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Explaining the contract terms of energy performance contracting in China: The importance of effective financing

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  • Li, Yan
  • Qiu, Yueming
  • Wang, Yi David

Abstract

Energy service company (“ESCO”) uses Energy Performance Contracting (“EPC”) to provide energy-saving services to its clients. Under an EPC, both ESCO and the client invest in the energy efficiency measures, according to a negotiated share of investment. Within the length of the contract, the ESCO and its client divide up the saved energy bill according to a negotiated share. Once the contract expires, the client claims all of the saved energy bills if the energy efficiency measures still last. Different EPC projects have different contract terms, including total investment, share of investment and length of contract. These contract terms directly determine the resulted energy savings. Thus it is essential and important to look at how these contract terms are formed and what are the major influencing factors. This paper first builds a theoretical bargain model between ESCO and its client to find out the structural relationship among these contract terms. Then, using the information of about 140 EPC contracts in China in 2010 and 2011, the paper empirically estimates the impacts of various factors on the contract terms and the resulted energy savings. We find that cost of capitals for ESCOs and the clients, especially for ESCOs, is a major factor influencing contract terms and the resulted energy savings. Thus providing effective financing is critical for the development of EPC in China.

Suggested Citation

  • Li, Yan & Qiu, Yueming & Wang, Yi David, 2014. "Explaining the contract terms of energy performance contracting in China: The importance of effective financing," Energy Economics, Elsevier, vol. 45(C), pages 401-411.
    • Handle: RePEc:eee:eneeco:v:45:y:2014:i:c:p:401-411
    DOI: 10.1016/j.eneco.2014.08.009
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    References listed on IDEAS

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    Cited by:

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    4. Shang, Tiancheng & Yang, Lan & Liu, Peihong & Shang, Kaiti & Zhang, Yan, 2020. "Financing mode of energy performance contracting projects with carbon emissions reduction potential and carbon emissions ratings," Energy Policy, Elsevier, vol. 144(C).
    5. Qin, Quande & Liang, Fuqi & Li, Li & Wei, Yi-Ming, 2017. "Selection of energy performance contracting business models: A behavioral decision-making approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 72(C), pages 422-433.
    6. Klinke, Sandra, 2018. "The determinants for adoption of energy supply contracting: Empirical evidence from the Swiss market," Energy Policy, Elsevier, vol. 118(C), pages 221-231.
    7. Töppel, Jannick & Tränkler, Timm, 2019. "Modeling energy efficiency insurances and energy performance contracts for a quantitative comparison of risk mitigation potential," Energy Economics, Elsevier, vol. 80(C), pages 842-859.
    8. Pei-Chien Lin & Ming-Feng Hung, 2016. "The Effect of Energy Service Companies on Energy Use in Selected Developing Countries: A Synthetic Control Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 335-348.
    9. Shang, Tiancheng & Liu, Peihong & Guo, Junxiong, 2020. "How to allocate energy-saving benefit for guaranteed savings EPC projects? A case of China," Energy, Elsevier, vol. 191(C).
    10. Zhou, Yuanrong & Evans, Meredydd & Yu, Sha & Sun, Xiaoliang & Wang, Juemin, 2020. "Linkages between policy and business innovation in the development of China's energy performance contracting market," Energy Policy, Elsevier, vol. 140(C).
    11. Hongquan Ruan & Xin Gao & Chaoxuan Mao, 2018. "Empirical Study on Annual Energy-Saving Performance of Energy Performance Contracting in China," Sustainability, MDPI, vol. 10(5), pages 1-25, May.
    12. Baltuttis, Dennik & Töppel, Jannick & Tränkler, Timm & Wiethe, Christian, 2020. "Managing the risks of energy efficiency insurances in a portfolio context: An actuarial diversification approach," International Review of Financial Analysis, Elsevier, vol. 68(C).
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    More about this item

    Keywords

    Energy performance contracting; Low-cost of capital; Contract terms; Financing;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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