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Published: 2/9/2014. Updated: 8/29/2017

Rate of return on investments (WACC)


The Commission, in accordance with the Methodology on Rate of Return on Investments, approved by Commission Resolution No. O3-510 as of September 22, 2015 (text in Lithuanian), publishes data for calculation of rate of return on investments (WACC). The data will be applied to electricity companies for setting the price caps for regulatory period of year 2017-2021.

Table 1. Data  used to calculate the rate of return on investments

Ratio​Value​Source/Link
Cap of cost of debt (interest rate), percent, Rd2,05

The average interest rate during the most recent twelve-month period of long-term loans in euros given to non-financial corporations, as announced by the Bank of Lithuania, para 6 of Methodology on Rate of Return on Investments

Return on equity, percent, RePara 9 of Methodology on Rate of Return on Investments
 - for electricity undertakings, engaging in transmission;6,10
 - for undertakings, recognized as having significant market power in electricity generation and reserve power markets;
 - for undertakings, providing public service obligation, i.e. electricity generation in specified power plants (to ensure the security of electricity supply) as well as the assurance of electricity system reserves in specified power plants (to ensure the energy security);
 - for setting tariffs of electricity produced using renewable energy sources.
 - for electricity undertakings, engaging in distribution and public energy supply;6,20
 - for undertakings, recognized as having significant market power in the market of independent energy supply.
Share of equity  capital (optimal capital structure), E0,4Para 10 of Methodology on Rate of Return on Investments
Share of debt capital (optimal capital structure),  D0,6Para 10 of Methodology on Rate of Return on Investments
Tax rate, m0,15The income tax rate applied in Lithuania
Risk-free rate of return on investments (in percent), Rf2,64The arithmetic mean of the average weighted profitability of the auctions of the Government bonds  denominated in Litas (till December 31,2014) and Euros (from January 1, 2015) with the maturity period of no less than 3468 days), held during the recent ten-year period.
Equity risk premium , Rerp 4,88 The sum of the equity risk premium of the country with the developed capital market (the US) and the additional market risk premium of Lithuania.
US equity risk premium is defined as difference between the return on investments (in percent) in the US securities market during a last twenty years,  and the rate of return on the US treasury bonds with a ten-year maturity, on the basis of the S&P 500 index announced by the rating agency Standard&Poor's and the data of the US treasury bonds announced by the bank of the US Federal Reserve System.
The additional market risk premium of Lithuania is determined as the difference between the risk ratio (in percent) corresponding to the credit rating of Lithuania and the risk ratio (in percent) corresponding to the US credit rating, on the basis of the data on prof.  A. Damodaran website.
Beta coefficient (levered β)    
 - for electricity undertakings, engaging in transmission;0,71 On the basis of the Report on the investment conditions in the EU member states published by the Council of European Energy Regulators (CEER), the arithmetic mean of the risk ratio in the electricity transmission sector of the European Union member states.
 - for undertakings, recognized as having significant market power in electricity generation and reserve power markets;
 - for undertakings, providing public service obligation, i.e. electricity generation in specified power plants (to ensure the security of electricity supply) as well as the assurance of electricity system reserves in specified power plants (to ensure the energy security);
 - for setting tariffs of electricity produced using renewable energy sources.
 - for electricity undertakings, engaging in distribution and independent energy supply;0,73 On the basis of the Report on the investment conditions in the EU member states published by the Council of European Energy Regulators (CEER), the arithmetic mean of the risk ratio in the electricity distribution sector of the European Union member states
 - for undertakings, recognized as having significant market power in the market of independent energy supply.
Actual weighted average cost of debt capital in electricity sector0,83Para 8 of Methodology on Rate of Return on Investments

 

WACC as of year 2018 by electricity companies: ​
AB „Litgrid“4,90
AB „Energijos skirstymo operatorius“4,88
AB „Lietuvos energijos gamyba“4,95

 

CountryWACC
EstoniaPSO – 4,46, STO – 4,5
Slovakia6,47
Hungary4,69
Sweden 4,56
PortugalPSO – 6,13, STO – 6,48
Poland5,633