Evaluation of economically optimal retrofit investment options for energy savings in buildings

TitleEvaluation of economically optimal retrofit investment options for energy savings in buildings
Publication TypeJournal Article
Year of Publication2012
AuthorsKumbaroğlu, G., and R. Madlener
JournalEnergy and Buildings
KeywordsBuilding energy efficiency, Energy conservation, Net present value, Real options

In this study, a techno-economic evaluation method for the energy retrofit of buildings is introduced, geared toward 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 method is developed, featuring a real options investment appraisal. The real options approach is introduced as an advancement in the practice of economic evaluation of building retrofit investment options. The new method is applied to an office building in Germany, illustrating its performance. The case study results indicate that energy price changes significantly affect the profitability of retrofit investments, and that high price volatility creates a substantial value of waiting, making it more rational to postpone the investment.