Energy Performance Contracting in a Competitive Environment*

Abstract

Energy Performance Contracting (EPC) is an important and effective energy conservation mechanism, under which an energy service company (ESCO) provides an energy‐saving service to its client and shares the resulting energy cost savings. Using a game‐theoretic model, we investigate the impacts of EPC on two competing manufacturers, of which one is more energy‐efficient in production than the other. The less energy‐efficient firm first proposes an energy‐saving sharing contract to the more energy‐efficient firm, who, if accepting the contract, acts as an ESCO that decides the energy‐saving target and helps realize it for the client. Then the firms engage in Cournot competition by producing/selling substitutable products. By solving the equilibrium solutions, we show that under an EPC project, the total production quantity of both firms increases (so the market price of the product decreases) with the ESCO producing less while its client producing more, which also leads to a higher consumer surplus. Meanwhile, both manufactures are better off under EPC and would obtain strictly higher profits when the service cost rate is high. Nevertheless, EPC may not result in a better environmental performance in that the total energy consumption of both firms may be higher under EPC, which happens when the market size is small and the ESCO has not much energy‐efficiency advantage over its client. We also study four extensions: When the energy saving service and production decisions are made separately, we find the more energy‐efficient firm is worse off when implementing EPC; when the energy‐saving sharing ratio is determined by the ESCO instead of the client, the ESCO extracts all the surplus derived from the EPC project while the total energy consumption of both firms is always reduced; when the energy‐saving sharing ratio is determined via Nash bargaining, the main insights from the base model remain valid; finally, when the client sets the target of overall cost reduction, it extracts all the surplus derived from the EPC project.

Promoting Energy Performance Contracting for Achieving Urban Sustainability: What is the Research Trend?

“…Originated from the oil crisis in 1970s, EPC was created as an innovative financing mode mainly for reducing energy consumption through recompose for costs of installing and managing energy-saving equipment [17]. EPC nowadays has been widely applied in various industries for energy conservation and received widespread attention from scholars [4,7,18,19]. In the context of construction industry for instance, EPC is perceived as a market mechanism or financing tool to encourage building owners to carry out energy retrofits [7].…”

“…In the context of construction industry for instance, EPC is perceived as a market mechanism or financing tool to encourage building owners to carry out energy retrofits [7]. Under such a mechanism, an ESCO normally provides EU with a series of energy-saving products or services, including energy auditing, EPC financing, energy-saving designing, equipment purchasing, and energy accounting [4]. Quite different from traditional mechanisms, the ESCO mainly profits from EPC projects through bearing energy-saving costs and sharing energy retrofit benefits with the EU [18].…”

“…In many developed countries, such as USA, Japan, Canada, UK, Finland, and Australia, EPC is mainly adopted for building energy-efficiency retrofits (see: [2,7,[21][22][23][24]). However, in some developing countries, such as China, EPC is primarily applied in coal, iron and steel [4], paper-making [25], and building sectors [26]. Such a difference in EPC application can be related to the particular socioeconomic context of the countries concerned.…”

“…Energy performance contracting (EPC) has been commonly regarded as a critical and valuable energy conservation mechanism in urban development, under which an energy service company (ESCO) provides an energy-saving service to the energy user (EU) and shares the energy cost-savings with EUs together [1][2][3][4]. The EPC mechanism has been proven to be applicable and beneficial to diverse sectors typically including iron, steel, coal, chemical, buildings, electricity, and energy [5,6].…”

Picture fuzzy multi-criteria group decision-making method to hotel building energy efficiency retrofit project selection

“…EPC, as an important and effective energy conservation mechanism, has been introduced in China since 1990s [5]. Under EPC mechanism, an energy service company (ESCO) will provide a turnkey service of energy saving to building owners and share the energy cost savings [59]. In China, 95% of existing buildings are "high-energy-consumers".…”