Including fuel price elasticity of demand in net present value and payback time calculations of thermal retrofits: Case study of German dwellings

In the domestic heating sector a number of different mathematical models are used to evaluate the economic viability of thermal retrofit measures. Currently, however, none of these models incorporate the effect of fuel price elasticity of demand. This paper offers a method for incorporating a factor for fuel price elasticity into models for assessing the net present value and payback time of thermal retrofits of existing homes. A set of working equations is developed, and empirically tested in a case study, a housing estate retrofit project in Ludwigshafen, Germany. The value used in these equations for year-on-year price elasticity, −0.476, is derived from further empirical studies. The inclusion of price elasticity is found to lower the net present value by 14–24% and lengthen the payback time by 5 years in some cases, and hundreds of years in others. It also shows CO2 saved over the technical lifetime of the retrofit measures to be 15–24% lower than anticipated. These findings have implications for government policy and investment decisions of businesses, private households and housing providers.

► Fuel price elasticity of demand affects the economics of thermal refits of dwellings.
► It reduces NPV and projected CO2 savings, and lengthens payback time.
► Mathematical models are developed to include it in NPV and PBT calculations.
► Empirical results confirm its significant effect on economic viability.