How Fuel Price Elasticity Affects the Economics of Thermal Retrofits

Abstract

Policymakers, their expert advisors and the academic community use mathematical models to evaluate the economic viability and payback time of thermal retrofits. Most of these models have the form of a cost-benefit analysis, where the thermal upgrade costs are compared to the net present value (NPV) of the benefits expected to be received in future years, through fuel savings. However, these models assume that, if the dwelling had not been retrofitted, its occupants would have continued to consume the same amount of heating fuel as previously, despite future fuel price rises. In other words, they fail to include a factor for fuel price elasticity of demand. In this chapter, we show how the mathematics of these models can be modified to include this factor. We then test its effect by assessing the NPV and payback time of a set of thermal retrofit projects on a large housing estate in Germany. Even using conservative values for our parameters, the analysis shows that when price elasticity is taken into account NPV is reduced by around 23%, payback time is lengthened by 15–31 years, and the cost of abated CO₂ rises by around 27%.