Energy Performance Contract models for the diffusion of green-manufacturing technologies in China: A stakeholder analysis from SMEs’ perspective

Energy Policy 106 (2017) 59–67

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Energy Performance Contract models for the diffusion of greenmanufacturing technologies in China: A stakeholder analysis from SMEs’ perspective

MARK

⁎

Peng Liua,b, Yuan Zhoua, , Dillon K. Zhoua, Lan Xuea a b

School of Public Policy and Management, Tsinghua University, Beijing, China The CAE Centre for Strategic Studies, Chinese Academy of Engineering, Beijing, China

A R T I C L E I N F O

A BS T RAC T

Keywords: Energy performance contracting Green-manufacturing Energy-saving technology Small-and-medium size enterprises Stakeholder theory Trade-offs

Small-and-medium-sized enterprises (SMEs) are significant to China's emission reduction programme. This research aims to improve our understanding of the challenge of diffusing green-manufacturing technologies among SMEs in China. Specifically, this study examines the Chinese Government's effort to facilitate reduction of energy consumption among SMEs through Energy Performance Contracts (EPCs) to incentivize domestic manufacturers to adopt energy efficient measures (EEMs) in order to reduce demand for energy and corresponding drop in emissions. The data is gathered from relevant EPC stakeholders in the National Motor Upgrading Demonstration Project and its implementation in Dongguan city, which is based on 30 in-depth interviews and 6 focus group discussions. Using stakeholder analysis, this study finds that guaranteed energy savings model is the favorite model in implementation, given the gained benefits outweigh committed resources, and the control capability overrides possible risks among the two core stakeholders. The outcomes of this study may allow the government to have a clear understanding of stakeholder perception of the different EPC models used in China so the design and deployment of these mechanisms can be improved.

1. Introduction Energy efficiency has become one of the high-priority policies of the Chinese Government in recent years (Zhou et al., 2015). Energy Performance Contracts (EPCs) as one of the energy efficient measures (EEMs) have been employed by the Chinese Government to promote the diffusion of energy-efficient technology (EET) among the nation's energy consumers. This method is well-suited to the task as policymakers at the national, provincial and local levels in China have a variety of options to stimulate the use of EPCs as a mechanism to effectively facilitate energy savings projects in industrial firms. The rise of energy-saving companies (ESCOs), which has served as crucial implementation platforms during the past five years in China not only helps to build a foundation for establishing the Chinese EPC market but also make EPCs an effective mechanism to spread the adoption of EETs at the national level (Yuan et al., 2016). There are a variety of drivers and barriers to the adoption of energy efficient technology (EET) and measures (EEMs) depending on the size of the firms and the type of industry. When promoting green energy policies, large size enterprises are generally easier to be convinced with mandatory compliance methods, but small-and-medium size enterprises (SMEs) ⁎

are more challenging to rally and coordinate, especially when the government uses a market-based approach (Kong et al., 2016). Stakeholder theory is critical to success for this type of policy push as the factors affecting the likelihood of SMEs’ adoption of the desired technological upgrade hinge upon the decision-making factors and methods of the stakeholders, which in this situation, the industrial firms (Verheul, 1999). While other institutions – including banks and ESCOs – are important for facilitating the adoption of EEMs and EETs, being pushed by the Chinese Government, the ultimate success of the Government's efforts rests upon decisions made by the industrial firms. There are greater difficulties in introducing green and energy saving technologies in small and medium-sized projects in all countries. For example, Albino and Beradardi (2012) recognized that the structure of the construction process is one of the critical barriers - the uncertainty and fragmentary nature of construction processes have been suggested as reasons for the high transaction costs for innovations in the building sector (Williamson, 1991; Hobbs, 1996; Williams and Dair, 2007). Adding to this, Bon-Gang and See, 2012 identified, the high cost premium of green building project to be the most critical obstacles. The lack of client interest in green building and market demand from the public is another significant obstacle with respect to green building

Corresponding author. E-mail addresses: [email protected] (P. Liu), [email protected] (Y. Zhou).

http://dx.doi.org/10.1016/j.enpol.2017.03.040 Received 21 March 2016; Received in revised form 23 February 2017; Accepted 19 March 2017 0301-4215/ © 2017 Elsevier Ltd. All rights reserved.

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attempted and successfully implemented in the developed world – including the US and Europe – to improve energy efficiency and reduce carbon emissions in the manufacturing sector using EPCs. These initiatives in developed countries have been realized with a united effort by willing, informed and coordinated industrial enterprises, ESCOs, financial institutions and other related actors. Upon close examinations, similarities could be observed regarding the energy policy challenges faced by policy makers, the nature of the drivers and barriers for adoption of the varied EEMs and EETs being promoted by the governments, as well as the efficacy of EPCs in paring energy consumption and improving energy-savings. As for the stakeholder theory, it has not been specifically used for analyzing and identifying a more effective way of pushing EEMs and EETs through initiatives like the ESUEM Project. However, a review of literatures suggests that this unique analytical framework and policy tool is a viable mean of realizing large-scale energy policies. Hence this study relied on the bottom-up approach to better understand the policy implementation challenges involved with the ESUEM Project. Energy consumption and subsequent carbon emissions of industrial enterprises using motor equipment constitute a major policy challenge for governments around the world. According to the International Energy Agency (IEA), these motors account for 60% of manufacturing final electricity use worldwide and represent an unrealized potential for considerable energy savings of 2.58 EJ in terms of final energy use (IEA, 20071). According to the National Bureau of Statistics of China, the stocks of electric motors in China in 20122 were about 1.7 billion kW, whose total power consumption reached about 3000 billion kW h, accounting for 64% of the overall power consumption in China. Particularly, in the industrial fields, the power consumption of electric motors was 2600 billion kW h, accounting for 75% of the whole power consumption. The energy consumption of the China's manufacturing sector accounted for approximately 57% of overall energy consumption in 2012 (Zhang et al., 2009). The upgrade of motors is therefore very important to the development of China as it could give its SMEs a much needed competitive edge due to energy savings, while reducing the negative environmental effects of SMEs (Teng and Gu, 2007). Why don’t managers at manufacturing firms consider upgrading their electric motors and other EETs* The common reasons for enterprises not upgrading to EETs or implementing EEMs are threefold:

