Key Issues and Challenges in Estimating the Cost of Capital for Energy Network Utilities in Emerging Markets

Estimating the cost of capital in emerging markets presents greater difficulties because these markets have relatively illiquid capital markets and higher levels of sovereign risk, economic uncertainties, and political risks. experience shows that in estimating cost of capital, energy regulators in emerging countries usually depend on the work and recommendations of their staff and/or outside consultancy services. since the ultimate decision is made by regulators, they need to understand the challenges and key issues in estimating a fair and reasonable cost of capital for energy utilities. the article introduces and discusses the key issues and challenges that regulators have to deal with when estimating cost of capital. unfortunately, there is no agreement among academics, regulators, bankers, and other practitioners on how to address the key issues and challenges in determining the cost of capital in emerging economies. this makes capital cost estimation even more difficult in emerging economies.