Tuesday, 13 January 2015

Impact of falling oil prices on the green building sector

From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. I have been often asked if this fall in the cruel oil prices has an impact on the green buildings market. If energy is so cheap then does it erode the value proposition for including energy efficient design in buildings? Here is my response.

Falling oil prices should not have an impact on operational costs of most buildings as the bulk of the energy used is electricity and natural gas (for heating/hot water). Therefore, there should be little impact on the cost to benefit of designing new buildings with energy-efficient technologies.
A few countries such as Nigeria and Lebanon that use diesel generators (due to significant power outages) to produce electricity on site may find that their operational costs go down marginally as diesel prices come down.

Case Study: Green Hotel in Lebanon
This green hotel example has a high performance fa├žade, energy-efficient A/C and lighting and is predicted to have 24% lower energy bills.  
Analysis of utility costs for a green hotel project in Lebanon using IFC’s EDGE software

  • “No Diesel Gensets” runs only on mains electricity.
  • In the “30% Gensets @0.9$/lt” scenario, 30% of electricity demand is met by diesel gensets at the 2013 cost of 0.9$ per liter.
  • In the “30% Gensets @0.5$/lt” scenario, the cost of diesel was changed to 0.5$ per liter.
A quick analysis of utility costs for a hotel project in Lebanon using IFC’s EDGE software shows that the impact of 50% reduction in diesel prices increases the simple payback period from 1.1 years to 1.4 years for the incremental cost of making the hotel green (i.e. 24% energy reduction).  With falling oil prices, hotel owners benefit from lower operational costs but the longer payback period makes the argument to build green slightly less convincing.
Overall the analysis shows that the impact of diesel prices is marginal even in countries where buildings use diesel genset for a significant part of their operating hours.

Screen Shots of Results from EDGE (www.edgebuildings.com)