Energy Economics: Payback Period and Investment Analysis

This lecture discusses the economic principles related to energy supply, focusing on the payback period and net present value (NPV) calculations for investments. The instructor explains how the payback period is determined by the number of years required for an investment to generate enough positive cash flow to cover its initial cost. The concept of the hurdle rate is introduced, which is the minimum required rate of return for an investment to be considered viable. The lecture also covers the implications of the carbon bubble, where the anticipated future income from fossil fuel investments may not materialize due to changing market conditions and climate policies. The instructor illustrates these concepts with examples, including the comparison of battery electric vehicles to internal combustion engine vehicles in terms of their payback periods. The discussion emphasizes the importance of understanding cash flows, discount rates, and the risks associated with investments in the energy sector, particularly in the context of transitioning to sustainable energy sources.