project management. Existing studies have focused on green building areas and rarely looked at the green manufacturing area. In this paper, the difficulties in SEMs’ green manufacturing are considered. The injection molding machines project which can be upgraded by employing energy saving servo motors in SMEs, is also a small and mediumsized project. Most firms operating in the sector are SMEs with a low degree of specialization. Instead of considering the adoption of green technologies, these firms prefer simple and stable traditional techologies. Many of these firms are worried about the technology risks, economic risks, and insufficient benefits associated with this upgrade. The main concern is about the high cost premium and limited returns – these firms are concerned with the initial investment, as well as the return model. The information asymmetry, skill gap, limited financing, and high risk have been suggested as the reasons for the high transaction costs linked to innovations in this project. This study examined the interests and concerns of SMEs regarding the adoption of EETs through EPC model based on a stakeholder analysis – by conducting a host of interviews, focus group sessions and a survey with managers from Dongguan's manufacturing firms – to determine the drivers and barriers to diffusion and integration of EEMs and EETs among Chinese SMEs. The focal point will be on the implementation of the “National Project on Energy Saving through Upgrading Electric Motors” (henceforth referred to as the “ESUEM Project”) in Dongguan – a municipality in China's Guangdong Province (Zhou et al., 2015). Energy-saving governance requires the participation of a range of stakeholders in order to create conditions for a winwin process where tangible benefits are realized by all related parties. The success of past EPC projects tells us that the allocation of benefits among the stakeholders is very important – especially the commissioning party and the contractor which are the manufacturing firms and the ESCOs in this situation (Hufen and Brujin, 2015; Shang et al., 2015). This research aims to understand different stakeholders’ views on three EPC models in order to promote the diffusion of green-manufacturing technologies among SMEs in China – this helps to explain why some EPC models are more popular, while others may need government intervention to overcome the reluctance of key stakeholders. There are very few studies that have examined the challenges of facilitating the adoption of green manufacturing technologies in China based on the stakeholder theory. This study intended to expand the understanding of this particular type of public policy scenario through an in-depth stakeholder analysis of primary and key stakeholders involved with the ESUEM Project. The analysis was based on data gathered from interviews and focus group sessions with representative stakeholders organized and conducted in the field by the authors, which illustrates the interest, power and barriers to the adoption of green manufacturing technologies by the SMEs of Dongguan and other relevant stakeholders. This study identified the key stakeholders in the Dongguan area's upgrading injection molding machines with EEMs and EETs using EPCs. This paper assessed the EPC models from the stakeholder perspective and explained which one was the most popular and practical for promoting the full adoption of EEMs and EETs among Dongguan's SMEs. The interviews and focus groups have produced valuable data that provide us insight as to the factors that could hold SMEs back from the adoption and what could be done to alleviate the SMEs’ reservations.

1. Management is not aware of the energy savings opportunity; 2. There is a lack of support from management to undertake motor system energy efficiency projects; 3. There is a limited understanding by consulting engineers and service providers on how to identify and implement system energy efficiency improvement opportunities in new and existing motor-driven systems. SMEs are particularly tricky to organize and motivate for adopting new green manufacturing practices due to their distinctive characteristics Ghazilla et al., 2015. Most studies examining environmental management at SMEs have focused on the unique experiences of companies when it came to promoting the use of green technology and policies at their production facilities. SMEs are generally characterized by their location, size, age, organizational structure, number of employees, sales or value of the company's assets and ownership through innovation and technology. The majority of SMEs utilize simple systems and procedures, which make the companies flexible as well as provide quick feedback and short decision-making chains. More importantly, SMEs generally have a better understanding and provide a

2. Literature review 2.1. China's ESUEM project and its policy challenges The core aims of China's ESUEM Project (Zhou et al., 2015) are to reduce the amount of energy consumption by the Chinese industrial firms through raising the energy efficiency from upgrading its electric motors and to reduce the environmental impact of manufacturers. This policy is part of a global energy policy initiative that has been

1 Tracking Industrial Energy Efficiency and CO2 Emissions. Available at: http://www. iea.org/w/bookshop/add.aspx*id=298. 2 Data from National Bureau of Statistics of China: http://data.stats.gov.cn, keywords energy and manufacturing.

