Bookmark and Share

Guarantee Design on Energy Performance Contracts under Uncertainty

Principal Investigator(s): 

Abstract: 

With the appearance of energy price increasing, resource scarcity and sustainable development problems, energy efficiency has become one of the quickest and cheapest ways to increase the amount of energy available for use. According to the U.S. Department of Energy, buildings account for about 40% of U.S. energy usage, and there are sufficient viable opportunities for energy-efficiency improvements to reduce carbon emissions and save money. Energy Performance Contracting (EPC) is such a turnkey building service that provides clients with a comprehensive set of Energy Conservation Measures (ECMs) and is often accompanied with guarantees that the savings produced by a project will be sufficient enough to finance the full cost of the project. Under EPC arrangement, Energy Services Companies (ESCOs) use the stream of income from future cost savings to repay their initial investments. However, few studies have examined how to set the guarantees or how to share the potential exceeding profit between ESCOs and the clients with fixed-price guarantees in EPC based on the existing annual energy savings estimation. In practice, the related contract items are often blurred or ignored by both the ESCOs and the clients. This research provides a more flexible energy savings guarantee designing method, considering the potential volatility risk of energy price and quantity. Having a better understanding on the contract specification could not only give a good reference on the optimal EPC bidder selection, future schedule and budget arrangements from the clients’ perspectives, but could also help ESCOs reasonably allocate the estimation financial risks with successful contract negotiation.