Cost of capital of energy efficiency projects: The case of space heating and cooling

Abstract

In this paper, we develop and test the hypothesis of zero betas for energy efficiency projects related to space heating and cooling. We focus only on projects using electricity or natural gas and reason that none of their key risk factors has correlations significantly different from zero with the market portfolio or one another, whether the investor is a household or business entity. Supporting evidence from a number of European countries is presented. Our findings suggest that, in the Capital Asset Pricing Model (CAPM) framework, the cost of capital is the risk-free rate. It is argued that this discount rate needs no adjustment for country risk and is likely to be valid for other countries as well as other types of energy efficiency projects using natural gas or electricity.