Academic Division: Civil Engineering
Research group: Sustainable Development
Telephone: +44 1223 3 32695
The research explores the decision making process of institutional investors when considering making investments in energy efficiency. Increased investment in renewable energy technology combined with energy efficiency can help meet future energy demand and minimise the risks of conventional energy supply such as those posed by the recent accident in Fukushima. There is significant literature dealing with investment into renewable energy but the issues surrounding attracting institutional investment into energy efficiency at scale have yet to be explored.
The UK has set itself very ambitious targets with respect to CO2 emissions reductions, an 80% reduction of 1990 levels by 2050 and 34% by 2020, which were set out as legally binding in the Climate Change Act of 2008. Globally, buildings have not only been identified as a sector that emits a large proportion of CO2 emissions but also as having significant and realistic mitigation potential, therefore mechanisms should be found to address the issue of retrofitting existing stock. Buildings account for 45% of all CO2 emissions in the. It has been established that of all sectors Buildings have the greatest mitigation potential meaning that of the identified measures, those that apply to buildings have the most potential to reduce CO2 emissions.
The investors’ basic model represents investments as a function of both risk and return. Investors rationally weigh the levels of risk and return of possible investment opportunities and will select those opportunities that provide the best return for a given level of risk, an assessment of risk adjusted return. In renewable energy investment, government policies can influence the assessment of risk adjusted return for a particular investment by increasing the returns (e.g. feed-in tariffs) or reducing the risk (e.g. loan guarantees or underwriting of the risk). An extension to the basic investment model of risk and return comes from portfolio theory where risk can be reduced by combining different assets together in a portfolio that have different risk profiles. Further cognitive issues of risk perception are important also in the investment model. The concept of bounded rationality and biases that have been identified within behavioural finance making use of cogitative factors have demonstrated how in reality financial markets deviate from orthodox economic models, in much the same way as for decision making by individuals.