Energy Service Companies (ESCOs) in China: Barriers and drivers from ESCOs' perspective

Abstract

China as the world's largest energy consumer and greenhouse gases emitter has a great urgency to improve its energy efficiency. Chinese Central government has made ambitious targets to reduce energy and carbon intensity in the 12th five-year plan (2011-2015). It also leverages the important role of Energy Service Companies (ESCO) using Energy Performance Contracting (EPC) in achieving these targets. Despite the huge potential and favoring policies, ESCO's diffusion in China is far from reaching its potential and large amount of cost-effective investment opportunities are unexploited. Therefore, the objective of this research is to offer an understanding of the underlying economics of ESCO market in China, and to contribute to the knowledge about the drivers and barriers in China for ESCOs.

The theoretical framework guiding this study was the Transaction Cost Economics (TCE). It is said, that the slow diffusion rates of ESCO market can be understood in terms of transaction costs. While Oliver Williamson developed the original theory, this study used the determinants of production and transaction costs modeled by Sorrell to identify the important barriers and drivers to ESCOs in China. Extensive literature review was done to understand the development of Chinese ESCO industry and semi-structured interviews were conducted for the empirical research.

In the current market's elements, most ESCOs are SMEs; projects concentrating in industry sector using mainly Shared Saving Model and the industry's investments and energy savings far from potentials. Variables as ESCO's and customer's size, relation between ESCO and customer were suggested to complete Sorrell's explanatory model for energy service contracting. More valuably, Chinese ESCOs perceptions were classified into the market, institutional, financial and technological barriers and drivers. Most important perceived barriers were intense competition for customers and technical experts, uncertainty in market dynamics with abrupt M&As, complexity in project and reward approval, difficulties in financing and lack of domestic technology. Most important perceived drivers were demonstrative effect of successful projects, standardized contract model, financing resource through capital market and cooperation with experts from education and research institutions.