A Dynamic Model of Risk Allocation of Energy Efficiency Retrofits under Energy Performance Contract for Office Buildings in China

Abstract

Given the rapid development of China’s economy and fast-paced urbanization, energy consumption gradually increases, leading to China being the largest energy consumers. Since buildings are responsible for around 40% of total energy, especially office buildings, many policies and mechanisms have been developed to make buildings more sustainable. Building Energy Efficiency Retrofit (BEER) is considered as one of the most effective methods to improve energy efficiency and reduce energy consumption of existing office buildings. Meanwhile, the Chinese government proposed the 13th Five-Year (2016-2020) Plan of Building Energy Efficiency Development to promote existing building energy efficiency retrofits which favours Energy Performance Contracting (EPC) as the market mechanism to promote building energy efficiency retrofit. However, there are many inherent risks in existing EPC projects due to the complexity and uncertainty of the EPC mechanism. Proper risk allocation can promote project management performance by means of contract clauses, but existing research mainly focus on static risk allocation. Most scholars have pointed out that the risk allocation could be confirmed after the period of tendering and bidding, considering the contract execution stage as risk management, not attaching importance to the phased and dynamic risk allocation. This paper is aiming to establish a dynamic mechanism of risk allocation under EPC for office buildings based on the theory of Incomplete Contract. Firstly, the paper identifies and analyzes the key risks of the EPC for BEER projects through a literature review and classifies risks based on the EPC project phases as risk initial distribution stage, risk overall allocation stage, risk tracking and redistribution stage. Secondly, the paper presents a theoretical analysis of the EPC contract clauses of risk allocation based on the Incomplete Contract Theory. Finally, the paper develops a dynamic EPC risk allocation model for BEER projects based on the Incomplete Contract Theory. The model will enable EPC project owners and contractors to make reasonable risk allocations in the process of contract negotiation and further risk reallocation in the future, which may make EPCs more attractive in China.

Keywords: Energy Performance Contract, dynamic risk allocation, energy efficiency retrofit, office buildings