An ESCO Business Model Using CER for Buildings’ Energy Retrofit

Hyein Yi,Jaejun Kim,Sanghyo Lee

doi:10.3390/su9040591

Abstract

This study proposes an Energy Service Company (ESCO) business model to which Certified Emission Reduction (CER) is applied mainly for guaranteed savings. To verify the effectiveness of this ESCO business model, option theory is used. Notably, along with call and put options, which are appropriate for profit structure evaluation of existing guaranteed savings contract, an up and knock-out option was used to analyze the option of securing profit from CER. Based on this analysis, the values of the guarantee acquired by an energy user from the change in the amount of energy savings and the values of an ESCO’s right to profit from energy savings and CER, were calculated. Through these valuations, the profit sharing ratio between energy users and the ESCO was estimated. When the model proposed in this paper was applied to a project case, the profit sharing ratio was 16.37%. The model proposed in this paper is useful for motivating ESCOs to save more energy during operating periods by effectively using profit from CER. Additionally, this model will contribute to the expansion of ESCO market and the effectiveness of energy performance projects in Korea.

Highlights

The 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) was recently hosted to establish a new climate change convention that will replace the Kyoto Protocol, which expires in 2020
The exercise price of the put option (Xp), which is the point at which the value of the guarantee is generated in Section A and where the energy savings becomes lower than the guaranteed savings, was set at USD 463,590
A means to enhance the effect of energy performance projects by applying Certified Emission Reduction (CER) profit to guaranteed savings contract was explored

Summary

Introduction

The 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) was recently hosted to establish a new climate change convention that will replace the Kyoto Protocol, which expires in 2020. Efforts to reduce GHG emissions that focus on the industrial sector and buildings are required to fulfill national emission reduction targets. The ESCO runs a business by providing technologies or the necessary financing for energy users to replace or enhance existing energy facilities for the purpose of saving energy. The installation of energy-saving facilities by an ESCO does not require the energy user’s initial investment, and the related technological risk caused by investment in facilities can be reduced because the professional service from the ESCO is used. The ESCO generates profits from the energy-saving service, verifies the volume of energy saving through monitoring and maintenance, and facilitates financing for investment in energy efficiency [9]. ESCO business models can be divided into shared savings contracts and guaranteed savings contract depending on the type of contract.

Methods

Results

Conclusion