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Promoting energy efficiency investments with risk management decision tools

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  • Jackson, Jerry

Abstract

This 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.

Suggested Citation

  • Jackson, Jerry, 2010. "Promoting energy efficiency investments with risk management decision tools," Energy Policy, Elsevier, vol. 38(8), pages 3865-3873, August.
  • Handle: RePEc:eee:enepol:v:38:y:2010:i:8:p:3865-3873
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    References listed on IDEAS

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    7. Giacomo Di Foggia, 2016. "Effectiveness of Energy Efficiency Certificates as Drivers for Industrial Energy Efficiency Projects," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 273-280.
    8. Polzin, Friedemann & von Flotow, Paschen & Nolden, Colin, 2016. "What encourages local authorities to engage with energy performance contracting for retrofitting? Evidence from German municipalities," Energy Policy, Elsevier, vol. 94(C), pages 317-330.
    9. Altwies, Joy E. & Nemet, Gregory F., 2013. "Innovation in the U.S. building sector: An assessment of patent citations in building energy control technology," Energy Policy, Elsevier, vol. 52(C), pages 819-831.
    10. repec:eee:rensus:v:88:y:2018:i:c:p:99-108 is not listed on IDEAS
    11. Daniel C. Matisoff & Douglas S. Noonan & Mallory E. Flowers, 2016. "Policy Monitor—Green Buildings: Economics and Policies," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 329-346.
    12. Deng, Qianli & Jiang, Xianglin & Zhang, Limao & Cui, Qingbin, 2015. "Making optimal investment decisions for energy service companies under uncertainty: A case study," Energy, Elsevier, vol. 88(C), pages 234-243.
    13. repec:eee:enepol:v:111:y:2017:i:c:p:179-192 is not listed on IDEAS
    14. May, Gökan & Stahl, Bojan & Taisch, Marco, 2016. "Energy management in manufacturing: Toward eco-factories of the future – A focus group study," Applied Energy, Elsevier, vol. 164(C), pages 628-638.
    15. repec:eee:rensus:v:82:y:2018:i:p3:p:3952-3961 is not listed on IDEAS
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    17. 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.
    18. Fuerst, Franz & Oikarinen, Elias & Harjunen, Oskari, 2016. "Green signalling effects in the market for energy-efficient residential buildings," Applied Energy, Elsevier, vol. 180(C), pages 560-571.
    19. Lee, P. & Lam, P.T.I. & Lee, W.L. & Chan, E.H.W., 2016. "Analysis of an air-cooled chiller replacement project using a probabilistic approach for energy performance contracts," Applied Energy, Elsevier, vol. 171(C), pages 415-428.
    20. Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
    21. Garbuzova-Schlifter, Maria & Madlener, Reinhard, 2016. "AHP-based risk analysis of energy performance contracting projects in Russia," Energy Policy, Elsevier, vol. 97(C), pages 559-581.
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