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

Abstract

The return on investment from energy efficiency is termed “sav-
ings” or avoided cost. ESCOs, equipment vendors, project developers,
facility owners, and financial institutions all desire accurate assessment
of the achievement of savings from their energy efficiency projects. The
best way to ensure the long-term achievement and persistence of en-
ergy savings is to establish, up-front, a cost-effective measurement and
verification (M&V) plan that is followed throughout the useful life of
the energy assets installed. Energy efficiency projects can be modeled as
investment decisions under uncertainty. Efficiency projects occur in the
physical world, but are justified through financial determinants. In the
simplest sense, an efficiency project is no different from any other invest-
ment. However, such projects present unique difficulties in quantifying
the value and risk resulting from the investment. While it may seem
obvious that efficiency is a good idea in general, it is far from obvious
how to conduct the valuation of projects in a manner that is efficient both
in terms of quantification of energy (physical settlement) and financial
appropriation of the resulting value (financial settlement). A major bar-
rier to the development of efficiency 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
Verification Protocol (IPMVP).