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faster response to customer needs compared with large enterprises. Bon-Gang and See (2012) identified a wide range of barriers specific in green construction projects in Singapore. Shizhen et al., 2013 cited the “absence of incentives on economic policies, lax enforcement of environmental regulations and high initial capital cost” as the most critical barriers to the adoption of green technology in China. This paper took into account the findings of this UN report and other factors discovered through the literature review. This study's data-gathering method was intended to gather more information on specific barriers that these three common reasons pose to the adoption of green manufacturing technology in China.

Bon-Gang and See (2012) took solutions to overcome main barriers specific in green construction projects. A construction tour could be organized for the client and the public to educate them on the benefits of green building so as to increase their interest and create a higher market demand for green buildings. The clients felt that the subsidy from government for research and development of green building systems and management could essentially provide concrete evidence of how beneficial they are to humans and society as well as the economy.

2.2. EPCs as a mechanism for improving energy efficiency

Learning from solutions to overcome main barriers specific in green construction (Albino and Beradardi, 2012; Bon-Gang and See, 2012) we should consider the stakeholders’ relationships in order to supply appropriate EPC models, in terms of benefits sharing and amount of shared risk. Stakeholder theory was first conceived in Freeman's (1984) book “Strategic Management: A Stakeholder Approach” based on theories from the realm of business like corporate social responsibility, strategy management and organizational theory. The corporation's objectives can be classified into two categories, “economic objectives and social objectives, and that the achievement or outcomes of those social objectives will further enhance or limit the results of economic objectives”. In other words, stakeholder theory is meant to pave the way for both the company and society to win together – though in this study the government was used on behalf of Chinese society. Mitchell et al., 1997 noted that there are two major issues in the stakeholder theory: (i) definition of stakeholders; and (ii) attributes of stakeholders, based on what managers satisfy interests of interest groups. Stakeholders are actors that are not part of the company. The definitions for the concept of a stakeholder are varied from Freeman's broad definition–“any group or individual, who can affect or is affected by the achievement of the organization's objectives” – and Freedman and Reed's narrow definition –“those groups without whose support the organization would cease to exist” (Freeman, 1984). Clarkson (1995) classified stakeholders by their relevance to the corporation project into primary stakeholders and secondary stakeholders. A primary stakeholder group is one without whose continuing participation in the corporation or primary actor cannot realize the goal(s) of its initiative, while secondary stakeholders include those that indirectly affect or are indirectly affected by the company. Carroll (1995) classified stakeholders by their contractual relationships with the company into direct stakeholders and indirect stakeholders. Direct stakeholders are interest groups defined by a contractual relationship with the company. Indirect stakeholders refer to interest groups without a direct contractual relationship. Donadson and Preston (1995) categorized the theory into three types: “(i) descriptive theory that describes the actions which are taken by managers in order to deal with stakeholder relationship; (ii) instrumental theory that analyses and identifies the relationship between stakeholder management and the traditional objective (profits) of the firm; and (iii) normative theory that suggests what managers should do in terms of business ethics and corporate social responsibility”. This paper seeks to identify stakeholders from a coordinator's point of view, who in this case is the Chinese Government seeking to better understand the unique experiences and needs of SMEs and other stakeholders. As far as we know, the existing literature on stakeholder theory doesn’t examine the challenges of balancing competing stakeholder interests and perceptions for industrial energy efficiency projects like the ESUEM Project. The main focus of stakeholder theory research focuses on how corporate entities realizes their private interests while satisfying the concerns of relevant stakeholders as part of a strategic business move. This study examines stakeholder interests and concerns from a public policy perspective in order to realize the public's interest in energy efficiency in industry.

2.3. Stakeholder theory from a public interest perspective

As an innovative market mechanism, Energy Performance Contracting (EPC) can effectively reduce the energy consumption. China has promulgated a series of laws, polices, regulations, and plans that have helped to create a vibrant market for ESCOs to conduct their businesses in marketing. Due to the massive demand as well as the facilitation efforts from the governments, EPC has developed rapidly in China. For instance, the number of employees, the aggregate investment, and the total output value of energy service companies have increased by 31.8 times, 56 times and 73.2 times from 2005 to 2013 (Yuan et al., 2016). China government encourages SMEs to use contract energy management (EPC) to do energy-saving technology transformation and makes many new polices for EPC.3,4 For the mainstream use of green-manufacturing technology, firstly it involves large-scale dissemination. Secondly, it is concerned with prolific SME manufacturers (Fleiter et al., 2012). Therefore in this case, the up-scaling diffusion barriers may include less technical barriers but more complex socio-market and institutional concerns (Williams et al., 2007). In addition, it is more difficult to facilitate the voluntary adoption of energy policies among SMEs, due to their small scale, scattered locations and loose relationships with local authorities (Parker et al., 2009). By combining these specific barriers (collated in Table 1) for the stakeholder, EPC and SMEs, we can classify these barriers (technology & non-technology) into three categories: information dissemination, lack of upgrading funding and concerns for risks. The current research on EPCs focuses on the general mechanics of convincing potential users to use this tool. This paper attempts to explain how EPCs are seen by stakeholders, who have different and sometimes conflicting perspectives on their costs and benefits in EPC-financed projects. Most EPC literature examines the use and efficacy of EPCs for residential projects and not on more complex projects involving green manufacturing which requires more consensus-building and financial hurdles to initiate and complete. There are some solutions to deal with the barriers in SEMs’ green technology diffusion in other countries. Albino et al. (2009) showed the importance of the sustainability specialization of firms which are involved in the development of green products. In particular, looking at sustainability driven companies, they found a high correlation between the development of green products and the existence of environmental strategies. Albino and Beradardi (2012) considered the organizational relationships between firms involved in construction processes. Different relationships between a firm and its suppliers have been recognized in the literature, spanning from basic trading negotiation to partnering (Bresnen and Marshall, 2000) and comakership (Lamming, 1993). Cooper and Ellram (1993) stated the differences between traditional trading relationships and supply chain management in terms of information sharing, coordination, joint planning and amount of shared risk. 3 Guidelines on Further Strengthening Energy Conservation and Emission Reduction of SMEs, Document of state (2009) 36. 4 Notice on Accelerating Promotion and Implementation of EPC and Energy Conserving Service Industry, Document of state, (2010) 25.

