Case Study
Financial Value of Building Decarbonization Technology Under Uncertainty – Energy Modelling & Investment
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Motivation
Property owners are facing increasing pressure from regulators, investors, and tenants to reduce building greenhouse emissions, particularly in large cities. Decarbonizing real estate requires costly investments for property owners, that tend to be recouped with the increase in property cashflows over a multi-decade horizon. The assessment of returns associated with those investments tend to be challenged by ongoing changes in regulatory environments and market conditions that hinder the ability of property owners to forecast the ultimate impact of decarbonizing investments on future energy costs, carbon emissions penalties or rental premiums. Against this background, building developers need a tool to assess the value of decarbonization upgrades under future uncertainties. Such a decision-making tool for building electrification will be critical for new as well as existing buildings.
Methodologies
- Integrated energy + finance modeling tool – integrates a building-energy model with a financial model to evaluate the costs and benefits of an energy investment under future uncertainty (Methodology, p. 3)
- Building-energy module – outputs a range of annual energy-use values that are converted into CO₂-emissions and operating-cost estimates (Methodology, p. 3)
- Financial module – calculates regulatory costs, capital costs and rental income from specified probability distributions, feeding the Monte Carlo cash-flow analysis (Methodology, p. 3)
Insights
- Electric & flexible designs beat gas – fully electric and flexible options for an NYC office high-rise deliver higher NPVs than gas-fuelled designs (Conclusion & Discussion, p. 23)
- Side-by-side comparability – results are presented so decision-makers can compare each design option directly, spotlighting financial upsides and downsides (Conclusion & Discussion, p. 23)
- Key trade-offs exposed – analysis clarifies trade-offs among construction costs, operating expenses, rental income and regulatory penalties for every option (Conclusion & Discussion, p. 23)
- Persuades risk-averse investors – the quantified risk/return picture is enough to sway a risk-averse investor toward the cleaner, more profitable option, whereas simple cost focus would favour gas (Conclusion & Discussion, p. 23)
Training
Relevant lectures:
- How to optimise design and decision-making under uncertainty
