Estimating opportunity costs for energy-efficiency renovations: Case study in Germany

Abstract

Since energy consumption in residential buildings produces 26 % of CO2 emissions worldwide, there is an urgent need to improve the energy efficiency of older buildings. This is expensive, and a component often poorly estimated is opportunity costs: the losses a building owner incurs by investing in an energy-efficiency upgrade rather than in a more profitable project. Some recent studies assume opportunity costs of about 6 % of the property owner's up-front cash investment, but they assume very passive investment behavior. This paper uses a case study of a standard energy-performance upgrade of a typical, gas-heated 1950s–60s western German apartment and an alternative investment of purchasing an additional rental property. It uses realistic figures for costs of renovation and finance, benefits through energy and CO2 tax savings and subsidies currently on offer, likely energy price and CO2 tax inflation rates, and realistic discount rates. The alternative investment is to purchase a rental apartment using the up-front cash as the deposit, based on actual properties for sale. After 25 years the most economically sound upgrade brings a loss of around 207 %, while the purchase brings a gain of at least 666 %, with a minimum opportunity cost of 8.49 % per year cumulative.