Increasing innovation in home energy efficiency: Monte Carlo simulation of potential improvements

Despite the enormous potential for savings, there is little penetration of market-based solutions in the residential energy efficiency market. We hypothesize that there is a failure in the residential efficiency improvement market: due to lack of customer knowledge and capital to invest in improvements, there is unrecovered savings. In this paper, we model a means of extracting profit from those unrecovered energy savings with a market-based residential energy services company, or RESCO. We use a Monte Carlo simulation of the cost and performance of various improvements along with a hypothetical business model to derive general information about the financial viability of these companies. Despite the large amount of energy savings potential, we find that an average contract length with residential customers needs to be nearly 35 years to recoup the cost of the improvements. However, our modeling of an installer knowledge parameter indicates that experience plays a large part in minimizing the time to profitability for each home. Large numbers of inexperienced workers driven by government investment in this area could result in the installation of improvements with long payback periods, whereas a free market might eliminate companies making poor decisions. (C) 2010 Elsevier B.V. All rights reserved.