Civil Engineering Reference
In-Depth Information
has an acceptable payback period. Uncertainty in the benefits of NZER occurs
because they are obtained over a long-term period and come from different
sources. Direct and monetary benefits such as the reduction in energy costs and the
increase in the value of the building are easy to quantify using energy simulation
models and other approaches; however, the inputs used to calculate these benefits
are highly uncertain and dependent on user input and experience (Turner Con-
struction
2010
). The reduction in energy costs depends on two highly uncertain
inputs such as the fluctuating energy costs and forecasting building performance.
The future value of the building depends on uncertain inputs such as the real estate
market conditions and the residual value of the building equipment; as well as,
demand for space. In the case of indirect benefits, it is even harder to quantify
benefits such as the improvement in occupant productivity and health, which are
highly subjective measures.
These uncertain costs and benefits of NZER result in high ratio of risk exposure
to the return on investment. NZER projects frequently fall short in traditional
quantitative capital budgeting analysis like pay-back period, internal rate of return
(IRR), and net present value (NPV). They also do not meet the common criteria
typically used to factor in risk in the evaluation of a project. For example, spec-
ulators or hedge fund managers are willing to take on risky investments with
proven returns, but energy-efficient investments in individual buildings are not
large enough to attract speculators and are perceived as too risky for commercial
bankers (Detserclaes
2007
). Bankers might rank NZER projects lower in their
agenda due to the long payback time that these projects tend to have in comparison
with other investments. Using payback period for analysis could reduce the
attractiveness of the investments due to the length of a building's lifetime, and
therefore, payback period should not be used alone to determine the attractiveness
of NZER investments (BPIE
2010
). However, lack of financier's awareness and
training on energy efficiency issues could hinder the ability of building stake-
holders to obtain qualified advice and proper evaluation of their investment in
NZER. If a financier uses the associated risk exposure, the payback time, and the
rate of the return on investment to evaluate the project, then the final decision
could be biased to not finance NZER due to high uncertainties in costs and
benefits. The lack of standardization in the measurement and verification proce-
dure, the relatively small size of NZER projects, and the high risk associated with
these projects, contribute to higher transaction costs for the projects compared to
other traditional investments (BPIE
2010
).
It is clear that the financing incentives are still modest because of the uncer-
tainty associated with the costs and benefits of NZER. Thus, there is a need to
classify and understand what the uncertainties are and their sources. In the next
section of the chapter, a life cycle perspective of the uncertainties associated with
NZER are discussed in detail.
