Abstract
This methodological paper has a didactic goal: improving our understanding of what “cost optimal energy performance of buildings” means and how financial appraisal of efficiency investments must be set up. Three items merit improvement. First, focus on the endowment character of energy performance of long-living assets like buildings. Second, defining cost optimal requires more than a comparative static trade-off scheme; cost optimal refers to dynamic efficiency, which results from technology dynamics induced by changes in society and policy. Third, financial appraisal is a more complex issue than simple net present value and life cycle cost calculations. It must reflect the time sequential dynamics of real-life processes including real-life decision making. Financial appraisal is embedded in a complex framework made up by three dimensions: future time, doubt and irrevocability. The latter dimension connects with issues like lock-in and path dependency that are generally overlooked in net present value calculations. This may lead to very erroneous recommendations regarding efficiency investments, in particular regarding the energy performance endowment of buildings. Mostly irrevocability is used as an argument to “wait and learn” what has, for example, blocked the pace of climate policy. But the opposite “choose or lose” is the logical outcome when the methodology is fed with evidenced expectations. The latter boosts energy efficiency to its boundaries, saving it from the middle-of-the-river quagmire where incomplete appraisals are dropping it too often (making the good the worst enemy of the best).
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Notes
Functional use refers on the one hand to the main function intended for the building (e.g. living, education, office work, health care), but on the other hand to the use intensity of provided capabilities of the building (e.g. number of actual occupants with time and duration of their occupation of the building, number of hot meals prepared in the building’s kitchen, laundry—washing, drying, ironing—at home or processed externally, etc.). Regulations are or can be specific for intended functions, but cannot cover actual functional use (Verbruggen 2008).
Events are out of control of given decision makers, while decisions (also called strategies) are created by decision makers or selected from a range of alternatives under control.
It may be understood that the standard option theory as described in the “wait and learn” case and in Dixit and Pindyck (1994) also can be applied to find the optimum date for starting the construction as such, a timing also influenced by EPE choice opportunities. However, many other (for people more important) considerations will fix the date of constructing, and therefore, analytical separation of the two decisions is plausible.
Abbreviations
- CBA:
-
Cost–benefit analysis
- EPBD:
-
Energy Performance of Buildings Directive (2010/31/EU)
- EPE:
-
Energy performance endowment
- NPV:
-
Net present value
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Improvements suggested by an anonymous reviewer are incorporated in the present version. All shortcomings remain the responsibility of the author.
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Verbruggen, A. Financial appraisal of efficiency investments: why the good may be the worst enemy of the best. Energy Efficiency 5, 571–582 (2012). https://doi.org/10.1007/s12053-012-9149-7
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DOI: https://doi.org/10.1007/s12053-012-9149-7