method is shown through a complicated energy investment: an Iranian Petroleum Contract (IPC).