Research On The Financing Problem Of EPC Industry And Its Solution

Construction is a booster to economic development, while energy is a necessity for construction. However, lots of energy consumptions are bound to dry up supplies and to lead to a number of various environmental issues, such as climate change and air pollution. Thus promoting the use of clean energy and enhancing usage efficiency becomes important subjects for today’s world. Basing on the current condition, substituting new energy for coal and petroleum or improving energy consumption efficiency of equipment and facilities will cost a vast number of investments into technology research and improvement construction. As a profit pursuant, companies are reluctant to invest in energy saving and efficient improving without strict regulation. Thus, a new cooperation scheme is brought in to solve the problem-energy performance contracting (EPC). EPC can help to solve the problem between environment protection and investment for energy saving. Energy service companies (ESCos) are the service providers of EPC projects. ESCos provides financing and technologies for other companies to implement new energy saving technologies or to conduct equipment upgrading, so that companies will enjoy the benefit from improving energy efficiency without investing in a large number of money or talents or other resources.Though EPC is a promising industry, there are many barriers to be conquered. Lack of effective financing method is one of the most difficult obstacles. Research points out that this problem is resulted from many reasons:business pattern determines that ESCos focus more on technologies than fixed assets; most ESCos have such short period of history that leading to bad credit standings, etc. Thus, ESCos are unable to gain loans from traditional financing institutions. However, those reasons revealed from former analysis are still facial factors. Actually the primary cause for financing problem of ESCos is information asymmetry. In order to obtain loans, asymmetry information leads to the requirement of mortgage and guarantee which ESCos lack. This is a dilemma that traditional financing institutions can hardly solve.Researchers raise some points and solutions to the problem, such as tightening government administration and regulation, setting up special funds, etc. But no method of using the profitability of EPC program is brought about or complete and concrete strategies are given. Based on the current cooperation scheme, EPC gains steady and profitable cash inflows during the contracts duration. This provides a possibility for asset-backed securitization.The paper attempts to figure out the current financing status of EPC industry via depth interview and questionnaire, and to find out factors leading to the financing problem. Furthermore, theoretical analysis is conducted to reveal the primary reason. In accordance to the fundamental reason, effective solution is brought up--asset backed securitization (ABS) of EPC projects. Taking advantage of ABS’s structure can effectively separate EPC from ESCos as financing entities, getting rid of the shortage of ESCos. Thus reduce the influence of information asymmetry.Following this, the paper elaborates the effectiveness of EPC securitization through analyzing the dynamic game with incomplete information. Meanwhile, key factors for ABS designing and operation are figured out from the game analysis. To ensure all the key factors will be dealt carefully, the paper brings about a complete trading structure and illustrates specific tactics, and demonstrates the feasibility and effectiveness of the tactics through case studies.