IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v9y2017i4p591-d95606.html
   My bibliography  Save this article

An ESCO Business Model Using CER for Buildings’ Energy Retrofit

Author

Listed:
  • Hyein Yi

    (Department of Architectural Engineering, Hanyang University, Seoul 133-791, Korea)

  • Sanghyo Lee

    (Innovative Durable Building and Infrastructure Research Center, Hanyang University, Seoul 133-791, Korea)

  • Jaejun Kim

    (Department of Architectural Engineering, Hanyang University, Seoul 133-791, Korea)

Abstract

This study proposes an Energy Service Company (ESCO) business model to which Certified Emission Reduction (CER) is applied mainly for guaranteed savings. To verify the effectiveness of this ESCO business model, option theory is used. Notably, along with call and put options, which are appropriate for profit structure evaluation of existing guaranteed savings contract, an up and knock-out option was used to analyze the option of securing profit from CER. Based on this analysis, the values of the guarantee acquired by an energy user from the change in the amount of energy savings and the values of an ESCO’s right to profit from energy savings and CER, were calculated. Through these valuations, the profit sharing ratio between energy users and the ESCO was estimated. When the model proposed in this paper was applied to a project case, the profit sharing ratio was 16.37%. The model proposed in this paper is useful for motivating ESCOs to save more energy during operating periods by effectively using profit from CER. Additionally, this model will contribute to the expansion of ESCO market and the effectiveness of energy performance projects in Korea.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jsusta:v:9:y:2017:i:4:p:591-:d:95606
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/9/4/591/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/9/4/591/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Wang, Qiang & Chen, Yong, 2010. "Barriers and opportunities of using the clean development mechanism to advance renewable energy development in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(7), pages 1989-1998, September.
    2. Stewart C. Myers, 1984. "Finance Theory and Financial Strategy," Interfaces, INFORMS, vol. 14(1), pages 126-137, February.
    3. Fang, Wen Shwo & Miller, Stephen M. & Yeh, Chih-Chuan, 2012. "The effect of ESCOs on energy use," Energy Policy, Elsevier, vol. 51(C), pages 558-568.
    4. Kostka, Genia & Shin, Kyoung, 2013. "Energy conservation through energy service companies: Empirical analysis from China," Energy Policy, Elsevier, vol. 52(C), pages 748-759.
    5. 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.
    6. 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.
    7. 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.
    8. Ren, Hongbo & Zhou, Weisheng & Gao, Weijun & Wu, Qiong, 2011. "Promotion of energy conservation in developing countries through the combination of ESCO and CDM: A case study of introducing distributed energy resources into Chinese urban areas," Energy Policy, Elsevier, vol. 39(12), pages 8125-8136.
    9. 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.
    10. Stuart, Elizabeth & Larsen, Peter H. & Goldman, Charles A. & Gilligan, Donald, 2014. "A method to estimate the size and remaining market potential of the U.S. ESCO (energy service company) industry," Energy, Elsevier, vol. 77(C), pages 362-371.
    11. Vine, Edward, 2005. "An international survey of the energy service company (ESCO) industry," Energy Policy, Elsevier, vol. 33(5), pages 691-704, March.
    12. Dowson, Mark & Poole, Adam & Harrison, David & Susman, Gideon, 2012. "Domestic UK retrofit challenge: Barriers, incentives and current performance leading into the Green Deal," Energy Policy, Elsevier, vol. 50(C), pages 294-305.
    13. Qian, Dong & Guo, Ju’e, 2014. "Research on the energy-saving and revenue sharing strategy of ESCOs under the uncertainty of the value of Energy Performance Contracting Projects," Energy Policy, Elsevier, vol. 73(C), pages 710-721.
    14. Sorrell, Steve, 2007. "The economics of energy service contracts," Energy Policy, Elsevier, vol. 35(1), pages 507-521, January.
    15. 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.
    16. 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.
    17. Rahman, Shaikh M. & Kirkman, Grant A., 2015. "Costs of certified emission reductions under the Clean Development Mechanism of the Kyoto Protocol," Energy Economics, Elsevier, vol. 47(C), pages 129-141.
    18. Suhonen, Niko & Okkonen, Lasse, 2013. "The Energy Services Company (ESCo) as business model for heat entrepreneurship-A case study of North Karelia, Finland," Energy Policy, Elsevier, vol. 61(C), pages 783-787.
    19. 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. Juan Aranda & Ignacio Zabalza & Andrea Conserva & Gema Millán, 2017. "Analysis of Energy Efficiency Measures and Retrofitting Solutions for Social Housing Buildings in Spain as a Way to Mitigate Energy Poverty," Sustainability, MDPI, vol. 9(10), pages 1-22, October.
    2. Seungjun Roh & Sungho Tae & Rakhyun Kim, 2018. "Developing a Green Building Index (GBI) Certification System to Effectively Reduce Carbon Emissions in South Korea’s Building Industry," Sustainability, MDPI, vol. 10(6), pages 1-17, June.
    3. Maria Rosa De Giacomo & Raimund Bleischwitz, 2020. "Business models for environmental sustainability: Contemporary shortcomings and some perspectives," Business Strategy and the Environment, Wiley Blackwell, vol. 29(8), pages 3352-3369, December.

    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. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Zhou, Yuanrong & Evans, Meredydd & Yu, Sha & Sun, Xiaoliang & Wang, Juemin, 2020. "Linkages between policy and business innovation in the development of China's energy performance contracting market," Energy Policy, Elsevier, vol. 140(C).
    7. 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.
    8. Zheng, Saina & Zhai, Haibo & Hsu, Shu-Chien & Armanios, Daniel Erian, 2024. "Uneven distribution in energy conservation services through performance contracts in China," Energy Policy, Elsevier, vol. 187(C).
    9. Akman, Ugur & Okay, Esin & Okay, Nesrin, 2013. "Current snapshot of the Turkish ESCO market," Energy Policy, Elsevier, vol. 60(C), pages 106-115.
    10. 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.
    11. Pantaleo, Antonio & Candelise, Chiara & Bauen, Ausilio & Shah, Nilay, 2014. "ESCO business models for biomass heating and CHP: Profitability of ESCO operations in Italy and key factors assessment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 30(C), pages 237-253.
    12. Stuart, Elizabeth & Larsen, Peter H. & Goldman, Charles A. & Gilligan, Donald, 2014. "A method to estimate the size and remaining market potential of the U.S. ESCO (energy service company) industry," Energy, Elsevier, vol. 77(C), pages 362-371.
    13. Ouyang, Jianjun & Ju, Peng, 2017. "The choice of energy saving modes for an energy-intensive manufacturer under non-coordination and coordination scenarios," Energy, Elsevier, vol. 126(C), pages 733-745.
    14. 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.
    15. 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.
    16. Helms, Thorsten, 2016. "Asset transformation and the challenges to servitize a utility business model," Energy Policy, Elsevier, vol. 91(C), pages 98-112.
    17. 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.
    18. Qin, Quande & Liang, Fuqi & Li, Li & Wei, Yi-Ming, 2017. "Selection of energy performance contracting business models: A behavioral decision-making approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 72(C), pages 422-433.
    19. 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.
    20. Li, Yan & Qiu, Yueming & Wang, Yi David, 2014. "Explaining the contract terms of energy performance contracting in China: The importance of effective financing," Energy Economics, Elsevier, vol. 45(C), pages 401-411.

    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:9:y:2017:i:4:p:591-:d:95606. 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.