Evaluation Tool and Retrofit Matrix for Office Buildings

 

Project duration: 7/2010 - 12/2011
Funded by E.ON ERC (in cooperation with Prof. Müller, EBC)

  Results for a sample office building: Mean NPVs from Monte Carlo simulation. NPVs below zero are not shown and indicate that returns from the investment will most likely be below the chosen discount rate (Source: FCN, own calculations)

When deciding on energy retrofit measures for office buildings, economic efficiency is probably the most important criterion besides actual energy and CO₂ savings. In this joint project, EBC calculates the latter for sets of possible retrofit measures (see EBC project description). FCN’s task is to develop a suitable method for economic evaluation. The final result will be a tool allowing the user to select from retrofit options for a specific building based on detailed knowledge of both energy and economic implications.

Existing tools for energy retrofit advice focus on the technical aspects of selecting the optimal combination of measures (FCN Working Paper No. 14/2011). They mostly use static indicators for economic comparison, such as investment cost or payback time based on first-year cost. However, investments in buildings generate benefits and costs, for example energy savings and maintenance, far into the future. A dynamic evaluation is called for in order to take the time value of money into account. Furthermore, the most important influence on cost-effectiveness of retrofits in self-used buildings is energy price, for which a linear model is merely a rough approximation. Thus even a dynamic method as used by Chidiac et al. (Energy and Buildings, 2011, 43 (2-3)) is not sufficient if it does not consider uncertainties in energy price trends.

In order to meet the requirements mentioned above, the economic analysis implemented within the retrofit evaluation tool comprises three elements. First, the Net Present Value method is used to account for the time value of money. Thereby, future cash flows are discounted to their current value which allows for a comparison of investments with different initial and future costs and benefits. Second, uncertainty in the energy price development is considered both by simultaneously evaluating different scenarios and by using Monte Carlo simulation to determine possible outcomes based on historical price developments. Third, the user may be advised as to whether to wait before investing. This real options analysis is based on the Monte Carlo forecasts and determines the probability of achieving a higher net present value at a later time. In the case where the investor does not benefit from energy savings, as in a let building, only the first element is applied, since future benefits are generated via rent increases.

There was further research into factors influencing the investment appraisal other than energy prices. In addition to investment and maintenance costs specific to each set of retrofit measures, general economic parameters are needed for the evaluation. The tool uses both standard values as well as ranges for transaction costs, periods under consideration, discount rates, inflation, and financing costs. Also, subsidies based on current state-aid programs are included for the different technologies.

Project publications

Hillebrand G., Arends G., Streblow R., Madlener R., Müller D. (2012). Evaluation Tool and Retrofit Matrix for Office Buildings, E.ON Energy Research Center Series, Vol. 4, Issue 4, December (ISSN: 1868-7415). [Download]