New Research Project: A Quantitative Assessment of the Energy Efficiency Gap

A new research project investigates how companies make energy efficiency project investment decisions.

A new research project investigates how companies make energy efficiency project investment decisions and how these compare to those for their core business projects.

The project is undertaken by Eamonn Boland and Sébastien Duquesnoy as a part of their Postgraduate Research at Imperial College and is supervised by Professor Walter Distaso and Dr. Ralf Martin from the Imperial College Business School. The project is also supported by Bloomberg New Energy Finance, Ceres and the Carbon Disclosure Project. The goal of their thesis is to assess if there is a misallocation of capital due to underinvestment in energy efficiency and, if so, to quantify how much capital is misallocated and how this misallocation affects companies’ financial performances.

The governing hypothesis of the thesis considers if current practices used in capital budget allocations adopt overly conservative investment conditions when assessing energy efficiency type investments. This hypothesis, if found to be correct, would suggest a misallocation of capital attributed to the use of high discount rates giving inaccurate and unattractive projected returns on energy efficiency type investments. Alternatively the hypotheses could also be disproved if these high discount rates can be shown to be a true market representation attributed to structural and behavioural market barriers under prevailing prices and market conditions.

To test the validity of the hypothesis, 1000 companies shall be surveyed to ascertain their investment criteria for core business and energy efficiency investments, along with the formulation methods and rationale behind their chosen criteria. In particular, the hurdle rates used for energy efficiency investments shall be surveyed. This effective hurdle rate shall then be compared to the theoretical optimal hurdle rate in order to work out how much capital, if any, is misallocated. If it can be shown that capital is misallocated and that it affects the financial performance of companies, then a strong evidence based argument can be postulated that would stimulate a change of current practices and enhance companies’ financial performances.

For further information, please contact:

Eamonn Boland
Email: eamonn.boland11@imperial.ac.uk

Sébastien Duquesnoy
Email: sebastien.duquesnoy11@imperial.ac.uk