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On optimal investment strategies for energy conservation

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  • Craig, Paul P.
  • Reeds, James

Abstract

This paper focuses on the problem of optimal time-phasing of investments in energy conservation. We determine the optimal time-phased investment strategy under the assumption that incremental investment can be made at any time without cost penalty. The results of the analysis are compared with the more practical approach of making all conservation investments at one time. We find, for a number of realistic cases, that there are only minor differences (typically 10% or less) between the two strategies in terms of present value. Accordingly, we conclude that a strategy of erring on the side of early investment in energy conservation measures is often justified. The analysis of the optimal time phasing for conservation investments involves the Kuhn-Tucker conditions, and is developed in detail in an appendix to the paper. The final form is quite simple when the amount of energy used annually by a system decreases exponentially with capital investment in conservation.

Suggested Citation

  • Craig, Paul P. & Reeds, James, 1980. "On optimal investment strategies for energy conservation," Energy, Elsevier, vol. 5(1), pages 1-11.
    • Handle: RePEc:eee:energy:v:5:y:1980:i:1:p:1-11
    DOI: 10.1016/0360-5442(80)90046-8
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