IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v45y2014icp401-411.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S014098831400190X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2014.08.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Okay, Nesrin & Akman, Ugur, 2010. "Analysis of ESCO activities using country indicators," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(9), pages 2760-2771, December.
    2. Hübler, Michael, 2011. "Technology diffusion under contraction and convergence: A CGE analysis of China," Energy Economics, Elsevier, vol. 33(1), pages 131-142, January.
    3. Yu, Yongzhen, 2010. "Policy redesign for solving the financial bottleneck in demand side management (DSM) in China," Energy Policy, Elsevier, vol. 38(10), pages 6101-6110, October.
    4. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    5. Xu, Pengpeng & Chan, Edwin Hon-Wan & Qian, Queena Kun, 2011. "Success factors of energy performance contracting (EPC) for sustainable building energy efficiency retrofit (BEER) of hotel buildings in China," Energy Policy, Elsevier, vol. 39(11), pages 7389-7398.
    6. Vine, Edward, 2005. "An international survey of the energy service company (ESCO) industry," Energy Policy, Elsevier, vol. 33(5), pages 691-704, March.
    7. Sorrell, Steve, 2007. "The economics of energy service contracts," Energy Policy, Elsevier, vol. 35(1), pages 507-521, January.
    8. Cristina Tébar Less & Steven McMillan, 2005. "Achieving the Successful Transfer of Environmentally Sound Technologies: Trade-related Aspects," OECD Trade and Environment Working Papers 2005/2, OECD Publishing.
    9. Shi, Guang-Ming & Bi, Jun & Wang, Jin-Nan, 2010. "Chinese regional industrial energy efficiency evaluation based on a DEA model of fixing non-energy inputs," Energy Policy, Elsevier, vol. 38(10), pages 6172-6179, October.
    10. Leonid Hurwicz & Leonard Shapiro, 1978. "Incentive Structures Maximizing Residual Gain under Incomplete Information," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 180-191, Spring.
    11. Goldman, Charles A. & Hopper, Nicole C. & Osborn, Julie G., 2005. "Review of US ESCO industry market trends: an empirical analysis of project data," Energy Policy, Elsevier, vol. 33(3), pages 387-405, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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).
    5. 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).
    6. Wenjie Zhang & Hongping Yuan, 2019. "Promoting Energy Performance Contracting for Achieving Urban Sustainability: What is the Research Trend?," Energies, MDPI, vol. 12(8), pages 1-18, April.
    7. Yueming (Lucy) Qiu & Xin Su & Yi David Wang, 2017. "Factors influencing commercial buildings to obtain green certificates," Applied Economics, Taylor & Francis Journals, vol. 49(20), pages 1937-1949, April.
    8. Zheng, Saina & Zhai, Haibo & Hsu, Shu-Chien & Armanios, Daniel Erian, 2024. "Uneven distribution in energy conservation services through performance contracts in China," Energy Policy, Elsevier, vol. 187(C).
    9. 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.
    10. Liu, Tiansen & Song, Yazhi & Xing, Xinpeng & Zhu, Yue & Qu, Zhengyu, 2021. "Bridging production factors allocation and environmental performance of China’s heavy-polluting energy firms: The moderation effect of financing and internationalization," Energy, Elsevier, vol. 222(C).
    11. 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).
    12. Guangyuan Xing & Dong Qian & Ju’e Guo, 2016. "Research on the Participant Behavior Selections of the Energy Performance Contracting Project Based on the Robustness of the Shared Savings Contract," Sustainability, MDPI, vol. 8(8), pages 1-13, July.
    13. 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).
    14. Korkeamäki, Lauri & Kohtamäki, Marko & Parida, Vinit, 2021. "Worth the risk? The profit impact of outcome-based service offerings for manufacturing firms," Journal of Business Research, Elsevier, vol. 131(C), pages 92-102.
