Research on the energy-saving and revenue sharing strategy of ESCOs under the uncertainty of the value of Energy Performance Contracting Projects

Abstract

Under the uncertainty of the value of Energy Performance Contracting Projects (EPCPs), this paper develops a revenue-sharing bargaining model between an Energy Service Company (ESCO) and an Energy-Using Organization (EU). Based on the model the paper analyzes the impacts of energy prices, risk-adjusted discount rates and accidents on the ESCO’s bargaining strategies. The research shows that the greater the probability of adverse circumstances is, the higher is the revenue share (of the EU), and the more disadvantageous is the ESCO’s position in the game. Furthermore, we design a forecast–commitment contract between an ESCO and an EU and analyze the optimal product’s energy savings commitment strategy of the ESCO to cope with uncertain energy savings and contract risk. The research illustrates that by introducing penalties and commitments, the contract can eliminate the impact of the uncertain energy savings on the contract execution to a certain extent; when the EU takes a greater commitment risk, the ESCO is willing to provide a higher commitment, thus enhancing the strategy value of the bilateral relationship and reducing the contract risk. Finally, the policy recommendations about improving shared savings contract standard, third-party energy savings measurement and verification mechanism and arbitration mechanism of EPCs are provided.