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

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Author Info

  • Kumbaroğlu, Gürkan

    ()
    (Department of Industrial Engineering, Boğaziçi University)

  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University)

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.

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Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 14/2011.

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Length: 24 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:ris:fcnwpa:2011_014

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Web page: http://www.eonerc.rwth-aachen.de/fcn
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Related research

Keywords: Building energy efficiency; Energy conservation; Net present value; Real options;

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References

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  1. Ghoshray, Atanu & Johnson, Ben, 2010. "Trends in world energy prices," Energy Economics, Elsevier, vol. 32(5), pages 1147-1156, September.
  2. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy-efficiency gap What does it mean?," Energy Policy, Elsevier, vol. 22(10), pages 804-810, October.
  3. Jakob, Martin, 2006. "Marginal costs and co-benefits of energy efficiency investments: The case of the Swiss residential sector," Energy Policy, Elsevier, vol. 34(2), pages 172-187, January.
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Citations

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Cited by:
  1. Ghosh, Gaurav & Shortle, James, 2012. "Managing Pollution Risk through Emissions Trading," FCN Working Papers 1/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  2. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  3. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  4. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies," FCN Working Papers 12/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  5. Sorda, Giovanni & Madlener, Reinhard, 2012. "Cost-Effectiveness of Lignocellulose Biorefineries and their Impact on the Deciduous Wood Markets in Germany," FCN Working Papers 8/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  6. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Motivation to Adopt a Residential Heating System: A Principal-Component Analysis," FCN Working Papers 17/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jan 2013.
  7. Achtnicht, Martin & Madlener, Reinhard, 2012. "Factors Influencing German House Owners' Preferences on Energy Retrofits," FCN Working Papers 4/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  8. Hackbarth, André & Madlener, Reinhard, 2011. "Consumer Preferences for Alternative Fuel Vehicles: A Discrete Choice Analysis," FCN Working Papers 20/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  9. Bruns, Stephan B. & Gross, Christian, 2013. "What if Energy Time Series are not Independent? Implications for Energy-GDP Causality Analysis," FCN Working Papers 10/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  10. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
  11. Palmer, Johannes & Sorda, Giovanni & Madlener, Reinhard, 2013. "Modeling the Diffusion of Residential Photovoltaic Systems in Italy: An Agent-based Simulation," FCN Working Papers 9/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  12. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  13. Michelsen , Carl Christian & Madlener, Reinhard, 2013. "Switching from Fossil Fuel to Renewables in Residential Heating Systems: An Empirical Study of Homeowners’ Decisions in Germany," FCN Working Papers 14/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  14. Hackbarth, André & Madlener, Reinhard, 2013. "Willingness-to-Pay for Alternative Fuel Vehicle Characteristics: A Stated Choice Study for Germany," FCN Working Papers 20/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  15. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  16. Rohlfs, Wilko & Madlener, Reinhard, 2012. "Assessment of Clean-Coal Strategies: The Questionable Merits of Carbon Capture-Readiness," FCN Working Papers 18/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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