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Promoting energy efficiency investments with risk management decision tools

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  • Jackson, Jerry

Abstract

This paper reviews current capital budgeting practices and their impact on energy efficiency investments. The prevalent use of short payback "rule-of-thumb" requirements to screen efficiency projects for risk is shown to bias investment choices towards "sure bet" investments bypassing many profitable efficiency investment options. A risk management investment strategy is presented as an alternative to risk avoidance practices applied with payback thresholds. The financial industry risk management tool Value-at-Risk is described and extended to provide an Energy-Budgets-at-Risk or EBaR risk management analysis to convey more accurate energy efficiency investment risk information. The paper concludes with recommendations to expand the use of Value-at-Risk-type energy efficiency analysis.

Suggested Citation

  • Jackson, Jerry, 2010. "Promoting energy efficiency investments with risk management decision tools," Energy Policy, Elsevier, vol. 38(8), pages 3865-3873, August.
    • Handle: RePEc:eee:enepol:v:38:y:2010:i:8:p:3865-3873
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