Quantifying The Financial Value of Building Decarbonization Technology Under Uncertainty: Integrating Energy Modeling and Investment Analysis

Abstract

Property owners are facing increasing pressure from regulators, investors, and tenants to reduce building greenhouse emissions, particularly in large cities. Decarbonizing real estate requires costly investments for property owners, that tend to be recouped with the increase in property cashflows over a multi-decade horizon. The assessment of returns associated with those investments tend to be challenged by ongoing changes in regulatory environments and market conditions that hinders the ability of property owners to forecast the ultimate impact of decarbonizing investments on future energy costs, carbon emissions penalties or rental premiums. Against this background, building developers need a tool to assess the value of decarbonization upgrades under future uncertainties. Such a decision-making tool for building electrification will be critical for new as well as existing buildings. This paper develops an integrated framework that combines energy modelling with investment analysis to support the adoption of decarbonizing technologies under a context of uncertainty. This integrated framework includes projections of costs and benefits associated with the adoption of technology (i.e., changes in rental cashflows, vacancy rates, maintenance and energy costs) under a wide range of potential pathways of the energy markets and regulatory environment, and local real estate market demand for green buildings using Monte Carlo simulations. Additionally, this paper develops the approach to investigate the potential value of flexibility in designing for building electrification (i.e., the ability to fully electrify gas heating systems at a later year). We illustrate the use of this approach in a case study of a new office building in New York City. We evaluate the decision to adopt of a fully electric heating system, against a heating system relying on natural gas that serves as a baseline. We consider 10,000 scenarios changing future greenhouse emission penalties, investments in local electric grid, local real estate market conditions and energy prices. Our simulations indicate that, in approximately 76 percent of scenarios, the most profitable decision for the building owner is to adopt a natural gas-powered heating system. However, adopting a building design that provides a building the flexibility to fully electrify at a later date is more profitable than a natural gas-heating building in 99 percent of scenarios. A sensitivity analysis shows that the most influential factor in this decision is the future presence of green premiums in the real estate market, followed by electricity prices and local carbon penalties for building owners.