Promoting energy efficiency investments with risk management decision tools

This paper reviews current capital budgeting practices and their impact on energy efficiency investments. The prevalent use of short payback rule-of-thumb requirements to screen efficiency projects for risk is shown to bias investment choices towards sure bet investments bypassing many profitable efficiency investment options. A risk management investment strategy is presented as an alternative to risk avoidance practices applied with payback thresholds. The financial industry risk management tool Value-at-Risk is described and extended to provide an Energy-Budgets-at-Risk or EBaR risk management analysis to convey more accurate energy efficiency investment risk information. The paper concludes with recommendations to expand the use of Value-at-Risk-type energy efficiency analysis. (C) 2010 Elsevier Ltd. All rights reserved.