# Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings

^{1}

^{2}

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## Abstract

**:**

## 1. Introduction

#### 1.1. Rationale for Price Risk Reduction

_{i}, and for each x

_{i}there is a value v(x

_{i}) that the consumer assigns to them. The sum of all the values v weighted by their likelihood is the value the consumer assigns to the risky undertaking. Let the probability of each x

_{i}be π

_{i}. Then the von Neumann–Morgenstern function for economic utility u can be stated as follows:

_{i}in Equation (1) and their respective likelihoods as π

_{i}.

_{a}and x

_{b}in Figure 2 have a 50% likelihood each and they give the utilities v

_{a}and v

_{b}respectively, then the consumer faces an expected value of utility of v

_{ev}which is the average of v

_{a}and v

_{b}. If, however, the consumer can instead choose the average outcome x

_{av}with a likelihood of 100%, then the consumer would receive the utility v

_{av}. Since this holds higher utility than v

_{ev}, it is preferable compared to the random outcome.

#### 1.2. Review of Price Risk Valuation Methods

## 2. Methods

#### 2.1. Calculating the Value of Price Risk Reduction

#### 2.2. Electricity Price

#### 2.3. Case Buildings and Energy Consumption

- Business as usual (BAU), with direct electric radiators as the only source of heat;
- BAU + fireplace, with a fireplace supplementing the radiators;
- BAU + heat pump, with an air source heat pump supplementing the radiators; and
- BAU + solar collectors, with roof-mounted solar heat collectors supplementing the radiators.

## 3. Results

## 4. Conclusions

## Acknowledgments

## Author Contributions

## Conflicts of Interest

## References

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**Figure 3.**The value of price risk reduction and remaining cost in each case for three different timespans used in the calculation.

**Table 1.**The average makeup of the electricity price for consumers during the period studied (2007–2012).

Price Component | Amount (c/kWh) | Source |
---|---|---|

Electricity spot price | 4.34 | [31] |

Electricity tax | 1.39 | [32] |

Value-added tax | 0.97 | [31] |

Power company price marginal | 0.25 | [33] |

Transmission fee | 3.16 | [31] |

Total consumer price | 10.11 | - |

**Table 2.**Key figures concerning the heating systems in the different cases. BAU stands for Business as usual.

Indicator | BAU | BAU + Fireplace | BAU + Heat Pump | BAU + Solar |
---|---|---|---|---|

Investment cost (€) | 4000 | 9500 | 6000 | 10,000 |

Electricity consumption (kWh/a) | 16,387 | 13,984 | 13,488 | 14,370 |

Other heat sources (kWh/a) | 0 | 2403 | 2899 | 2017 |

Cost Type | BAU | BAU + Fireplace | BAU + Heat Pump | BAU + Solar |
---|---|---|---|---|

Variable cost | 1655 | 1612 | 1362 | 1451 |

Capital cost | 269 | 639 | 403 | 605 |

Total cost | 1924 | 2251 | 1765 | 2056 |

**Table 4.**Accounting of annualized costs to the investor in the four cases over three different time periods. Total annualized cost (€/a) shows annualized cost of each type of heating system, value of risk reduction (€/a) shows the value of risk reduction in each case and time period as a negative cost, remaining cost (€/a) shows the total cost of the heating system after subtracting the value of price risk reduction and, finally, relative value (%) shows the relative value of price risk reduction compared to the total cost of the heating system in each case and for each time period.

Time Period | Type of Cost or Value | BAU | BAU + Fireplace | BAU + Heat Pump | BAU + Solar |
---|---|---|---|---|---|

- | Total annualized cost | 1924 | 2251 | 1765 | 2056 |

1 year | Value of risk reduction | 0 | −140 | −168 | −117 |

Remaining cost | 1924 | 2111 | 1597 | 1939 | |

Relative value | 0% | 6% | 10% | 6% | |

5 years | Value of risk reduction | 0 | −204 | −247 | −172 |

Remaining cost | 1924 | 2047 | 1518 | 1884 | |

Relative value | 0% | 9% | 14% | 8% | |

10 years | Value of risk reduction | 0 | −218 | −263 | −183 |

Remaining cost | 1924 | 2033 | 1502 | 1873 | |

Relative value | 0% | 10% | 15% | 9% |

© 2017 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).

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**MDPI and ACS Style**

Tuominen, P.; Seppänen, T. Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings. *Energies* **2017**, *10*, 1545.
https://doi.org/10.3390/en10101545

**AMA Style**

Tuominen P, Seppänen T. Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings. *Energies*. 2017; 10(10):1545.
https://doi.org/10.3390/en10101545

**Chicago/Turabian Style**

Tuominen, Pekka, and Tuomas Seppänen. 2017. "Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings" *Energies* 10, no. 10: 1545.
https://doi.org/10.3390/en10101545