Wednesday, July 22, 2009

On Financial innovation

Financial innovation has gotten a somewhat deserved bad rap, because as Matt smartly pointed out earlier, so much innovation is really just regulatory arbitrage.

That can cloud the fact, however, that there really is a societal benefit to efficiently allocating capital. This is particularly true with regard to solar energy, where the high capital and long operating lifetimes makes the cost of capital a significant factor of the total cost.

For instance, the Solar Buzz solar electricity index assumes a 5% cost of capital to calculate the price per kwh. They note that if the rate were instead 0%, a system that had cost 24 cents per kwh at 5% would instead only cost 15 cents per kwh. Even modest changes to the discount rate dramatically alter the economic viabilty of installations.

It's one specific area where we could probably use a good deal of financial innovation.