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A real options-based approach in guaranteed energy savings contracting

Author

Listed:
  • Nicola Costantino
  • Giovanni Mummolo
  • Claudio Pascarelli
  • Roberta Pellegrino
  • Luigi Ranieri

Abstract

The full development of the energy services company (ESCO) industry is still inhibited by the difficulties during the negotiation between customers and ESCOs. Contractual arrangements are traditionally based on energy performance contracting (EPC). Improvements on EPC schemes are required in order to achieve the success of the negotiation. This work focuses on a particular type of EPC, named guaranteed savings (GS) contract, where a minimum energy saving is guaranteed to the customer by the ESCO. A model based on real options theory to share risks among contractual parties is proposed in order to estimate the fair value of main contractual parameters. A Monte Carlo simulation is adopted for evaluating the most critical factors influencing the overall risk sharing. A numerical example concerning a cogeneration plant of a paper mill is presented. A two level full factorial design of experiments (DOE) analysis is carried out in order to estimate single and compound effects of model parameters.

Suggested Citation

  • Nicola Costantino & Giovanni Mummolo & Claudio Pascarelli & Roberta Pellegrino & Luigi Ranieri, 2012. "A real options-based approach in guaranteed energy savings contracting," International Journal of Engineering Management and Economics, Inderscience Enterprises Ltd, vol. 3(4), pages 305-325.
    • Handle: RePEc:ids:ijemec:v:3:y:2012:i:4:p:305-325
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    Citations

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    Cited by:

    1. Xian, Hui & Colson, Gregory & Mei, Bin & Wetzstein, Michael E., 2015. "Co-firing coal with wood pellets for U.S. electricity generation: A real options analysis," Energy Policy, Elsevier, vol. 81(C), pages 106-116.
    2. Laura Martiniello & Donato Morea & Francesco Paolone & Riccardo Tiscini, 2020. "Energy Performance Contracting and Public-Private Partnership: How to Share Risks and Balance Benefits," Energies, MDPI, vol. 13(14), pages 1-19, July.

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