Real Options Valuation of Phased Investments in Commercial Energy Retrofits under Building Performance Risks
Publication: Journal of Construction Engineering and Management
Volume 140, Issue 6
Abstract
Although the importance of energy efficiency investments has grown substantially in recent years, there has been very little about reliable valuation methods specifically aimed for commercial building energy retrofits under building performance risks. To fill this gap, the key objective of this study is to develop and exemplify a real options valuation framework that can be used to evaluate the financial impact of phased investments in a building portfolio. This study proposes a rigorous theoretical decision-support framework: Phased Investment for Energy Retrofits (PIER). PIER blends real options and net present value (NPV) analysis techniques together to valuate managerial flexibility associated with the phased investment strategy. The research results revealed that use of PIER would lead to a favorable NPV while performance risks could serve as a crucial factor that determines the level of government subsidy. The valuation framework of this study will help project owners and decision-makers better assess the impact of performance risks on commercial energy retrofit investments, which will serve as a solid foundation for them to make further better-informed project decisions.
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Acknowledgments
The authors acknowledge that this work was supported by a seed grant from Oregon State University. Any opinions, findings, conclusions, or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of Oregon State University.
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Information & Authors
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Published In
Journal of Construction Engineering and Management
Volume 140 • Issue 6 • June 2014
Copyright
© 2014 American Society of Civil Engineers.
History
Received: Jul 9, 2013
Accepted: Jan 13, 2014
Published online: Feb 24, 2014
Published in print: Jun 1, 2014
Discussion open until: Jul 24, 2014
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