Bridging the transparency gap in energy efficiency financing by co-designing an integrated assessment framework with involved actors

Abstract

Energy efficiency investments are subject to various risks and uncertainties, which may affect involved actors’ profitability, and as such, there is a need for developing tools to support their decisions. So far, the developed methodological frameworks that aim at projecting the profitability and risk of such investments present a high technical complexity, and involved actors have difficulties in digesting their results. Consequently, despite their technical and academic value, the existing frameworks cannot achieve the essence of their scope, i.e., to provide concrete implications to capital providers. This article introduces the concept of IRR curve, as an appropriate tool for assessing the economic performance of energy efficiency investments from investors’ point of view. Based on this tool, an integrated framework for profitability assessment of energy efficiency investments is developed, by linking their economic performance and riskiness to investor preferences. The added value of this methodological framework lies in the comparability that it provides between different energy efficiency investments, thereby facilitating investment selection. Utilising this framework, capital providers can be supported in the selection of the country, sector, and project type to invest, while on the other hand, they can better comprehend the risk nature of energy efficiency investments as well as project their profitability and optimal investment holding period. To demonstrate the functionality of the proposed framework, we applied it to the German energy efficiency sector. Our findings provide evidence for the profitability potential of energy efficiency investments and implications about investment holding period.

Keywords

• Investments
• Risk
• Cost of Capital
• IRR
• Germany
• DEEP