Energy Performance Contracts in Imperfect Markets: A Study on Energy Efficiency Retrofits of Commercial Buildings in China

Abstract

Energy performance contracts (EPCs) are a tested and effective mechanism to improve energy efficiency, however, they have not been widely used in the current building energy efficiency market. To establish why the market has not reacted as expected, this research examines the nature and characteristics of the EPC market and proposes an incentive mechanism to encourage the uptake of EPCs in the market of commercial building energy efficiency retrofit in China. The research formalises the economic characteristics of the imperfect EPC market from three perspectives: incomplete information, market power and externalities. It reveals the nature of the EPC market in a theoretical and holistic way. Adapting the theory of transaction costs, these market imperfections are addressed by potential policies. In the long term, policies of energy prices and carbon taxes are theoretically suitable. Strategies of information disclosure, particularly energy performance benchmarking, and reforming the existing financing system are identified as necessary for efficient markets. Subsidies and energy consumption limits are identified as useful in the short term. The research outcome shows the potential to boost the uptake of EPCs and improve the energy efficiency of commercial buildings in China.