Optimal Investment in Energy Efficiency Under Uncertainty

The research employs a three-dimensional binomial lattice and real options analysis to determine the trigger investment cost for energy efficiency projects. It finds that the 'energy efficiency paradox'—where worthwhile projects are not undertaken—can be explained by the value of the option to wait, particularly when the remaining useful life of a facility is short.

• The authors identify three primary sources of uncertainty that affect the decision to invest in energy efficiency: fuel commodity prices, emission allowance prices, and the overall investment cost.
• In the base case scenario with an initial investment cost of 500, it is optimal to invest when the facility has a remaining useful life of more than six years; for facilities with six years or less, it is preferable to wait even if the Net Present Value (NPV) is positive.
• Higher volatility in investment costs increases the threshold for investment, meaning a lower investment cost is required to make the project optimal. For a 15-year maturity, increasing volatility from 0.10 to 0.20 requires an 11.4% fall in the trigger cost.
• The study suggests that public subsidies can effectively bring forward energy efficiency investments; for example, a 50% subsidy on initial costs can make investment optimal six years earlier than without the subsidy.

APA

Abadie, L. M., Chamorro, J. M., & González-Eguino, M. (2009). Optimal Investment in Energy Efficiency Under Uncertainty. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200911261201201772437402.pdf

Chicago

Abadie, Luis M., José M. Chamorro, and Mikel González-Eguino. Optimal Investment in Energy Efficiency Under Uncertainty. Basque Centre for Climate Change, 2009. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200911261201201772437402.pdf.

Wikipedia

{{cite report |last1=Abadie |first1=Luis M. |last2=Chamorro |first2=José M. |last3=González-Eguino |first3=Mikel |title=Optimal Investment in Energy Efficiency Under Uncertainty |publisher=Basque Centre for Climate Change |date=November 2009 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200911261201201772437402.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{abadie2009optimal, author = {Abadie, Luis M. and Chamorro, José M. and González-Eguino, Mikel}, title = {{Optimal Investment in Energy Efficiency Under Uncertainty}}, institution = {Basque Centre for Climate Change}, year = {2009}, month = nov, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200911261201201772437402.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }