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

FCN Working Paper No. 14/2011

30 Pages Posted: 29 Oct 2011

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2011


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.

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

Suggested Citation

Kumbaroğlu, Gürkan and Madlener, Reinhard, Evaluation of Economically Optimal Retrofit Investment Options for Energy Savings in Buildings (September 1, 2011). FCN Working Paper No. 14/2011 . Available at SSRN: https://ssrn.com/abstract=1950577 or http://dx.doi.org/10.2139/ssrn.1950577

Gürkan Kumbaroğlu (Contact Author)

Bogazici University

Bebek, İstanbul 34342

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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