Are Your Energy efficiency Projects Enough Profitable? Check it From the Profitability Index Method!

Bernard Chabot, ADEME

Keywords

economic analysis, profitability analysis, life cycle cost analysis, energy efficiency, energy savings, negaWatts, renewable energy, incentives, subsidies, avoided emissions trading, carbon credits, white certificates, energy efficiency certificates, CDM

Abstract

Beside the availability of energy efficiency technologies and a favourable framework to overcome non technical and non economic barriers, a large scale dissemination of energy efficiency projects requires a "fair and sufficient profitability" for investors. In order to evaluate if this profitability level is met, and if not in order to calculate what are the required incentives, this paper presents a simple, innovative and reliable economic analysis method, the "Profitability Index Method", from the name of the ratio between the net present value (or the differential net present value) generated by an investment and the initial cost (or over-cost) of this investment. The main advantages of this method are presented:

Universal linear model of the project profitability index versus the price of energy delivered or saved, defining the cost, the cost structure and the required price of energy services.
Rational assessment of the minimum value of the profitability index to attract investors.
Direct determination of required incentives (subsidies, carbon credits, energy efficiency certificates...) if this minimum level is not met.

The preliminary presentation of the method is made from examples of simple sustainable energy. Then the extension of the method to the general case of energy saving or energy efficiency projects is detailed and the interest of this extension is assessed.