Bank lending to energy services companies: a real options valuation of third-party financing

The business model of the Energy Services Company can leverage on a larger scale diffusion of Distributed Generation as an alternative approach to supplying and managing energy resources (electricity and heat) versus the traditional centralized power framework. Market uncertainty of the start-up phase and managerial flexibility embedded in the Distributed Generation business may justify the integrated use of Real Options Analysis in firm valuation. Particularly, the decision about the legal contracting strategy and the technology can be treated as a real option problem so as to improve the valuation process. Additionally, the White Certificates mechanism may increase the financial attractiveness of energy efficiency projects as both a further opportunity for the ESCo’s management to strengthen the business plan and a key guaranty mechanism for banks willing to lend money.