Investment Valuation Model for Renewable Energy Systems in Buildings

Abstract

Transformative technologies for producing renewable energy have promising features for substantial reductions in carbon emissions and environmental footprints of the building sector. Investments in renewable energy systems require substantial implementation costs followed by a long period of recovering the invested capital through savings in utilities bills. Favorable timing of renewable energy system implementation can reduce capital expenses and enhance returns on investments. An appropriate investment valuation method is needed to identify the appropriate time to implement any given renewable energy system and to find the values of properly scheduled investments. Real options analysis provides the ability to cope with investment timing under uncertainty. However, current real options models are theoretically limited in the context of decision making about investments in building energy improvements. In this paper, the writers address the theoretical limitations of current real options models and create a new real options model to evaluate investment options for renewable energy systems under uncertainty. This theoretically well-founded and practically useful model is tailored to the context of investment decision making for building energy improvements. The primary contribution of this research to the body of knowledge is the creation of (1) a method to account for uncertainty about energy savings following the implementation of renewable energy systems in buildings; (2) a novel method to estimate the volatility of renewable energy projects subject to uncertainty; and (3) an investment valuation approach to identifying the best time to implement renewable energy systems in buildings and to determine the corresponding investment option value. It is expected that this work will contribute to the construction engineering and management global community by presenting a new class of investment assessment tools that help in making hard energy investment decisions and will therefore increase the likelihood of achieving ambitious goals for the adoption of renewable energy systems.