Technical Note No. 9
The functioning of the market for energy efficiency and the environment (M3E) depends critically on the economic viability of M3E projects as perceived by investors. Investors will only participate in M3E if the benefits of investing in energy efficiency under M3E are large enough to recoup the investment costs quickly enough.
This paper takes the perspective of a potential investor considering an investment in an energy efficient electric motor. Using real data from a brick factory, we evaluate the costs and benefits an investor would face. Since the economic viability of any M3E project ultimately depends on the certificate price at which the saved energy can be traded, we consider various price scenarios.
At current domestic prices, the project is not economically viable from the investors’ perspective because the payback period is too long. However, if domestic prices in Iran were to rise to the level of neighbouring countries or if the M3E were to allow an export option, payback periods would be significantly reduced and investments in energy efficiency would be more economically viable.
We also consider how dynamic factors such as the opportunity cost of capital, inflation, and transaction costs affect economic profitability. To increase participation in M3E, inflation must be controlled, and the M3E project cycle should be simplified to reduce transaction costs.
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