Promoting energy efficiency investments with risk management decision tools
AbstractThis paper reviews current capital budgeting practices and their impact on energy efficiency investments. The prevalent use of short payback "rule-of-thumb" requirements to screen efficiency projects for risk is shown to bias investment choices towards "sure bet" investments bypassing many profitable efficiency investment options. A risk management investment strategy is presented as an alternative to risk avoidance practices applied with payback thresholds. The financial industry risk management tool Value-at-Risk is described and extended to provide an Energy-Budgets-at-Risk or EBaR risk management analysis to convey more accurate energy efficiency investment risk information. The paper concludes with recommendations to expand the use of Value-at-Risk-type energy efficiency analysis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 38 (2010)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/enpol
Energy efficiency Risk management Energy paradox;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schall, Lawrence D & Sundem, Gary L & Geijsbeek, William R, Jr, 1978. "Survey and Analysis of Capital Budgeting Methods," Journal of Finance, American Finance Association, vol. 33(1), pages 281-87, March.
- Yard, Stefan, 2000. "Developments of the payback method," International Journal of Production Economics, Elsevier, vol. 67(2), pages 155-167, September.
- Fama, Eugene F, 1996. "Discounting under Uncertainty," The Journal of Business, University of Chicago Press, vol. 69(4), pages 415-28, October.
- Anderson, Soren T. & Newell, Richard G., 2004.
"Information programs for technology adoption: the case of energy-efficiency audits,"
Resource and Energy Economics,
Elsevier, vol. 26(1), pages 27-50, March.
- Newell, Richard & Anderson, Soren, 2002. "Information Programs for Technology Adoption: The Case of Energy-Efficiency Audits," Discussion Papers dp-02-58, Resources For the Future.
- Sadeghi, Mehdi & Shavvalpour, Saeed, 2006. "Energy risk management and value at risk modeling," Energy Policy, Elsevier, vol. 34(18), pages 3367-3373, December.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Anthony M. Marino & John G. Matsusaka, 2005. "Decision Processes, Agency Problems, and Information: An Economic Analysis of Capital Budgeting Procedures," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 301-325.
- Ansar, Jasmin & Sparks, Roger, 2009. "The experience curve, option value, and the energy paradox," Energy Policy, Elsevier, vol. 37(3), pages 1012-1020, March.
- DeCanio, Stephen J., 1993. "Barriers within firms to energy-efficient investments," Energy Policy, Elsevier, vol. 21(9), pages 906-914, September.
- Brown, Marilyn A. & Levine, Mark D. & Short, Walter & Koomey, Jonathan G., 2001. "Scenarios for a clean energy future," Energy Policy, Elsevier, vol. 29(14), pages 1179-1196, November.
- Mathew, Paul & Kromer, J. Stephen & Sezgen, Osman & Meyers, Steven, 2005. "Actuarial pricing of energy efficiency projects: lessons foul and fair," Energy Policy, Elsevier, vol. 33(10), pages 1319-1328, July.
- Sanstad, Alan H. & Howarth, Richard B., 1994. "`Normal' markets, market imperfections and energy efficiency," Energy Policy, Elsevier, vol. 22(10), pages 811-818, October.
- H. Martin Weingartner, 1969. "Some New Views on the Payback Period and Capital Budgeting Decisions," Management Science, INFORMS, vol. 15(12), pages B594-B607, August.
- Mills, Evan, 2003. "Risk transfer via energy-savings insurance," Energy Policy, Elsevier, vol. 31(3), pages 273-281, February.
- Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
- Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
- Mills, Evan & Kromer, Steve & Weiss, Gary & Mathew, Paul A., 2006. "From volatility to value: analysing and managing financial and performance risk in energy savings projects," Energy Policy, Elsevier, vol. 34(2), pages 188-199, January.
- Schleich, Joachim, 2009. "Barriers to energy efficiency: A comparison across the German commercial and services sector," Ecological Economics, Elsevier, vol. 68(7), pages 2150-2159, May.
- Deng, S.J. & Oren, S.S., 2006. "Electricity derivatives and risk management," Energy, Elsevier, vol. 31(6), pages 940-953.
- Goldman, Charles A. & Hopper, Nicole C. & Osborn, Julie G., 2005. "Review of US ESCO industry market trends: an empirical analysis of project data," Energy Policy, Elsevier, vol. 33(3), pages 387-405, February.
- Harris, Jane & Anderson, Jane & Shafron, Walter, 2000. "Investment in energy efficiency: a survey of Australian firms," Energy Policy, Elsevier, vol. 28(12), pages 867-876, October.
- Elazar Berkovitch, 2004. "Why the NPV Criterion does not Maximize NPV," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 239-255.
- Akman, Ugur & Okay, Esin & Okay, Nesrin, 2013. "Current snapshot of the Turkish ESCO market," Energy Policy, Elsevier, vol. 60(C), pages 106-115.
- Ludovico Alcorta & Morgan Bazilian & Giuseppe De Simone & Ascha Pedersen, 2012. "Return on Investment from Industrial Energy Efficiency: Evidence from Developing Countries," Working Papers 2012.35, Fondazione Eni Enrico Mattei.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.