Exploring the financial value of an energy savings guarantee
Consider two investments of $100,000. Each is to yield $20,000 per year for 10 years – but one has high risk and the other low risk. Which is the better investment? The answer seems obvious – yet businesses often ignore relative risk when comparing investments in energy projects.
Energy savings guarantees reduce risk by ensuring that the financial benefits of a sustainability investment (e.g. energy / CO2 reduction) are actually realized. They also drive behaviors that reduce other risks associated with managing projects. The premise of this paper is that energy savings guarantees associated with energy projects deliver a quantifiable risk advantage that can and should be used in making investment decisions. The value of a performance guarantee can be unlocked only if companies use a methodology like the one presented in this paper to take different levels of risk into account when making investment decisions.
How can the dollar value of savings guarantees be calculated? This paper explores the various risks associated with different approaches to energy project delivery, how savings guarantees reduce those risks, and how the value of risk reduction can be quantified. It then presents two simple ways to incorporate the value of risk reduction into decision making. Companies can easily apply this method as part of their capital investment decision-making.
The likely result is more investment in building projects that reduce energy usage and CO2 emissions, guarantee investment returns greater then financial markets can provide, enhance brand value, and drive shareholder value.
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