GUARANTEE DESIGN ON ENERGY PERFORMANCE CONTRACTS UNDER UNCERTAINTY

Abstract

Due to the growing concerns with climate change and energy supply, Energy Performance Contracting (EPC), which uses the guaranteed future utility savings to repay the initial renovation investments, becomes increasingly popular. However, most Energy Service Companies (ESCOs) set the savings guarantee roughly based on their previous experience, which leads to inaccurate estimates in practice. This paper has built the stochastic models for the savings risks both from the energy price volatility and the facility performance instability, which follow the Geometric Brownian Motions (GBM) and Ito's lemma. Then, a flexible guarantee designing method for ESCOs is developed to minimize the financial risks and a case study has been conducted to show the application. Finally, suggestions have been made for how ESCOs set the guarantee and the extra profit sharing proportion in contracts based on the existing information. This method will help them appropriately allocate risks with successful contract negotiation.