IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v7y2015i12p15816-16289d60187.html
   My bibliography  Save this article

Profit Distribution in Guaranteed Savings Contracts: Determination Based on the Collar Option Model

Author

Listed:
  • Sanghyo Lee

    (Sustainable Building Research Center, Hanyang University, 55 Hanyangdaehak-ro, Sangrok-gu, Ansan-si, Gyeonggi-do 426-791, Korea)

  • Sungho Tae

    (School of Architecture and Architectural Engineering, Hanyang University, 55 Hanyangdaehak-ro, Sangrok-gu, Ansan-si, Gyeonggi-do 426-791, Korea)

  • Sungwoo Shin

    (School of Architecture and Architectural Engineering, Hanyang University, 55 Hanyangdaehak-ro, Sangrok-gu, Ansan-si, Gyeonggi-do 426-791, Korea)

Abstract

This paper seeks to determine the value of Energy Service Company (ESCO) contracts based on the guaranteed savings contracts, which are relatively widely used among ESCO contract models. A framework is proposed based on the collar option model to qualitatively calculate the profit distribution ratio between energy users and the ESCO. The profit distribution model is defined with the guaranteed and target savings, changes in energy cost reductions, and volatility. The model determines a profit distribution ratio such that the energy user offers the ESCO profits equivalent to the value of the guarantee. The model is evaluated using a case study. The model suggested in this study is expected to resolve previous issues with making decisions based on past experiences, as the profit distribution ratio is determined objectively. Moreover, it is possible to effectively assess various profit structures in guaranteed savings contracts according to changes in the guaranteed and target savings. Ultimately, this model is expected to assist in revitalizing the Korean ESCO market.