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Table 1 A review on stakeholders, EPC and SMEs theory. Themes

Key arguments

Key literature

1. Stakeholders

Stakeholder theory was put forward Primary and secondary stakeholders were classified Relationship was used to classify stakeholders. Two major issues were concluded: definition and attributes of stakeholder

Freeman (1984) Clarkson (1994) Clarkson (1995) Carroll (1995) Mitchell et al. (1997)

Introduction for EPC to China's ESCO Industry Energy conservation through EPC from China The status and future of EPC in China Lack of information is more prevalent in SMEs Required payback period, projected costs Adoption affected by the order of recommendation and the managerial attention

Sun et al. (2011) Kostka et al. (2013) Yuan et al. (2016) Gruber and Brand (1991) Anderson and Newell (2004) Muthulingam et al. (2011)

(1 & 2) Stakeholders & EPC

Stakeholder views on EPC development Specific barriers to EPC: 1. Information Issue 2. Financial crisis 3. Miss trust ESCO

Basar (2013)

(1 & 3) Stakeholders & SMEs (2 & 3) EPC & SMEs

Specific barriers to SMEs: 1. Information issues on energy contracts 2. Lack of interest on energy contracts 3. Hidden costs. 4. Investment costs Specific barriers to SMEs’ EPC: 1. Imperfect information 2. Hidden costs 3. Risk 4. Access to capital

Trianni et al. (2013)

2. EPC

3. Green strategiesfor SMEs

Fleiter et al. (2012)

3. Research method and case study 3.1. Research design This study conducted a qualitative case-study of the “National-level Motor Upgrading Demonstration Project” using a method similar to what Yin (2003) and Zhou et al. (2015) did to determine the barriers to the adoption of EEMs and EETs among Chinese industrial SMEs. This case-study benefited from having access to a wide range of stakeholders involved in the process of promoting the ESUEM Project. This demonstration project also has the potential to reduce 7.3% of its annual energy consumption for China if the ESUEM Project's aims were realized as Guangdong Province has the largest amount of injection molding machines in China (Zhou et al., 2015). Moreover, it is one of the key demonstration projects in China and it falls into the categories of “more-mature technologies” and “larger-scale market diffusion (to vast SMEs)”. The policy-research on this demonstration project was jointly conducted by Chinese Academy of Engineering (CAE) and Ministry of Industry and Information Technology (MIIT). This case study consists of four parts (Fig. 1). First of all, this study investigated this national project and its implementation in the plastic injection molding industry in Dongguan city based on a thorough examination of relevant research and policy documents (Zhou et al., 2015). For this purpose, we systematically studied 34 policy documents and reports (dated 2013) on the “electric motor upgrading project” and “the implementation of plastic injection molding” at the ministerial, provincial, and municipal levels respectively. In addition, to make comparisons and enrich our desk research, we conducted several preliminary interviews with policy makers and experts accordingly. Based on this work, we sketched the case context, progress, as well as the policies and related actors. Secondly, this study probed into stakeholder analysis of different EPC models and identified the energy saving trading models, i.e., guaranteed energy savings contracts, shared savings contracts and outsourcing contracts model. The primary stakeholders (energy users and ESCO) and secondary stakeholders (government, financial institutions, third party energy saving audits, motor manufacturers) were classified according to literature review and pilot interviews. Thirdly, this study explored the specific barriers that may thwart SMEs from adopting green technologies; the kind of EPC can be demonstrated to diffuse green technologies, and the policies and implementation measures that could effectively cope with these barriers.

Fig. 1. Case study design and methods.

Finally, this study helped the government of China make innovation policies in order to demonstrate the good EPC to increase key stakeholders' interest and reduce the risk.

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Fig. 3. Benefit/Task/Control/Risk Models for stakeholders’ analysis.

Third-party powers saving audits play a supporting role as collaborative mechanisms in project implementation to ensure the smooth implementation of EPC projects.

Fig. 2. Stakeholders in upgrading injection molding machines project.

