Oxera assisted the Energy Networks Association in addressing the question of whether sovereign yields are the correct measure of the risk-free rate to use in a CAPM framework. We reviewed the definition of the risk-free asset in the CAPM, the academic research that derives estimates of the risk-free rate, and the approach used by practitioners when valuing companies. Highly-rated government bonds have special safety and liquidity characteristics, which reduce their yields below the risk-free rate defined in the CAPM. Using a risk-free rate that adjusts for these characteristics can have a material impact on estimates of the cost of capital. Practitioners frequently assume a risk-free rate higher than the yields on government bonds when valuing companies, thereby implicitly adjusting for the special characteristics of government bonds.