Building energy consumption has become an important issue in China. As major energy consumers, commercial buildings have become the target for energy efficiency retrofit. Energy Performance Contract (EPC) is a new mechanism in China which offers a series of retrofit strategies and financial investments by energy service companies (ESCOs). This mechanism, however, has not been widely used by the current building energy efficiency market although the Chinese government has published a compulsory policy and completed a second EPC demonstration program. In order to establish the reasons why the market has not reacted expectedly, this research aims to examine the nature and characteristic of the EPC market, challenges/barriers, and the development of an incentive mechanism to encourage the use of EPC for the commercial building sector in China. The commercial building sector is selected as the subject of the research as the potential for energy savings and property right structure.

The research is led by three main research questions: 1) What is the current state of the EPC market in the Chinese building sector.2) What are the factors limiting the uptake of the EPC of CBEER in China.3) How can the Transaction Cost Theory be adapted to incentivise the uptake of EPC in such an imperfect market. The objectivist epistemology and positivist theoretical perspective are chosen as philosophical assumptions. Quantitative paradigm is chosen as the research approach considering this research is going to test the imperfect market theorem and the deductive research inquiry process. Multiple research methods including qualitative and quantitative practices are applied to the collection of data.Firstly, the research starts with reviewing literature associated with the EPC market to develop an analytical framework for understanding the current situation and limitations of the EPC market in commercial buildings. Secondly, the research involves a questionnaire survey and interviews to test the theory of imperfect market. An online questionnaire survey is conducted to identify challenges/barriers and semi-structured interviews are used to examine reasons contributing to challenges/barriers. Thirdly, the transaction cost theory is used to develop a theoretical framework as a mechanism for incentivising the EPC market in China. Case studies selected from successful pilot EPC projects in China are developed to examine the robustness of the theoretical framework.

The quantitative analyses were stemming from ANOVA test and factor analysis. The ANOVA test showed there’s a significant difference towards the effects and difficulties of using EPC between the building owners and ESCOs. Furthermore, the findings from factor analysis identified nine factors impacting the uptake of EPC: unclear EPC costs and benefits, the complicity of commercial building energy efficiency retrofits, incomplete EPC contract, uncertain energy savings, high criteria for ESCOs, policies and regulations, financial support, service quality of ESCOs, and the number of ESCOs.The interviews analysed through thematic analysis showed the reasons contributing to these factors. The incomplete information is the major trigger of the market failure of EPC which will also lead to market power. Meanwhile, the externalities of building energy consumption couldn’t be internalised only based on a market mechanism (like EPC) and need more government intervention to deal with. Subsidies,taxes, and regulations are designed to decrease the transaction costs caused by the incomplete information and externalities to play the role of the EPC market. 

The outcome of this research looks to formalise theories of the characteristics of the imperfect EPC market and adapts transaction cost theory as an incentive policy-design tool providing fairness between stakeholders. It provides policymakers with a framework for generating market incentives in the EPC market and offers information to EPC stakeholders on the current market situation and potentially make EPC more popular for building energy efficiency in China.