New approach to brown coal pricing using internal rate of return methodology

Highlights: • We showed that brown coal is the substitute for black coal only at the time of the investment decision. • We compiled the model used in a calculation of the economically justified price for the productive and extractive component. • The resulting economically justified price is on a par with the current black coal price. • The proposed methodological approach is applicable to solve similar tasks not only in the energy sector. - Abstract: Brown coal is one of the dominant local strategic raw materials in Europe, used, to a large extent, in the power-generating industry. The current situation, where the price of gas and electricity precludes the efficient use of gas sources, leads to the extraction of older sources, chiefly brown coal ones. In tandem with a turning away from nuclear power, brown coal is experiencing a renaissance and the issue of brown coal price setting is, and will be, relevant. This paper deals with a proposal of a new method for determining the base price, consisting of defining the reference fuel chain for electricity and heat production based on brown coal. It builds on the notion that the degree of risk of the involved parties should be reflected in the modified amount of revenue per capital invested. The resulting price is then an economically justified price which encourages a respect for the specific features of the market in question and set the base price of the commodity in a way that is acceptable for both the extractive and the productive components of the fuel chain