(An) evaluation of retrofit investment in non-residential buildings for energy efficiency improvement in Korea

Abstract

The building sector makes up 35% of total energy consumption globally. Moreover, the past few decades, energy consumption from the building sector has continuously increased. Thus, energy consumption reduction and efficiency improvement in the building sector is essential for converting the conventional fossil fuel based system to a renewable energy system in order to achieve the national greenhouse gas emission reduction target. The main objective of this paper is to evaluate the economic feasibility of doing an energy retrofit to existing buildings considering electricity price volatility and government policy. This research analyzed a public office building, ‘Nowon Eco Center’ which is the first energy remodeled building in South Korea. The building is designed and constructed so that it uses zero fossil energy. In this research, the Monte Carlo simulation is conducted based on Geometric Brownian Motion to forecast future power price. Three price scenarios are derived from the simulation result. Economic evaluation used in this research is based on net present value (NPV) analysis including both conventional (static) evaluation and sequential (dynamic) evaluation. Sequential evaluation including the real option concept is applied to reflect price uncertainty and irreversibility of renewable energy investment. Without government subsidy, the building energy retrofit project faces a difficult challenge in ensuring profitability. There are no differences between price scenarios because the money earned from the system marginal price is too small to be differentiated. However, when Feed-in Tariff is implemented, NPV improves. It is also found that as the amount of subsidy increases, the times where “invest” is more profitable than “wait” moved up. The results provide useful information about building energy retrofit investment and policy impacts in an uncertain environment.