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Appraisal and Valuation pp 105–116Cite as

Do Policy Incentives to Buildings Energy Retrofit Encourage Homeowners’ Free-Rider Behavior?

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Part of the book series: Green Energy and Technology ((GREEN))

Abstract

To encourage homeowners in undertaking buildings energy-efficient renovations, Governments have introduced a wide range of incentive measures. Nonetheless, the cost-effectiveness of this incentive policy is controversial. The general perception is that incentives are costly and, if they are not optimally designed, they can attract free riders and generate undesirable outcomes to efficient resource allocation and to Society. In this paper, we investigate whether investments in buildings energy retrofit (BER) are be profitable in the phasing out of incentives and if current incentive policy encourage homeowners’ free-rider behavior. In detail, we analyze the investment decision of a homeowner, who has to undertake retrofit interventions of an existing building, regardless incentives are cancelled out. In detail, we develop and implement a Real Option Model to determine the investment value and its optimal timing, by modeling the opportunity to invest as a call option. Our results show that negative NPV investments may turn to be profitable if the option to defer is optimally exercised. The value of flexibility to invest adds to the investment value and make incentive schemes not necessary in encouraging investments in BER. By contrast, current fiscal incentive policy in Italy may attract free riders and generate an over-investment effect, which in turn increase costs for Government and Society.

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Notes

  1. 1.

    Under the hypothesis that markets are complete, the investment present value coincides with the expected value of discounted cash flows generated. i.e. net energy cost savings.

  2. 2.

    According to McDonald and Siegel [43] and D’Alpaos et al. [23] \(\delta \equiv \hat{\mu } - \mu > 0\). In addition, as \(\hat{\mu } = r + RP,\) where RP is the risk premium, \(\mu - RP = r - \delta\), where \(r - \delta\) is the certainty equivalent rate of return.

  3. 3.

    p0 is the average PUN yearly price in the period January 2016-Septeber 2019 as provided by Gestore Mercati Energetici (GME), which operates power, gas and environmental markets.

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Author information

Authors and Affiliations

  1. Department of Civil Environmental and Architectural Engineering and Centro Studi Levi Cases, University of Padova, Padova, Italy

    Chiara D’Alpaos

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  1. Chiara D’Alpaos
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Correspondence to Chiara D’Alpaos .

Editor information

Editors and Affiliations

  1. ICAR, Polytechnic University of Bari, Bari, Italy

    Pierluigi Morano

  2. DASTU, Politecnico di Milano, Milan, Italy

    Alessandra Oppio

  3. DIA, University of Trieste, Trieste, Italy

    Paolo Rosato

  4. ABC, Politecnico di Milano, Milan, Italy

    Leopoldo Sdino

  5. DiAP, Sapienza University of Rome, Rome, Italy

    Francesco Tajani

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D’Alpaos, C. (2021). Do Policy Incentives to Buildings Energy Retrofit Encourage Homeowners’ Free-Rider Behavior?. In: Morano, P., Oppio, A., Rosato, P., Sdino, L., Tajani, F. (eds) Appraisal and Valuation. Green Energy and Technology. Springer, Cham. https://doi.org/10.1007/978-3-030-49579-4_8

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  • DOI: https://doi.org/10.1007/978-3-030-49579-4_8

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