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Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings

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  • Pekka Tuominen

    (VTT Technical Research Centre of Finland Ltd., P.O. Box 1000, 02044 VTT Espoo, Finland)

  • Tuomas Seppänen

    (OP Financial Group, P.O. Box 308, 00101 Helsinki, Finland)

Abstract

This paper presents a method for calculating the value of price risk reduction to a consumer that can be achieved with investments in energy efficiency. The value of price risk reduction is discussed to some length in general terms in the literature reviewed but, so far, no methodology for calculating the value has been presented. Here we suggest such a method. The problem of valuating price risk reduction is approached using a variation of the Black–Scholes model by considering a hypothetical financial instrument that a consumer would purchase to insure herself against unexpected price hikes. This hypothetical instrument is then compared with an actual energy efficiency investment that reaches the same level of price risk reduction. To demonstrate the usability of the method, case examples are calculated for typical single-family houses in Finland. The results show that the price risk entailed in household energy consumption can be reduced by a meaningful amount with energy efficiency investments, and that the monetary value of this reduction can be calculated. It is argued that this often-overlooked benefit of energy efficiency investments merits more consideration in future studies.

Suggested Citation

  • Pekka Tuominen & Tuomas Seppänen, 2017. "Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings," Energies, MDPI, vol. 10(10), pages 1-11, October.
    • Handle: RePEc:gam:jeners:v:10:y:2017:i:10:p:1545-:d:114313
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    References listed on IDEAS

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    Cited by:

    1. Florijan Celic & Nela Vlahinic Lenz, 2022. "EU Financial Instruments in Practice: SMEs investments in energy efficiency and renewable energy in Croatia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(4), pages 173-185, July.
    2. Cezar-Petre Simion & Ciprian Nicolescu & Mihai Cioc, 2018. "Selection of Energy Efficiency Projects for Dwelling Stock to Achieve Optimal Project Portfolio at the Regional Level by Applying LCC. An Analysis Based on Three Scenarios in the South-Muntenia Region," Energies, MDPI, vol. 11(6), pages 1-21, June.

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