Impact of Deferral Option on Investment: Empirical Evidence from Residential Customers of District Heating Company

This paper examines option to defer an investment in thermal rehabilitation of building. Heat savings generated by energy efficiency investment in two distinctive areas connected to district heating in Prague are studied. Despite substantial difference of heat price over several years no significant difference in heat savings between the two areas is found. It is shown that different volatility of heat prices in different areas and its changes influencing value of deferral option can partly explain the observed flat owner’s behavior. Two specific “real” features of the deferral option are further introduced, improvement of the option valuation model is proposed and expected impact on the value of deferral option is discussed. Technicka 2, 166 27 Praha 6, The Czech Republic Fax:+420 233 334 232 [email protected] Introduction Classical investment rule based on NPV would suggest that rational flat owners should invest in energy saving measures up to the point when present value of marginal energy saving equals marginal increase in investment cost.