Postponement Pays! The real option theory applied to determine the optimal investment timing of energy saving measures available to newly-build dwellings, by Koen van Cann (with Bouwfonds Property Development)
June 8, 2013
Energy saving measures in the residential sector play an important role in the reduction of the primary energy consumption. Such measures may become unprofitable when the energy prices drop after the upfront investment costs of the measure are incurred. This research examines the effect of future energy prices uncertainty on the optimal investment timing and the value of options on energy saving measures embedded in newly-build dwellings. A binomial option pricing model based on standard option theory is tailored to the specific context. The results show that at the current level of energy prices, options on energy saving measures carry along a significant value of waiting. This means that although it may be profitable to take these measures today, it is even more profitable to postpone these measures and wait until the energy prices have risen sufficiently. Furthermore, the results show that the total value of options on energy saving measures embedded in an energy concept reduces the expected total cost of ownership of the energy concept significantly. Overall, the results show that from an economic perspective, a future-prepared energy concept is more valuable than an energy efficient concept.