Profit Distribution in Guaranteed Savings Contracts: Determination Based on the Collar Option Model

Abstract

This paper seeks to determine the value of Energy Service Company (ESCO) contracts based on the guaranteed savings contracts, which are relatively widely used among ESCO contract models. A framework is proposed based on the collar option model to qualitatively calculate the profit distribution ratio between energy users and the ESCO. The profit distribution model is defined with the guaranteed and target savings, changes in energy cost reductions, and volatility. The model determines a profit distribution ratio such that the energy user offers the ESCO profits equivalent to the value of the guarantee. The model is evaluated using a case study. The model suggested in this study is expected to resolve previous issues with making decisions based on past experiences, as the profit distribution ratio is determined objectively. Moreover, it is possible to effectively assess various profit structures in guaranteed savings contracts according to changes in the guaranteed and target savings. Ultimately, this model is expected to assist in revitalizing the Korean ESCO market.