Research on energy performance contracting with shared savings under stochastic market demand

Abstract

In practice, the market risk caused by stochastic market demand is a main risk affecting the shared savings contract implementation in energy performance contracting. We develop a game-theoretic model to characterize the strategic interaction between the manufacturer’s ex-ante capacity decision and the energy service company (ESCO)’s investment decision on digitization and intellectualization to save energy, through which we unfold the impact of stochastic market demand upon all the stakeholders, the supply chain efficiency and the total energy consumption. The results show that the demand uncertainty can significantly affect the decisions of the ESCO and the manufacturer. Specifically, when there is no demand uncertainty, the manufacturer’s capacity decision is independent of the ESCO’s decision on energy-saving effort. By contrast, under stochastic demand there exists a complementary relationship between the manufacturer’s capacity investment and the ESCO’s energy-saving effort. Moreover, by comparing the optimal equilibria in shared savings with that under centralized supply chain, we find that decentralization causes inefficiencies in the form of lower energy-saving effort, underinvestment or overinvestment in capacity, and lower supply chain profit. In addition, it is more valuable for the supply chain to coordinate the ESCO and the manufacturer when the market demand is more stochastic. Furthermore, though always cutting the manufacturer’s total energy consumption without demand uncertainty, implementing the ESCO’s energy-saving service can increase the manufacturer’s total energy consumption and carbon emission in the society in the presence of demand uncertainty. Hence, governmental agencies should not ignore the impact of stochastic demand upon the total energy consumption with the interplay between the endogenous capacity setup decision and energy-saving service, and to reduce the carbon emission in the society governmental policies should be designed by taking into account such an increase of the total energy consumption.