Efficiency valuation – concepts and practice

Paolo Bertoldi, European Commission
Steve Kromer, Teton Energy Partners

Keywords

Energy Efficiency, Risk Management, Valuation, Measurement and Verification

Abstract

Energy efficiency projects can be modelled as investment decisions under uncertainty. Efficiency projects occur in the physical world, but are justified through financial determinants. In the simplest sense, an efficiency project is no different from any other investment. The primary difference is the difficulty in quantifying the value and risk resulting from the investment.

While it may seem obvious that efficiency is a good idea in general, it is far from obvious how to conduct the valuation of projects in a manner that is efficient both in terms of quantification of energy (physical settlement) and financial appropriation of the resulting value (financial settlement).

A major barrier to the development of efficiency projects is the cost associated with establishing a baseline and measuring the results. One leading document in the Measurement and Verification (M&V) arena is the International Performance Measurement and Verification Protocol (IPMVP). The IPMVP addresses issues and provides a framework to make decisions, but stops short of providing a financial decision framework. Lacking a means to arrive at the proper amount of metering for a particular project many people opt to stipulate the results, thereby introducing a large amount of uncertainty in the project valuation. Both the engineers and the bankers shall agree upon the accepted level of risk and M&V requirements.

This paper discusses a framework for performing efficiency investment valuation and making decisions based on the combined physical and financial uncertainty, and the value of information resulting from the M&V plan. The authors hope that wider discussion on this topic will lead to a growing body of expertise on efficiency valuation techniques and thereby enhance investment in efficiency.