Advancing Investment Valuation Models for High Performance Buildings
For the past five years, we have worked to evaluate investment options on building energy improvements under uncertainties. Pending government and private investments in building energy programs will amount to the largest coordinated monetary injection in the building stock in the U.S. history. Given the increasing scale of investments in sustainable buildings, it is critical to offer proper investment decision-making methods to mitigate the imminent risk that funds are misappropriated and energy reduction goals are not realized. Conventional investment valuation methods assume that all energy investment decisions are made at one time. These assumptions are inconsistent with the real-world investment decision-making, in which an investor can delay adopting an emerging energy improvement technology until it becomes available at lower cost, energy price rises, or stricter environmental regulations are put in place. Real options approach provides the opportunity for bridging the gap in the conventional valuation by thinking about energy improvements as investment options. However, current real options models are theoretically limited for the context of investment decision-making about building energy improvements.
Our research has made significant scholarly contributions in the academic domain of investment valuation of high performance buildings. Our novel real options models for investment valuation of high performance buildings were published in several journal papers, research reports, and conference proceedings. For instance, in 2011 our paper “An Investment Analysis Framework for Energy Retrofit in Existing Buildings” received the Best Paper Award from the 47th Annual International Conference of the Associated Schools of Construction (ASC). It characterized uncertainties in the three major sources of information that drives investment decision-making: projected energy savings, energy price predictions, and future technology costs. Our work focused on creating the missing link for integrating these uncertainties into investment valuation.
In September 2012, The ELECTRI International – The Foundation for Electrical Construction awarded us a $7,000 special research grant through a partnership created by the Atlanta Chapter NECA and Lutron Electronics Company, Inc. for the research “A Systematic Approach for the Assessment of Green Opportunities for Electrical Contractors”. Also in June 2011, the Royal Institution of Chartered Surveyors (RICS) awarded us £6,270 for a research on “Timing of Investments in Building Solar Energy Intervention: A Real Options Framework to Evaluate Investments in Solar Energy for Buildings”. Transformative technologies, such as Photovoltaic (PV) systems, have promising features for substantial reductions in carbon emissions and environmental footprints of the building sector. We created an investment valuation model that determines the best time for the implementation of solar energy systems in existing buildings. Our model characterizes investors’ financial risk profiles in solar energy investments under uncertainties. The findings of this research were published in the RICS Research Report “Evaluation of Investment in Solar Energy” in January 2013 and will appear in two upcoming journal papers, “An Investment Valuation Model for Renewable Energy Systems in Buildings” (Journal of Construction Engineering and Management) and “Investment in solar energy: An alternative approach” (RICS Land Journal, September 2013). Institutional owners in private and public sectors will benefit from this valuation model to make more-informed investment decisions about the viability and proper timing of solar retrofit solutions in existing buildings.
Further, we successfully completed a $37,977 research project “Multifamily Property Utility Benchmarking Program” for American Utility Management (AUM). We analyzed energy performance in multifamily properties and created an energy benchmarking program using Data Envelopment Analysis (DEA). We developed a web-based multifamily energy benchmarking tool, AUMScore® (SCORE stands for “Statistical Comparison of Relative Efficiency”), that enables property owners to compare their properties’ energy usage across their own portfolios and across the multifamily industry. This tool helps owners drastically reduce their energy expenses and consumption by benchmarking energy use within a portfolio using continuously updated information from similar peer properties. One of his PhD students, Jian Lu, and Dr. Baabak Ashuri hold invention disclosure GTRC-5807 “Peer-to-peer Energy Benchmarking Model for the Multifamily Building Industry”.
We established extensive research collaborations with the High Performance Buildings group in the College of Architecture to create novel investment valuation models for sustainable buildings. For instance, we submitted several research proposals with Professor Augenbroe to National Science Foundation (NSF), Department of Energy (DOE), and Department of Housing and Urban Development (HUD). Our collaboration resulted in several publications, such as “How Can American AEC Firms Get the Lead in Sustainable Building Design?” presented in the 2009 Specialty Conference Leadership and Management in Construction. We will continue our collaboration with the High Performance Buildings group and will extend our collaboration to other related units in the College of Architecture to develop state-of-the-art decision-making models for green buildings.
Advancing investment valuation of high performance buildings will remain the trajectory of our scholarship over the next several years. Most recently, our research in investment valuation of building energy efficiency was recognized by a $250,000 award from the National Science Foundation for “Valuation of Investments in Building Energy Improvements under Uncertainties”. The objective of this research is to create an investment valuation model to assess building energy-saving projects under uncertainty that takes into account the future of energy prices and the cost and performance of energy-saving technologies. This investment valuation model will determine the optimal time of investment for the building energy-saving project. The proposed model is based on a real options formulation. An alternative method will be developed to estimate the volatility of the investment that captures the impact of the uncertainty on the value of the energy-saving project. The proposed investment valuation model will be used to examine how uncertainty potentially influences the behavior of decision makers when dealing with energy-saving projects and in this way provide some theoretical insights.