Suggested Citation

  • Sanghyo Lee & Sungho Tae & Sungwoo Shin, 2015. "Profit Distribution in Guaranteed Savings Contracts: Determination Based on the Collar Option Model," Sustainability, MDPI, vol. 7(12), pages 1-17, December.
    • Handle: RePEc:gam:jsusta:v:7:y:2015:i:12:p:15816-16289:d:60187
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/7/12/15816/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/7/12/15816/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brown, Marilyn A., 2001. "Market failures and barriers as a basis for clean energy policies," Energy Policy, Elsevier, vol. 29(14), pages 1197-1207, November.
    2. Stewart C. Myers, 1984. "Finance Theory and Financial Strategy," Interfaces, INFORMS, vol. 14(1), pages 126-137, February.
    3. Jesper Ole Jensen & Susanne Balslev Nielsen & Jesper Rohr Hansen, 2013. "Greening Public Buildings: ESCO-Contracting in Danish Municipalities," Energies, MDPI, vol. 6(5), pages 1-21, May.
    4. Liang Shan & Michael Garvin & Raman Kumar, 2010. "Collar options to manage revenue risks in real toll public-private partnership transportation projects," Construction Management and Economics, Taylor & Francis Journals, vol. 28(10), pages 1057-1069.
    5. DeCanio, Stephen J, 1998. "The efficiency paradox: bureaucratic and organizational barriers to profitable energy-saving investments," Energy Policy, Elsevier, vol. 26(5), pages 441-454, April.
    6. Larsen, Peter H. & Goldman, Charles A. & Satchwell, Andrew, 2012. "Evolution of the U.S. energy service company industry: Market size and project performance from 1990–2008," Energy Policy, Elsevier, vol. 50(C), pages 802-820.
    7. Steinberger, Julia K. & van Niel, Johan & Bourg, Dominique, 2009. "Profiting from negawatts: Reducing absolute consumption and emissions through a performance-based energy economy," Energy Policy, Elsevier, vol. 37(1), pages 361-370, January.
    8. Du, Ping & Zheng, Li-Qun & Xie, Bai-Chen & Mahalingam, Arjun, 2014. "Barriers to the adoption of energy-saving technologies in the building sector: A survey study of Jing-jin-tang, China," Energy Policy, Elsevier, vol. 75(C), pages 206-216.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Zabaneh, Ghassan A., 2011. "Zero net house: Preliminary assessment of suitability for Alberta," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(6), pages 3237-3242, August.
    11. Cellura, Maurizio & Guarino, Francesco & Longo, Sonia & Mistretta, Marina, 2015. "Different energy balances for the redesign of nearly net zero energy buildings: An Italian case study," Renewable and Sustainable Energy Reviews, Elsevier, vol. 45(C), pages 100-112.
    12. Vine, Edward, 2005. "An international survey of the energy service company (ESCO) industry," Energy Policy, Elsevier, vol. 33(5), pages 691-704, March.
    13. Goldman, Charles A. & Hopper, Nicole C. & Osborn, Julie G., 2005. "Review of US ESCO industry market trends: an empirical analysis of project data," Energy Policy, Elsevier, vol. 33(3), pages 387-405, February.
    14. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    15. Ionescu, Constantin & Baracu, Tudor & Vlad, Gabriela-Elena & Necula, Horia & Badea, Adrian, 2015. "The historical evolution of the energy efficient buildings," Renewable and Sustainable Energy Reviews, Elsevier, vol. 49(C), pages 243-253.
    16. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy-efficiency gap What does it mean?," Energy Policy, Elsevier, vol. 22(10), pages 804-810, October.
    17. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2001. "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(3), pages 345-370, September.
    18. Xu, Pengpeng & Chan, Edwin Hon-Wan & Qian, Queena Kun, 2011. "Success factors of energy performance contracting (EPC) for sustainable building energy efficiency retrofit (BEER) of hotel buildings in China," Energy Policy, Elsevier, vol. 39(11), pages 7389-7398.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hyein Yi & Sanghyo Lee & Jaejun Kim, 2017. "An ESCO Business Model Using CER for Buildings’ Energy Retrofit," Sustainability, MDPI, vol. 9(4), pages 1-21, April.
    2. Xinxin Liu & Xiaosheng Wang & Haiying Guo & Xiaojie An, 2021. "Benefit Allocation in Shared Water-Saving Management Contract Projects Based on Modified Expected Shapley Value," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 35(1), pages 39-62, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hyein Yi & Sanghyo Lee & Jaejun Kim, 2017. "An ESCO Business Model Using CER for Buildings’ Energy Retrofit," Sustainability, MDPI, vol. 9(4), pages 1-21, April.
    2. Töppel, Jannick & Tränkler, Timm, 2019. "Modeling energy efficiency insurances and energy performance contracts for a quantitative comparison of risk mitigation potential," Energy Economics, Elsevier, vol. 80(C), pages 842-859.
    3. Wenjie Zhang & Hongping Yuan, 2019. "A Bibliometric Analysis of Energy Performance Contracting Research from 2008 to 2018," Sustainability, MDPI, vol. 11(13), pages 1-23, June.
    4. Wenjie Zhang & Hongping Yuan, 2019. "Promoting Energy Performance Contracting for Achieving Urban Sustainability: What is the Research Trend?," Energies, MDPI, vol. 12(8), pages 1-18, April.
    5. Sanghyo Lee & Kyunghwan Kim, 2015. "Collar Option Model for Managing the Cost Overrun Caused by Change Orders," Sustainability, MDPI, vol. 7(8), pages 1-15, August.
    6. Klinke, Sandra, 2018. "The determinants for adoption of energy supply contracting: Empirical evidence from the Swiss market," Energy Policy, Elsevier, vol. 118(C), pages 221-231.
    7. Zhang, Mingshun & Wang, Mujie & Jin, Wei & Xia-Bauer, Chun, 2018. "Managing energy efficiency of buildings in China: A survey of energy performance contracting (EPC) in building sector," Energy Policy, Elsevier, vol. 114(C), pages 13-21.
    8. Vitaliy Roud & Thomas Wolfgang Thurner, 2018. "The Influence of State‐Ownership on Eco‐Innovations in Russian Manufacturing Firms," Journal of Industrial Ecology, Yale University, vol. 22(5), pages 1213-1227, October.
    9. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    10. Bettina Freitag & Lukas Häfner & Verena Pfeuffer & Jochen Übelhör, 2020. "Evaluating investments in flexible on-demand production capacity: a real options approach," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 133-161, April.
    11. Madlener, Reinhard & Stoverink, Simon, 2012. "Power plant investments in the Turkish electricity sector: A real options approach taking into account market liberalization," Applied Energy, Elsevier, vol. 97(C), pages 124-134.
    12. Nolden, Colin & Sorrell, Steve & Polzin, Friedemann, 2016. "Catalysing the energy service market: The role of intermediaries," Energy Policy, Elsevier, vol. 98(C), pages 420-430.
    13. Bertoldi, Paolo & Boza-Kiss, Benigna, 2017. "Analysis of barriers and drivers for the development of the ESCO markets in Europe," Energy Policy, Elsevier, vol. 107(C), pages 345-355.
    14. David Ford & Diane Lander & John Voyer, 2002. "A real options approach to valuing strategic flexibility in uncertain construction projects," Construction Management and Economics, Taylor & Francis Journals, vol. 20(4), pages 343-351.
    15. Anna Dahlqvist & Patrik S derholm, 2019. "Industrial Energy Use, Management Practices and Price Signals: The Case of Swedish Process Industry," International Journal of Energy Economics and Policy, Econjournals, vol. 9(3), pages 30-45.
    16. Kangas, Hanna-Liisa & Lazarevic, David & Kivimaa, Paula, 2018. "Technical skills, disinterest and non-functional regulation: Barriers to building energy efficiency in Finland viewed by energy service companies," Energy Policy, Elsevier, vol. 114(C), pages 63-76.
    17. Nathalie Lazaric & Kevin Maréchal, 2010. "Overcoming inertia: insights from evolutionary economics into improved energy and climate policy," Post-Print hal-00452205, HAL.
    18. Shang, Tiancheng & Zhang, Kai & Liu, Peihong & Chen, Ziwei & Li, Xiangpeng & Wu, Xue, 2015. "What to allocate and how to allocate?—Benefit allocation in Shared Savings Energy Performance Contracting Projects," Energy, Elsevier, vol. 91(C), pages 60-71.
    19. Pei-Chien Lin & Ming-Feng Hung, 2016. "The Effect of Energy Service Companies on Energy Use in Selected Developing Countries: A Synthetic Control Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 335-348.
    20. Deng, Qianli & Jiang, Xianglin & Cui, Qingbin & Zhang, Limao, 2015. "Strategic design of cost savings guarantee in energy performance contracting under uncertainty," Applied Energy, Elsevier, vol. 139(C), pages 68-80.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:7:y:2015:i:12:p:15816-16289:d:60187. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.