Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings

Pekka Tuominen and Tuomas Seppänen
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Pekka Tuominen: VTT Technical Research Centre of Finland Ltd., P.O. Box 1000, 02044 VTT Espoo, Finland
Tuomas Seppänen: OP Financial Group, P.O. Box 308, 00101 Helsinki, Finland

Energies, 2017, vol. 10, issue 10, 1-11

Abstract: This paper presents a method for calculating the value of price risk reduction to a consumer that can be achieved with investments in energy efficiency. The value of price risk reduction is discussed to some length in general terms in the literature reviewed but, so far, no methodology for calculating the value has been presented. Here we suggest such a method. The problem of valuating price risk reduction is approached using a variation of the Black–Scholes model by considering a hypothetical financial instrument that a consumer would purchase to insure herself against unexpected price hikes. This hypothetical instrument is then compared with an actual energy efficiency investment that reaches the same level of price risk reduction. To demonstrate the usability of the method, case examples are calculated for typical single-family houses in Finland. The results show that the price risk entailed in household energy consumption can be reduced by a meaningful amount with energy efficiency investments, and that the monetary value of this reduction can be calculated. It is argued that this often-overlooked benefit of energy efficiency investments merits more consideration in future studies.

Keywords: energy efficiency; energy end use; multiple benefits; investment; price risk (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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