    15. Wenjie Zhang & Hongping Yuan, 2019. "A Bibliometric Analysis of Energy Performance Contracting Research from 2008 to 2018," Sustainability, MDPI, vol. 11(13), pages 1-23, June.
    16. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Deng, Qianli & Jiang, Xianglin & Cui, Qingbin & Zhang, Limao, 2015. "Strategic design of cost savings guarantee in energy performance contracting under uncertainty," Applied Energy, Elsevier, vol. 139(C), pages 68-80.
    3. Garbuzova, Maria & Madlener, Reinhard, 2012. "Russia’s Emerging ESCO Market: Prospects and Barriers for Energy Efficiency Investments," FCN Working Papers 6/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2012.
    4. Wenjie Zhang & Hongping Yuan, 2019. "A Bibliometric Analysis of Energy Performance Contracting Research from 2008 to 2018," Sustainability, MDPI, vol. 11(13), pages 1-23, June.
    5. Zheng, Saina & Lam, Chor-Man & Hsu, Shu-Chien & Ren, Jingzheng, 2018. "Evaluating efficiency of energy conservation measures in energy service companies in China," Energy Policy, Elsevier, vol. 122(C), pages 580-591.
    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. 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).
    8. Hyein Yi & Sanghyo Lee & Jaejun Kim, 2017. "An ESCO Business Model Using CER for Buildings’ Energy Retrofit," Sustainability, MDPI, vol. 9(4), pages 1-21, April.
    9. Wenjie Zhang & Hongping Yuan, 2019. "Promoting Energy Performance Contracting for Achieving Urban Sustainability: What is the Research Trend?," Energies, MDPI, vol. 12(8), pages 1-18, April.
    10. Zhang, Mingshun & Wang, Mujie & Jin, Wei & Xia-Bauer, Chun, 2018. "Managing energy efficiency of buildings in China: A survey of energy performance contracting (EPC) in building sector," Energy Policy, Elsevier, vol. 114(C), pages 13-21.
    11. Pantaleo, Antonio & Candelise, Chiara & Bauen, Ausilio & Shah, Nilay, 2014. "ESCO business models for biomass heating and CHP: Profitability of ESCO operations in Italy and key factors assessment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 30(C), pages 237-253.
    12. Fang, Wen Shwo & Miller, Stephen M. & Yeh, Chih-Chuan, 2012. "The effect of ESCOs on energy use," Energy Policy, Elsevier, vol. 51(C), pages 558-568.
    13. 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.
    14. Wang, Zhenfeng & Xu, Guangyin & Lin, Ruojue & Wang, Heng & Ren, Jingzheng, 2019. "Energy performance contracting, risk factors, and policy implications: Identification and analysis of risks based on the best-worst network method," Energy, Elsevier, vol. 170(C), pages 1-13.
    15. 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.
    16. Larsen, Peter H. & Goldman, Charles A. & Satchwell, Andrew, 2012. "Evolution of the U.S. energy service company industry: Market size and project performance from 1990–2008," Energy Policy, Elsevier, vol. 50(C), pages 802-820.
    17. Kindström, Daniel & Ottosson, Mikael, 2016. "Local and regional energy companies offering energy services: Key activities and implications for the business model," Applied Energy, Elsevier, vol. 171(C), pages 491-500.
    18. Lu, Shilei & Feng, Wei & Kong, Xiangfei & Wu, Yong, 2014. "Analysis and case studies of residential heat metering and energy-efficiency retrofits in China′s northern heating region," Renewable and Sustainable Energy Reviews, Elsevier, vol. 38(C), pages 765-774.
    19. Sanghyo Lee & Sungho Tae & Sungwoo Shin, 2015. "Profit Distribution in Guaranteed Savings Contracts: Determination Based on the Collar Option Model," Sustainability, MDPI, vol. 7(12), pages 1-17, December.
    20. Okay, Nesrin & Akman, Ugur, 2010. "Analysis of ESCO activities using country indicators," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(9), pages 2760-2771, December.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:45:y:2014:i:c:p:401-411. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.