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

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 an...

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Bibliographic Details
Published in:Energy economics Vol. 45; pp. 401 - 411
Main Authors: Li, Yan, Qiu, Yueming, Wang, Yi David
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.09.2014
Elsevier
Elsevier Science Ltd
Subjects:
Applied sciences
Capital
China
China (People's Republic)
Clients
Contract negotiations
Contract terms
Contracting
Contracts
Cost
Cost of capital
Economic data
Energy
Energy conservation
Energy development
Energy economics
Energy efficiency
Energy industry
Energy market
Energy performance contracting
Energy policy
Energy use
Exact sciences and technology
Financing
Financing methods
General, economic and professional studies
Investment
Investment effectiveness
Investments
Low-cost of capital
Mathematical models
Methodology. Modelling
Negotiation
Performance related pay
Project finance
Saving
Savings
Studies
Asia
China
China, People's Rep
Contract terms
Q48
Financing
Q28
Q49
Low-cost of capital
Energy performance contracting
Performance evaluation
Contracting service
Econometric analysis
Success factor
Modeling
Energy savings
Energy conservation
Contract
Capital cost
Firm
ISSN:0140-9883, 1873-6181
Online Access:Get full text
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Summary: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. •We build a theoretical bargain model between an ESCO and its client.•We empirically quantify the impacts of various factors on EPC contract terms.•Cost of capital is a key factor determining EPC contract terms.•Providing effective financing, especially for ESCOs is important.
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ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2014.08.009