3.2. Stakeholder framework and model for EPC

3.2.2. Stakeholder analysis model Given the limited abilities of the Chinese Government to closely regulate SMEs, a deliberate, albeit voluntary method is required to implement the ESUEM Project. Stakeholder theory offers the framework for addressing this very problem as its purpose is to help policy makers understand the interests of the parties required to make this massive undertaking a success. Interest is defined as profit that can be obtained from an EPC project, including benefits and obtained tasks performed. Value refers to a broad set of benefits derived by a stakeholder from an exchange, which, in the context of sustainability, not only include economic benefits, but also social and environmental benefits (Yang et al., 2014). Meanwhile, tasks can be defined from EPC project including supply equipment, supply service and supply finance. Power of stakeholders is defined as the ability to influence an EPC project, including risk and control. Hu and Zhou (2011) studied the engineering risks existing in EPC including the market risk, the technology risk and the financial risk. Meanwhile, control can be defined from an EPC project, which includes policy control, contract control and ability control. Fig. 3 shows the four dimensions of power and the interest model for analysis of stakeholders in an EPC project. In any EPC model, only when the balance between power and interest is reached, will stakeholders carry out an EPC project (Table 2). If the willingness (W) of a primary stakeholder (buyer/seller) to select a model is low (L), it will be very hard to roll out the model. If the W of all primary stakeholders is not L, then the roll-out of the model is feasible and other means such as institutional environment improvement, capacity funding and increased enforcement can be leveraged to facilitate roll-out.

3.2.1. Stakeholder framework Stakeholder analysis consists of three steps, identification of stakeholders, determination of stakeholders’ power and interest, and stakeholders’ impact analysis (Mitchell et al., 1997). The data in Fig. 2 presents evidence for injection molding machine upgrading projects for the primary stakeholders including Energy (Motor) users and ESCOs, who are buyers and sellers in EPC projects, respectively. Energy users as the most important participants of EPC projects play a dominant role in EPC project implementation. The implementation of EPC project can bring ESCOs the most of energysaving benefits so as to recover their investment and secure some profits. Energy users as the target of EPC project implementation can obtain part of the benefits, all energy-saving benefits and the ownership of energy-saving equipment of the project after expiry of the contract, as well as valuable experience in energy-efficient servo motor technologies. ESCOs and Energy users are the most important and direct participants in EPC projects. If either party is reluctant to adopt the EPC mode, then it is hard to rely on such model to roll out injection molding machine upgrading projects. In the EPC project implementation process, there are some other groups and sectors that have minor impacts on the project operation compared with key stakeholders, including the government, banks, motor manufacturers, and third party power saving auditing companies. The government which represents the public interest can make policies to promote energy-efficient technologies and phase out the obsolete technologies by imposing mandatory government regulations (e.g. energy audit, target accountability system, etc.) and providing with incentives such as tax rebates and financial subsidies. Nevertheless, these cannot ensure the success of EPC projects, especially for SMEs as they are numerous and spread out in terms of location and thus are difficult to manage from a governance standpoint. Financial institutions (banks, guarantee firms) are dependent on EPC projects carried out by ESCOs. After EPC projects are rolled out, financing is increasingly becoming a challenge for the industry. The relevant authority has taken some measures accordingly, but financing is still one of the bottlenecks that harness the roll-out of injection molding machine upgrading projects. Most ESCOs are evolved to energy-saving equipment suppliers, where they can not only provide energy services but also energy-saving equipment. For this reason, the paper does not classify motor manufacturers as a key stakeholder.

Table 2 Power and interest for stakeholders (using 3-point scale to measure benefit/task/control/ risk). Benefit vs. Task Benefit > Task Benefit=Task Benefit < Task

Interest H M L

Control vs. Risk Control > Risk Control=Risk Control < Risk

Power H M L

H=High, M=Medium, L=Low.

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3.3. Interview and EPC cases study

Table 4 Stakeholder framework results for EPC case studies.

The “Dongguan Ten Thousand Injection Molding Machine Upgrading Project” is an example of the specific upgrading issues include disperse firm-users including massive small firms, technology adoptions by these small firms, and market failure issues like lacking financing to these small firms. This paper argues which EPC model can solve the financing problem so the project can be completed by convincing the holdout stakeholders to upgrade using an EPC. Shared Savings Contracts (EPC1). In this model, ESCOs provide the bulk of project financing and they are compensated for their investment and services by their clients from a portion of the energy cost savings resulting from the project. The assets created by the project are owned by the ESCO until contract completion, when they are transferred to the clients, usually for no charge. Outsourcing Contracts (EPC2). In this model, ESCOs provide the bulk of the project financing and develop energy savings assets within the clients’ facilities, and operate these assets over an extended period for agreed compensations, which are linked in one way or another to the energy savings achieved. Guaranteed Energy Savings Contracts (EPC3). In these contracts, clients provide the bulk of project financing. Assets generated belong to the clients. In addition to the design and implementation services, ESCOs guarantee the energy savings levels from the project. To be considered proper energy performance contracting, failure to achieve the guaranteed energy savings amounts must have direct financing repercussions for the ESCOs under the terms of this EPC model. In these three models in energy savings industries, EPC1, EPC2 and EPC3 account for 32%, 8% and 57% of the EPC projects in China, respectively (2015 Reports on The development of China's Strategic Emerging Industries). Table 3 illustrates the details of each option in the three models. We considered and invited a group of representatives based on their levels of authority, activity and involvement in their respective industries. Firstly, we interviewed key policy actors, including policy makers in MIIT, policy agencies in Dongguan and non-legislative actors such as service companies and exemplar firms. Then we deliberately chose 30 SMEs as our samples, taking into account the firm employment size (ranging from 40+ to 800+), sectors (like electrical equipment, recreation products, etc.) and upgrading status (upgraded, on-trial, undecided). Six round interviews (including 30 in-depth interviews, 6 focus group, and a survey) were conducted from July 2013 to May 2015. The interviewees and focus group participants included policy makers and policy agencies (21 interviewees, including MIIT officers), the managers of manufacturing firms (29 firms), the managers of energy service company (5 firms), financial institutions (2 banks and 2 guarantee firms), third party power saving audits (3 institutions) and motor manufacturers (3 factories). Each interview lasted between one to two hours. Most interviewees would have been interviewed twice or more at follow-up.

