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The contribution of energy service contracting to a low carbon economy

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posted on 2023-06-08, 20:45 authored by Steven SorrellSteven Sorrell
Energy service contracting can provide a cost-effective route to overcoming barriers to energy efficiency. Energy service contracts allow the client to reduce operating costs, transfer risk and concentrate attention on core activities. However, the energy services model may only be appropriate for a subset of energy services and energy using organisations. A challenge for both business strategy and public policy is to identify those situations in which energy service contracting is most likely to be appropriate and the conditions under which it is most likely to succeed. Energy service contracting is a form of outsourcing. It will only be chosen where the expected reduction in the production cost of supplying energy services can more than offset the transaction cost of negotiating and managing the relationship with the energy service provider. Production costs will be determined by a combination of the physical characteristics of the energy system and the technical efficiency of the relevant organisational arrangements, including economies of scale and specialisation. Transaction costs, in turn, will be determined by the specificity of the assets required to provide the energy services, the difficulty in specifying and monitoring contractual terms and conditions, the competitiveness of the energy services market and the relevant legal, financial and regulatory rules. This project develops these ideas into a general framework that may be used to assess the feasibility of energy service contracting in different circumstances. The framework leads to a number of hypotheses that are suitable for empirical test. The project also proposes a definition of energy service contracting, classifies the different approaches, examines how these affect incentives and risks, provides an overview of the market in the US and Europe and examines the nature and structure of the UK market in more detail.


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Tyndall Centre for Climate Change Research



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University of Sussex

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