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An ESCO Business Model Using CER for Buildings’ Energy Retrofit

Hyein Yi (), Sanghyo Lee () and Jaejun Kim ()
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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

Sustainability, 2017, vol. 9, issue 4, 1-21

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.

Keywords: ESCO; Guaranteed Savings Contract; Certified Emission reduction; real options (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2017
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