Quantifying the financial value of building decarbonization technology under uncertainty: Integrating energy modeling and investment analysis

Abstract

The built environment accounts for approximately 40% of global emissions. The evaluation of returns linked to investments in building decarbonization is impeded when confronted with uncertainties surrounding future energy prices, building emission regulations, and real estate market conditions. This paper develops an integrated framework that combines energy modeling with investment analysis to support the adoption of decarbonizing technologies under a context of uncertainty. The integrated framework includes projections of costs and benefits associated with the adoption of technology (i.e., changes in rental cashflows, vacancy rates, maintenance and energy costs) under a wide range of potential pathways of the energy markets and regulatory environment, and local real estate market demand for green buildings using Monte Carlo simulations. Additionally, this paper develops the approach to investigate the potential value of flexibility in designing for building electrification (i.e., the ability to fully electrify gas heating systems at a later year). We illustrate the use of this approach in a case study of a new office building in New York City, faced with design choices between natural gas and electrified heating systems. We consider 10,000 scenarios changing future greenhouse emission penalties, investments in the local electric grid, local real estate market conditions and energy prices. In approximately 60 percent of simulations, the most profitable decision for the building owner is to adopt a natural gas-powered heating system. However, adopting a building design that provides a building the flexibility to fully electrify at a later date is more profitable than a natural gas-heating building in 96 percent of scenarios. A sensitivity analysis shows that the most influential parameter in the valuation of a design option is the size of the green premiums associated with improved energy efficiency.