I=B/T P=C/R

EPC1

EPC2

EPC3

Energy

Benefit Task Interest

H L H

M L M

H M M

Users

Control Risk Power W

H L H H

L H L L

H M M H

ESCOs

Benefit Task Interest Control Risk Power W

M H L M H L L

L H L M M L L

H M M H M H H

Government

Benefit Task Interest Control Risk Power W

H L H H L H H

H M M H L H H

H M M H L H H

Financial institutions

Benefit Task Interest Control Risk Power W

H L H H L H H

H L H H L H H

H L H H L H H

Motor manufacturer

Benefit Task Interest Control Risk Power W

H M M H M M M

H M M H M M M

H M M H M M M

Third-party power saving audits

Benefit Task Interest Control Risk Power W

L M L H L H M

L M L H L H M

L M L H L H M

H=High, M=Medium, L=Low.

4. Results and discussion 4.1. Results and empirical analysis 4.1.1. Results from stakeholder analysis model in EPC The values of Benefit in relation to Task and Control in relation to

Table 3 Comparison of contract energy savings contracts. EPC Model

EPC1

EPC2

EPC3

Investor Energy-saving benefit sharing way Risk for Energy Users Risk for ESCOs Suitable for energy-user

ESCOs A proportional amount of the energy saving benefits Low High Focus on investment

ESCOs Agreed upon in the contract costs, Rent

Energy Users Agreed service fee in advance, Installment

High High Pay attention to pay the cost of reducing energy consumption

Low Low Pay attention to pay the cost of reducing energy consumption

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outsourcing contracts model (EPC2), making it hard to rely on EPC2 for roll-out of an efficient injection-modeling motor upgrading. SMEs view their low control of essential equipment under this EPC model as risky given uncertainty about how they would be billed. Since the electric motor(s) would belong to the ESCO and the energy cost would be determined by the measurements of an unfamiliar third party, there is concern about opportunistic behavior. On the other hand, ESCOs sees a low benefit in using this model because the revenue is very small, in comparison to the risk and costs of this model, because the costs for renting electrical motors is lower than the cost of the equipment.

Table 5 Results of comparison among three kinds of EPC modes by stakeholder's analysis. Stakeholder Mode

EPC1

EPC2

EPC3

Energy users’level of willingness ESCOs’level of willingness Government's level of willingness Financial institutions’ level of willingness Motor manufacturer's level of willingness Third-party power saving audits’ level of willingness Available extending model or not

H L H H M M ×

L L H H M M ×

H H H H M M √

4.1.2.3. Case3 (EPC3). Energy-users, ESCOs, the government and financial institutions show a high interest in this model, whereas motor manufacturers, third parties and energy saving auditing companies take a neutral stance. In this case, it is feasible to roll out the primary model for realizing the energy efficiency goals of the Government. The basic position and attitude for each of the six stakeholders for EPC3 projects are as follows: 1. Energy Users: there is high benefit. It is possible to obtain high energy-saving benefits with low energy-saving costs. Energy users can rely on future energy-saving benefits for plant and equipment upgrading to further reduce the operating costs. High energy-saving benefits are obtained with energy savings of 40–80%. 2. ESCOs: there is low risk. ESCOs are only willing to provide a small portion of the initial costs and prefers to recoup their costs and fees through a short return period to minimize their exposure. 3. Government: there is high benefit. The government regulates the market order and relies on energy technology innovation to obtain financial, reputation and taxation benefits. It is green and lowcarbon sustainable development. 4. Financial institutions: there is high control. The bank can control loans, guarantee performance, credit rating and guarantee ESCOs' access to money transfers. 5. Motor manufacturers: for a medium risk, there are policy risks about fast motor upgrading and short policy duration. 6. Third-party power saving audits: for a medium task, it is the thirdparty monitoring of energy savings and inspection & acceptance of EPC projects; bridging businesses and governments by promoting energy saving policies. For control, it is the report of electrical saving inspection by the third party.

Fig. 4. 3D Power-interest- EPC matrices with stakeholders’ positions for the adoption of energy-saving technologies in the three EPC models studies in Dongguan ten thousand injection molding machine upgrading project.

Risk (Table 4) for six different stakeholders among the three EPC models were rated by a panel of relevant experts who participated in the investigation. The values were high (H), medium (M) and low (L). The results for the willingness of each stakeholder (Table 5) can be figured out from Table 2. Berardi (2013) analyzed stakeholders’ influence on the adoption of energy-saving technologies in Italian homes through 3D Grouping of Power, Interest and Time. This paper analyzed which EPC models were adopted by primary stakeholders through 3D grouping of Power, Interest and EPC models, as seen in Fig. 4.

