Multiple benefits of renovation in buildings - PU Europe

Multiple benefits of investing in energy
efficient renovation of buildings
Secondly, much evidence has shown that renovating the existing building stock is one of
the most attractive and low cost options to reduce CO 2 emissions, and potentially improve
energy security by reducing imports of fossil fuels. A number of studies have suggested
that the net cost of investing in renovating the existing building stock is not only low, but
is in fact negative. 28 This means, that through the induced energy savings, investments in
energy efficient renovation of buildings will pay for themselves at current energy prices.
In addition to Marginal Abatement Cost curves (MAC-curves) prominent in several macro
studies, several studies find that energy efficiency improvements in buildings are profitable
even with very high financing cost. One assessment from 2011 found that the internal
rate of return (IRR) on typical energy efficiency investments to be nearly 30 per cent on
average for an individual firm (even higher benefits to society). 29 This implies that an investment
will be profitable to undertake even when the real interest rate (the financing
cost) is 30 per cent or less. The IRR varies across different types of projects, and can be as
high as 49 per cent for an average investment in e.g. improving lighting. The largest absolute
saving potential is typically found in the heating and cooling category, as its share of
energy consumption is relatively larger.
Some criticism has been raised against the MAC and IRR approach in general and specifically
on the McKinsey approach on several accounts, inter alia: 30 1) that ex ante studies
dominate much of the estimates, and that ex post assessments often show a lower than
expected potential, 2) that “free riders” are not always properly accounted for, so that the
overall potential includes behaviour that would have taken place even without policy, 3)
most assessments ignore the rebound effects, which implies that as the price of energy is
reduced in response to increased energy efficiency, demand for energy (consumption)
increases, and 4) transaction cost, including e.g. scarce management time and resources
are typically not included. In sum, this implies that such findings tend to value the potential
too optimistically.
However, even with a reduction in the profitability of energy efficiency projects, there is
strong reason to believe that such projects are highly profitable. As the real interest rate in
most European countries is currently very low – and even negative in several countries –,
cf. Figure 18, projects will be profitable even with very low IRRs.
28 A large number of studies construct MAC-curves that makes this point. The MAC curve has been popularised by e.g. McKinsey
& Company (2010).
29 United Technologies Corporation (2011)
30 See e.g. NBER (2009)
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