Economics of Plant Energy Savings Projects in a Changing Market

Abstract

Energy prices have exhibited significant volatility in recent years. For example, natural gas prices ranged from $4 to $15 per MM BTU's in calendar years 2005 through 2011. Future prices are uncertain but are likely to retain a high level of volatility. This volatility complicates analysis of potential plant capital investments to reduce energy usage, in particular those that involve consideration of alternate energy sources, since traditional financial investment valuation assumes that future cash flows are known exactly. Yet, this is clearly not the case for many energy saving investments. In addition, future price probability functions may be best characterized as non symmetric and economic objective functions as non-linear further complicating investment analysis. Failure to recognize these effects can result in incorrectly valuing the potential financial return of the investment. In this paper, appropriate techniques to evaluate such investments are presented along with case studies illustrating the approach.