CAPM has been the workhorse model for cost of equity across regulated utilities but is reaching its limits. Implementing CAPM requires a stock price or a peer group of listed comparables for the asset in question. Yet many assets are not listed: only a third of UK regulated energy & water companies remain listed—even fewer are pure plays. The infrastructure context also clashes with CAPM’s assumptions: project risks are often skewed downwards (not symmetric), infrastructure investors are often not widely diversified (don’t hold “the market”), and political & regulatory risk cannot easily be hedged. Both regulators and investors increasingly recognize the need for a new approach.
In response to these challenges, Vallorii has built VAPRI—the Vallorii Price of Risk model. VAPRI builds the cost of equity bottom-up from probabilistic modelling of a project's cash flows. It prices total business risk from an investor perspective. Implementation does not require stock-market listing or a peer group. Government and regulatory risk-sharing mechanisms have become central to large infrastructure; unlike CAPM, VAPRI can estimate the implications of different support packages. The large nuclear project Sizewell C is a case in point: the Secretary of State rejected CAPM; the ensuing bid process revealed a cost of equity around 400 basis points above CAPM, even with government risk-sharing.
The VAPRI approach now has an academic foundation. A new working paper at Cambridge University, written by Vallorii co-authors, establishes when a total-risk model like VAPRI estimates cost of equity better than CAPM. It is horses for courses, and the conditions can be tested. Unlike CAPM, VAPRI can explain investor behaviour in Sizewell C.
More research
When accounting shapes behavior: the hidden incentives in infrastructure valuation
In regulated infrastructure, value is not a fixed concept. The value of an infrastructure asset depends on how it is measured and which accounting basis drives returns. Different accounting frameworks produce markedly different views of the same asset base. Regulatory asset values (RAV), historical cost accounts, and current cost accounts (modern equivalent asset value, MEAV, or replacement cost), each serve distinct purposes. But when the differences between these measures changes,...
Kirsten Dupuy
4 min read
Depreciation, Affordability, and the Hidden Trade-offs in Infrastructure Investment
Infrastructure debates tend to focus on what should be built next. Yet a more fundamental question sits beneath them: how quickly should we pay for what has already been built? That question goes to the heart of depreciation. As discussions at the March roundtable underscored, it is emerging as a central lever in infrastructure economics and regulation. How does intergenerational fairness impact affordability? Depreciation directly shapes returns, bill trajectories, and risk allocation over...
Kirsten Dupuy
4 min read