Efficiency Valuation: How to “Plan, Play and Settle” Energy Efficiency Projects

  • Steve Kromer Chair Efficiency Valuation Organization (EVO)
Keywords: Efficiency Valuation, Energy Efficiency

Abstract

The return on investment from energy effi ciency is termed “savings” or avoided cost. ESCOs, equipment vendors, project developers, facility owners, and fi nancial institutions all desire accurate assessment of the achievement of savings from their energy effi ciency projects. The best way to ensure the long-term achievement and persistence of energy savings is to establish, up-front, a cost-effective measurement and verifi cation (M&V) plan that is followed throughout the useful life of the energy assets installed. Energy effi ciency projects can be modeled as investment decisions under uncertainty. Effi ciency projects occur in the physical world, but are justifi ed through fi nancial determinants. In the simplest sense, an effi ciency project is no different from any other investment. However, such projects present unique diffi culties in quantifying the value and risk resulting from the investment. While it may seem obvious that effi ciency is a good idea in general, it is far from obvious how to conduct the valuation of projects in a manner that is effi cient both in terms of quantifi cation of energy (physical settlement) and fi nancial appropriation of the resulting value (fi nancial settlement). A major barrier to the development of effi ciency projects is the cost associated with establishing a baseline and measuring the results. One leading document in the M&V arena is the International Performance Measurement and Verifi cation Protocol (IPMVP). The IPMVP addresses issues and provides a framework to make decisions, but stops short of providing a fi nancial decision framework. Lacking a means to arrive at the proper amount of metering for a particular project, many people opt to stipulate the results, thereby introducing a large amount of uncertainty in the project valuation. Engineers and project fi nanciers must agree on the accepted level of risk and M&V requirements. This article discusses a framework for performing effi ciency investment valuation and making decisions based on the combined physical and fi nancial uncertainty—or how to “plan, play, and settle” energy effi ciency projects.

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Author Biography

Steve Kromer, Chair Efficiency Valuation Organization (EVO)

Steve Kromer is chair of the Effi ciency Valuation Organization (EVO). He is also a principal of Teton Energy Partners, LLC, an engineering consulting fi rm focusing on energy measurement (M&V), energy information, and risk management. Prior to founding Teton Energy Partners, he was a senior engineer at the Lawrence Berkeley National Laboratory and a director at Enron Energy Services. For more on EVO and to sign up to receive information on the organization on joining as a subscriber, visit the EVO website at www.evo-world.org. Contact EVO chair Steve Kromer at stevek@kromer.com

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