Evaluation of Economically Optimal Retrofit Investment Options for Energy Savings in Buildings

Gürkan Kumbaroğlu () and Reinhard Madlener
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Gürkan Kumbaroğlu: Department of Industrial Engineering, Boğaziçi University, Postal: 34342 Bebek, Istanbul, Turkey

No 14/2011, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: In this study, a techno-economic evaluation methodology for energy retrofit of buildings is introduced, geared towards finding the economically optimal set of retrofit measures. Split incentives of building owners and users are considered explicitly in a conventional (static) evaluation to identify the investment alternatives maximizing the net present value (NPV). Energy price uncertainty for various distributional assumptions of the stochastic variables is addressed through Monte Carlo simulation. Results from the simulation are used to compute probabilities and expected NPVs. Based on this, a sequential (dynamic) evaluation methodology is developed, featuring a real options investment appraisal. The methodological advancements introduced are applied to an office building, illustrating the model’s performance. The case study results indicate that energy price changes significantly affect the profitability of retrofit investments, and that increased price volatility creates a substantial value of waiting, making it more rational to postpone the investment. Further insight is gained on various aspects of economic decision-making concerning energy retrofit of buildings.

Keywords: Building energy efficiency; Energy conservation; Net present value; Real options (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-09
New Economics Papers: this item is included in nep-cmp and nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2011_014

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