4.1.3. Results from internal stakeholders’ trade-offs in EPC From comparison of the three types of EPC modes by stakeholder's analysis, energy users, ESCOs, the government and financial institutions (Bank) can be classified as internal stakeholders and others (motor manufactures and third-party power saving audits) can be classified as external stakeholders, depending on whether they are members or not of the project coalition. Through stakeholder's analysis scores and Grouping of Power, Interest and the three EPC Models, we can see that the third party and motors manufactures are not important to have power and interests, so we classified them as outside stakeholders. Others are internal stakeholders include energy users, ESCOs, bank and the government. In the EPC3 Model, the internal stakeholders can get trade-offs. Energy-user financing usually involves financing with internal funds of the user that's backed by an energy savings guarantee provided by the ESCO. The energy-user financing may also be associated with borrowing as the direct borrower and has to provide a guarantee (collateral) to the finance institution to secure the loan. As noted in Fig. 5, the energy-user takes a loan from a finance

4.1.2. Results from Interviews 4.1.2.1. Case1 (EPC1). As one of the primary stakeholders, ESCOs have a low interest in using the shared savings contracts model, so it would be hard to utilize EPC1 as the primary mechanism for advancing efficient injection-modeling motor upgrading. ESCOs noted that this option poses a high risk for them as initial costs will be borne, in full, by ESCOs during the early stage of any efficiency project. In addition, SME motor users have limited or poor credit, which posing a serious risk for ESCOs to recoup their investment and make any profit from such ventures. Products manufactured after upgrading are not stable, which is attributed to the poor quality of efficient motors, leading to controversy.

4.1.2.2. Case2 (EPC2). Both principal stakeholders, Energy users and ESCOs, have low willingness and strong concerns towards the 65

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means for implementation. The results from the interviews and focus groups only indicate the general positions of the surveyed stakeholders. These results don’t mean that EPC3 would be successful as it exists at present – in terms of how its designed and implemented in the field – and may require more precise adjustments to address stakeholder concerns. The analysis of the hypothetical decision-making – based on benefit, risk, control and task – allows us to find a path of least resistance, which should be further improved to optimize the acceptance of using EPC3. None of the positions put forward by the surveyed participants indicate much strong reluctance in using this model. Therefore, it may be prudent to verify the potential of EPC3 by doing more surveys in order to further validate the option of advancing EPC3 as the main mechanism for realizing green upgrades for China's industrial hubs. There are, however, some serious limitations to this study as more precise details on how the concerns can be resolved for each particular stakeholder. This requires further study of the risks and other barrier to the use of EPCs to more fully understand how each factor affects the positive change in the use rate for each model. The actual interviews were designed to give candid answers from all involved stakeholders, though some personal bias and caution may have been exercised during the course of the field study. In addition, the approaches to how risks might be mitigated should be explored to understand how competing risks and interests might be considered in China based on continued research in the field and further exploration of studies on risk reduction and stakeholder cooperation.

Fig. 5. EPC3 finance agreement with energy user and other stakeholders.

institution, which is backed by an energy savings guarantee agreement by the ESCO. The purpose of the savings guarantee is to demonstrate to the bank that the project for which the customer borrows will generate a stable positive cash flow, which guarantees savings to cover the debt repayment. Thus the energy savings guarantee reduces the risk perception of the bank, which has implications for the interest rates where financing is acquired. For ESCOs, they get payment from the energy users according to the letter of guarantee. For the government, it gives the real subsidy to the first key stakeholder, i.e., the energy user. Through financial guarantee funding, it guides the bank financing to balance the primary stakeholders’ interests. For bank, it enlarges the customers and increase deposits. Meanwhile, it can help energy users with financial difficulties get desired loan as well as help solve the payment collection issues for ESCOs. Moreover, the bank can get the interest subsidy from the government. Eventually, the government promotes the injection molding machine energy-saving green technology through subsides and financial support. By September 30, 2015, Dongguan injection molding server's energy reconstructed (or updated and replaced) has been completed for 8727 standard sets. Now the ten thousand injection-modeling machine upgrading demonstration project (from 2013 to 2017) has accomplished more than 87.27% of the target number of sets to be replaced for the Project.

5. Conclusions The stakeholders’ analysis on the barriers associated with each model allows the Chinese Government an opportunity to improve the design and implementations of the ESUEM Project with a more rational and effective approach. From this study, we have three findings: (i) For small sized energy saving project in SMEs, the users tend to have low risks in EPC1 and EPC3. (ii) Both principal stakeholders, Energy users and ESCOs, have big financial risks and strong concerns with EPC2. This is a particular case for ESCOs, where they need massive labor, material and financial resources at the early stage of upgrading. In addition, they would encounter a long period of returned money at the latter stage, which may even face illegal contract, repudiate a debt or bad loans. Therefore, ESCOs have big financial risks and more concerns with EPC1 and EPC2. (iii) Energyusers and ESCOs have high interest and low risks in EPC3. It is feasible to roll out the EPC3 primary model for realizing the energy efficiency goals of the government. Through the stakeholder analysis above, this study finds that guaranteed energy savings (EPC3) model is the favorite model in implementation, given the gained benefits outweigh committed resources, and the control capability overrides possible risks among the two core stakeholders. The government have made policies to promote EPC3 as a proven mode for the injection-modeling machine upgrading project by guiding banks to play a role as third party guarantee agencies. In November 2014, Dongguan city introduced the financial credit guarantee model, when the government arranged 20 million as risk compensatory special funds of EPC according to the financial institutions execution of cooperation plan and completion as well as the time deposited by installment in accounts of financial institutions. Pilot financial institutions credit amplified more than 10 times the size of risk compensation fund pool, providing financial support for the electric motor and injection-modeling machine upgrading demonstration project reconstructed of EPC model. In summary, we built a stakeholder analysis model and studied qualitatively on the benefits, tasks, controls, and risks of six stakeholders in the Dongguan injection-modeling machine upgrading demonstration project reconstructed with three different EPC modes, we graded the four dimension by experts’ scoring with predefined logic rules

