Building Energy Retrofit Hurdle Rates and Risk Arbitrage in Energy Efficiency Investments

26 Pages Posted: 11 Sep 2020

See all articles by Yuan Lai

Yuan Lai

Massachusetts Institute of Technology (MIT)

Sokratis Papadopoulos

New York University (NYU) - Center for Urban Science and Progress

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Gary Pivo

University of Arizona

Jacob S. Sagi

University of North Carolina Kenan-Flagler Business School

Constantine E. Kontokosta

New York University - Center for Urban Science and Progress; New York University (NYU) - Marron Institute of Urban Management

Date Written: August 15, 2020

Abstract

Despite extensive empirical evidence of the economic and financial benefits of green buildings, energy retrofit investments in existing buildings have not reached widespread adoption.This paper empirically estimate returns to energy retrofit investments for multifamily and commercial buildings in New York City, using a novel database of actual audit report recommendations and permitted renovation work extracted using natural language processing. By modeling the estimated rate of return for energy retrofit investments, we generate a more comprehensive understanding of the perceived risk of these investments and the market and regulatory mechanisms that can overcome financial and informational barriers to investment in energy conservation measures (ECMs). Based on auditor costs and savings estimates, the median internal rate of return (IRR) for adopted ECMs is found to be 21% for multifamily buildings and 25% for office properties. Adoption rates are higher for office buildings than multifamily, and in both cases adopter buildings tend to be larger, higher value, and less efficient at the time of implementation. The economically significant magnitudes of returns to adopted ECMs raise important questions about why many property owners choose not to adopt. As such, we discuss incentive and regulatory mechanisms that can overcome financial and informational barriers to the adoption of energy efficiency measures.

Keywords: energy retrofits; building energy performance; retrofit investment; energy efficiency

JEL Classification: Q41; Q48; Q51; R30; C55

Suggested Citation

Lai, Yuan and Papadopoulos, Sokratis and Fuerst, Franz and Pivo, Gary and Sagi, Jacob and Kontokosta, Constantine E., Building Energy Retrofit Hurdle Rates and Risk Arbitrage in Energy Efficiency Investments (August 15, 2020). Kenan Institute of Private Enterprise Research Paper No. 20-07, Available at SSRN: https://ssrn.com/abstract=3674539 or http://dx.doi.org/10.2139/ssrn.3674539

Yuan Lai

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Sokratis Papadopoulos

New York University (NYU) - Center for Urban Science and Progress ( email )

1 Metrotech Center
19th Floor
Brooklyn, NY 11201
United States

Franz Fuerst

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

Gary Pivo

University of Arizona

Department of History
Tucson, AZ 85721
United States

Jacob Sagi

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

Constantine E. Kontokosta (Contact Author)

New York University - Center for Urban Science and Progress ( email )

1 MetroTech Center
19th Floor
Brooklyn, NY 11201
United States

New York University (NYU) - Marron Institute of Urban Management ( email )

60 Fifth Ave
2nd Floor
New York, NY 10011
United States

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