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

Lee, Sanghyo; Tae, Sungho; Shin, Sang Jin

doi:10.3390/su71215816

Cited by 10 publications

(4 citation statements)

References 35 publications

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“…The revenue of a typical PPP project is a combined result of the MRG (minimum revenue subsidy) and ERS (excess revenue sharing mechanisms) [30,31]. This mechanism balances the profit of projects by providing the private sector support against revenue risks borne from low revenue and giving the government the right to capture the excess revenue [32].…”

Section: Sewage Revenue In Practicementioning

confidence: 99%

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Liu

Liao

Guo

et al. 2019

Water

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Many sewage treatment facilities in China have been developed and operated using the Public-Private Partnerships (PPP) model. However, a big challenge faced by these PPP projects is that the subsidy requested from the government during the operation is normally higher than what was estimated originally, thus often exceeding the budget that the government can afford. This leads to a high risk of project failure or insufficient operation. This problem is largely caused by the uncertainties exhibited in the existing models, such as the Black-Scholes (BS) model. While being used in the budget estimation, these models cannot sufficiently account for the short-term uncertainty that may be incurred during the operation of projects. In this study, a method to account for this short-term uncertainty has been proposed to improve the BS model. This allows for investigations to address issues related to how the real option value of a government subsidy is affected. A Monte Carlo simulation was performed to take into account the noise in the estimation. A sensitivity analysis further revealed that this discrepancy is largely affected by the values of the relevant parameters in the short-term uncertainty model. We found that the short-term uncertainty has a significant effect on private revenue and government subsidy and that the changes of the latter are more sensitive to the change of short-term uncertainty. The value of the relevant variables of short-term uncertainty determined the fluctuation of the revenue. The mean value and revenue had a positive correlation. The reverting speed and revenue showed a negative correlation. The short-term volatility had a positive correlation toward the fluctuation range of the revenue. The simulation results indicate that this enhanced method can produce more accurate information for a better assessment of the PPP project under a wide range of uncertainty scenarios, allowing for the best decision making by the government.

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Section: Sewage Revenue In Practicementioning

confidence: 99%

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Liu

Liao

Guo

et al. 2019

Water

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“…In advanced countries, the share of guaranteed saving contract is relatively higher [6], and the guaranteed savings contract is actively applied to the majority of ESCO businesses. Table 2 shows the terminologies used in the guaranteed savings contract in Korea [11].…”

Section: Disadvantagesmentioning

confidence: 99%

Section: Profit Sharingmentioning

confidence: 99%

“…Accordingly, the value guarantee by the ESCO in Section 1 is evaluated, and the profit sharing ratio is calculated in Section 3 in such a way that it becomes the same as the value of guarantee. Then, the guaranteed savings contract is signed between the ESCO and the user [11]. This study explores ways to encourage buildings' energy retrofit by ESCOs based on the combination of guaranteed savings contract, which have characteristics and additional cash flow generated from CER.…”

Section: Profit Sharingmentioning

confidence: 99%

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An ESCO Business Model Using CER for Buildings’ Energy Retrofit

Lee

Kim

2017

Sustainability

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This study proposes an Energy Service Company (ESCO) business model to which Certified Emission Reduction (CER) is applied mainly for guaranteed savings. To verify the effectiveness of this ESCO business model, option theory is used. Notably, along with call and put options, which are appropriate for profit structure evaluation of existing guaranteed savings contract, an up and knockout option was used to analyze the option of securing profit from CER. Based on this analysis, the values of the guarantee acquired by an energy user from the change in the amount of energy savings and the values of an ESCO's right to profit from energy savings and CER, were calculated. Through these valuations, the profit sharing ratio between energy users and the ESCO was estimated. When the model proposed in this paper was applied to a project case, the profit sharing ratio was 16.37%. The model proposed in this paper is useful for motivating ESCOs to save more energy during operating periods by effectively using profit from CER. Additionally, this model will contribute to the expansion of ESCO market and the effectiveness of energy performance projects in Korea.

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Benefit Allocation in Shared Water-Saving Management Contract Projects Based on Modified Expected Shapley Value

Liu

Wang

Guo

et al. 2020

Water Resour Manage

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

Cited by 10 publications

References 35 publications

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

Effects of Short-Term Uncertainties on the Revenue Estimation of PPP Sewage Treatment Projects

An ESCO Business Model Using CER for Buildings’ Energy Retrofit

Benefit Allocation in Shared Water-Saving Management Contract Projects Based on Modified Expected Shapley Value

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