4.2. Discussion This case study is unique, because of the number of machines being targeted, the high degree of technology integration undertaken, the diffusion method, and market-based solution being pushed by the government. Due to the lack of strategic resources, limited financing and mature energy market. SMEs tend to have a short-term view of upgrading projects. For the specialty of the stakeholders in China, SMEs have low credit for securing loans and low ability to resist risks. The ESCOs have high risk in terms of cost premium. The Chinese government has a high degree of power for supporting and regulating all industries, but lack the efficiency and efficacy to carry out this project through traditional means. China's banks have a high degree of power, including limited claims, trust contracts and joint credit recovery. Based on the results, the Chinese Government has a better picture of how the stakeholders view the risks, tasks, control and benefits of each EPC model. The findings allow us to see the outstanding priorities of each stakeholder under all EPC models. EPC3 seems to be the model that should undergo development as most key stakeholders can agree as the acceptable mechanism for promoting EEMs like the ESUEM Project as the involved risks and benefits are aligned with the calculation of the managers. Furthermore, the key stakeholders have been identified as the energy-users and ESCOs as their role in any EPC project is essential. The other stakeholders are largely dependent on the two key stakeholders as their role remains supportive. At the same time, there is a necessity to further investigate the terms under which most stakeholders would agree to use EPC3 as the 66

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and got the value of power and interest as well as the willingness of all stakeholder for the three EPC models. By examining the degree to which the barriers affect each of the EPC models, the amount of work needed to make each a viable mechanism for promoting the green manufacturing Project pushed by the Government is now more self-evident. From this study, we have two policy implications: (i) the government may promote the optimal EPC model that realizes the most compromises between the priorities of key stakeholders, in order to mobilize non-legislative actors such as ESCOs to play significance roles in promoting these green technologies; (ii) the government should make a more concerted effort in retooling the other two alternative EPC models to stimulate interest among financial institutions to prioritize funding this type of projects. The findings from this study offer an exploitative, though not quantitatively validated answer as to which EPC model should be singled out for promoting EEMs on a national scale. From a theoretical perspective, this paper makes new contributions to three areas. First, the use of stakeholder theory is expanded into new ground by using it to improve the efficiency and environmental impact of manufacturing, which hasn’t been done before as most similar papers relate to building energy efficiency. Second, EPC as tool for realizing green manufacturing in China is explored in depth here. Literature on this subject is sparse and mainly focused on residential or office building upgrades. Lastly, the trade-offs of each EPC model in China is assessed to better understand competing perceptions on the value and efficacy of using this mechanism to realize energy policy from the local level. In sum, this paper makes distinct advances in three key areas of public policy that will have an impact on energy efficiency upgrading. This paper not only presented a stakeholder analysis for SMEs to choose energy saving strategy, but also collected stakeholder views for the government to formulate energy saving policy tools. Last but not least, this research provides an analysis tool for the evaluation of energy saving policies as to the trade-offs balance among different stakeholders. Further study of EET is required for promoting this line of tech for SMEs across China. The information in this study provides a foundation for more accurate understanding of the perceptions of the key stakeholders and others. Continued research in these directions allows us to substantiate our findings in this study through further testing and exploration of this complex policy challenge. Refining the existing implementation methods will allow China to realize the goal of a market driven policy mechanism for the ESUEM Project and others like it in the future. Acknowledgements This research is supported by the National Natural Science Foundation of China (Grant Numbers: 91646102, L16240452, L1524015, 71203117), and the MOE (Ministry of Education in China) Project of Humanities and Social Sciences (Grant Number: 16JDGC011). This research is also supported in part by the Volvo Group in a research project of the Research Center for Green Economy and Sustainable Development, Tsinghua University (20153000181). References Albino, V., Beradardi, U., 2012. Green buildings and organizational changes in Italian case studies. Bus. Strategy Environ. 21 (6), 387–400. Albino, V., Balice, A., Dangelico, R.M., 2009. Environmental strategies and green product development: the behaviors of sustainability-driven companies. Bus. Strategy Environ. 18 (2), 83–96. Anderson, S., Newell, R.G., 2004. Information programs for technology adoption: the case of energy-efficiency audits. Resour. Energy Econ. 26 (1), 27–50. Basar, Ezgi, 2013. Capacity Building for Energy Performance Contracting in European Union (Thesis). 〈http://www.diva-portal.org/smash/get/diva2:650653/ FULLTEXT02.pdf〉. Berardi, Umberto, 2013. Stakeholders' influence on the adoption of energy-saving technologies in Italian homes. Energy Policy 60, 520–530. Bon-Gang, Hwang, See, Tan Jac, 2012. Green building project management: obstacles and solutions for sustainable development, sustainable development. Sust. Dev. 20,

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