Evaluating the impact of hurdle rates on the Italian energy transition through TEMOA

Technology-specific hurdle rates significantly influence capital expenditures for deploying new technologies in the energy system, yet their definition in energy system optimization models often lacks a solid evaluation basis. This is crucial for providing relevant policy insights on clean finance investments. To address this gap, this paper introduces a framework for evaluating the impact of green finance measures on the future evolution of energy systems. Using the weighted average cost of capital methodology and recent literature, we robustly evaluate hurdle rates and explore their sensitivity by assessing the impact of reduced hurdle rates for green technologies on the cost of the energy transition through TEMOA-Italy. We differentiate hurdle rates for green and brown technologies to measure their potential to encourage low-carbon investments. The findings indicate that reducing hurdle rates for green technologies results in relatively low potential savings for the energy transition cost. Additionally, a 2÷3 % difference in hurdle rates is required to shift competitiveness from brown to green technologies, exceeding the realistic impact of green finance measures like the EU Taxonomy for Sustainable Activities (estimated at around 1 %). Therefore, green finance schemes should be combined with other strategic measures to fully support the energy transition. • Hurdle rates are crucial in energy modeling but their values are often unreliable. • Hurdle rates evaluated according to the WACC and the available literature. • Assessment of the transition's cost sensitivity to the hurdle rates reduction. • Exploring the role of technology-specific hurdle rates in the energy transition. • Green finance may help but it is not sufficient to drive the energy transition.