From Volatility to Value:

Analysing and Managing Financial and Performance Risk in Energy Savings Projects

Forthcoming in Energy Policy

Evan Mills, Ph.D.
Lawrence Berkeley National Laboratory
MS 90-4000
Berkeley, California, USA 94720
emills@lbl.gov

Steve Kromer, P.E.
Teton Energy Partners
1639 Delaware Street
Berkeley, California, USA 94703
skromer@tetonenergy.com

Gary Weiss, P.E.
Teton Energy Partners
4270 West Greens Place
Wilson, Wyoming, USA 83014
gweiss@tetonenergy.com

Paul A. Mathew, Ph.D.
Lawrence Berkeley National Laboratory
901 D. Street SW, Suite 950
Washington DC 20024
pamathew@lbl.gov

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Abstract

Many energy related investments are made without a clear financial understanding of their values, risks, and volatilities. In the face of this uncertainty, the investor—such as a building owner or an energy service company—will often choose to implement only the most certain and thus limited energy-efficiency measures. Conversely, commodities traders and other sophisticated investors accustomed to evaluating investments on a value, risk, and volatility basis often overlook energy-efficiency investments because risk and volatility information are not provided. Fortunately, energy-efficiency investments easily lend themselves to such analysis using tools similar to those applied to supply-side risk management. Accurate and robust analysis demands a high level of understanding of the physical aspects of energy-efficiency, which enables the translation of physical performance data into the language of investment. With a risk management analysis framework in place, the two groups—energy efficiency experts and investment decision-makers—can exchange the information they need to expand investment in demand-side energy projects. In this article, we first present the case for financial risk analysis in energy efficiency in the buildings sector. We then describe techniques and examples of how to identify, quantify, and manage risk. Finally, we describe emerging market-based opportunities in risk management for energy efficiency.

Note: An earlier version of this work was presented at the ECEEE Summer Study on Energy Efficiency, 2-7 June 2003, St Raphaël, Côte d'Azur, France.


Keywords: Energy Efficiency, Risk Management, Finance

Note: An earlier version of this work was presented at the ECEEE Summer Study on Energy Efficiency in Buildings 2-7 June 2003, St Raphaël, Côte d'Azur, France.

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