Success factors of energy performance contracting (EPC) for sustainable building energy efficiency retrofit (BEER) of hotel buildings in China

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Energy Policy 39 (2011) 7389–7398

Contents lists available at SciVerse ScienceDirect

Energy Policy

0301-42

doi:10.1

n Corr

E-m

journal homepage: www.elsevier.com/locate/enpol

Success factors of energy performance contracting (EPC) for sustainablebuilding energy efficiency retrofit (BEER) of hotel buildings in China

Pengpeng Xu n, Edwin Hon-Wan Chan, Queena Kun Qian

Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong SAR, PR China

a r t i c l e i n f o

Article history:

Received 25 March 2011

Accepted 1 September 2011Available online 16 September 2011

Keywords:

Energy performance contracting (EPC)

Critical success factor (CSF)

Building energy efficiency retrofit

15/$ - see front matter & 2011 Elsevier Ltd. A

016/j.enpol.2011.09.001

esponding author. Tel.: þ852 6157946; fax:

ail address: [email protected] (P. Xu).

a b s t r a c t

Hotel building is a type of high-energy-consuming building and most existing hotel buildings need

energy efficiency improvement in China. Energy performance contracting (EPC) is considered a

win�win mechanism to organize building energy efficiency retrofit (BEER) project. However, EPC

mechanism has been introduced into China relatively recently and many EPCs have not been successful

in building energy efficiency retrofit projects. This research aims to develop a set of critical success

factors (CSFs) of EPC for sustainable energy efficiency retrofit (BEER) of hotel buildings in China. Semi-

structured interviews and a questionnaire survey with practitioners and other professionals were

conducted. The findings reveal the relative importance of the 21 number of identified success factors. In

order to explore the underlying relationship among the identified critical success factors (CSFs), factor

analysis method was adopted for further investigation, which leads to grouping the 21 identified CSFs

into six clusters. These are (1) project organization process, (2) EPC project financing for hotel retrofit,

(3) knowledge and innovation of EPC, sustainable development (SD), and M&V, (4) implementation of

sustainable development strategy, (5) contractual arrangement, and (6) external economic environ-

ment. Finally, several relevant policies were proposed to implement EPC successfully in sustainable

BEER in hotel buildings.

& 2011 Elsevier Ltd. All rights reserved.

1. Introduction

For the past decades, building energy consumption in Chinahas been increasing at more than 10% each year. In 2004, buildingenergy consumption alone constituted 20.7% national energyconsumption and this will be increased to 33% by 2010 (Jiangand Yang, 2006; Liang et al., 2007; Chan et al., 2009). Buildingenergy consumption in large-scale public buildings and commer-cial buildings, such as offices, hotels, retails, hospitals, andschools, is up to 70–300 kWh/m2, which is 3–8 times of commonpublic buildings and 5�15 times of that in urban residentialbuildings (THUBERC, 2007). Hotel building is one type of large-scale public/commercial building and its main energy consumingsystems are heating, ventilation and air conditioning (HVAC),lighting, hot water provision, electricity (lifts, etc.), and cooking.There is a lack of statistical data about detail energy consumption inChina and hotel energy consumption varies in from one building toanother. Varying occupancy rates throughout the year and variedpersonal preferences of guests for indoor environment will lead todifferent operating schedules of building services systems andtherefore different energy consumption situations in hotel buildings

ll rights reserved.

þ852 27645131.

(Deng and Burnett, 2000). Surveys in 2006 shows that hotels inBeijing have electric consumption of 100–200 kWh/(m2a) (Xue,2007), whilst the range is 55�144.3 kWh/(m2a) for Chongqing(Zhou et al., 2008). Nine starred hotels in Shanghai show an averageenergy consumption of 750 kWh/(m2a) (Xue, 2007). Hotel buildingsin general with high energy consumption have a large potential forenergy efficiency improvement.

Building Energy Efficiency Retrofit (BEER) provides excellentopportunities to reduce energy consumption in buildings as wellas encouraging implementations of other sustainability such asenvironment protection, rational resources use, and occupants’healthcare. Building Energy Efficiency Retrofit (BEER) is a processto reduce building operation energy use by certain approaches ofbuilding envelope and mechanical systems improvement, whilstkeeping building indoor environment and comfort (ShanghaiConstruction and Transportation Commission, 2008). BEER hassignificant benefits to society, owners and occupants of buildings.They include (i) improving environment by reduction of CO2

emission; (ii) saving money on utility bills and reducing main-tenance cost; (iii) creating jobs and career opportunities; and(iv) enhancing comfort, safety and productivity in workplace andcommunity spaces. The process also modernizes buildings andbrings operations in line with best practices, which will upgradestaff credentials with new knowledge. Sustainable developmentas a concept has been gaining increasing popularity across various

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P. Xu et al. / Energy Policy 39 (2011) 7389–73987390

sectors including the construction industry, since the BruntlandCommission Report in 1987 (WCED, 1987). As mentioned above,BEER can improve energy efficiency, indoor environment qualityto help existing buildings becoming green buildings and thuscontribute towards sustainability (Papadopoulos et al., 2002;Gorgolewski, 1995; Hong et al., 2006). Sustainability consists ofmany levels of analysis and it is necessary to integrate thesustainable approach into BEER project level. A real sustainableBEER project should consider economic vitality, environmentalquality, and social equity at project level. Although there arepotential energy-saving programs for existing hotel buildings,many of these energy efficiency projects are still not implemen-ted. The reasons for the hindrance vary and most energy effi-ciency projects stall due to one or a combination of the followingperceived barriers (Zobler and Hatcher, 2003): lack of (i) money,(ii) time or personnel to design and plan the projects because ofother higher priorities, (iii) internal expertise to implement theprojects, and (iv) policy support within the decision makingprocess of the corporation.

Energy performance contracting (EPC) has been introduced asa market mechanism to deliver energy efficiency projects. EPC is afinancing package provided by Energy Service Companies (ESCOs)that include energy savings guarantees and associated design andinstallation services for energy efficiency projects. EPC mechan-ism provides great advantages for building clients to conductbuilding energy efficiency retrofit projects. However, both build-ing clients and ESCO are profit-oriented. In BEER project, theirmain concern is about their profit from economic aspect and it isdifficult to achieve sustainability of these BEER projects. There arealso some problems leading to failure in implementing theseprojects with EPC mechanism. The problems include the broadrange of risks and uncertainties involved in long-term perfor-mance of contracting, the multiple participants involved, and thelack of EPC experience and expertise in China. Therefore, there isan urgent need to develop a workable and efficient procurementprotocol for improving the implementation of future EPC projectsof retrofitting existing buildings.

This research aims to develop a set of critical success factors(CSFs) of EPC projects for implementing Building Energy Effi-ciency Retrofit (BEER) in hotel buildings with emphasis onsustainability. In this research, a systematic approach is adoptedto combine several research exercises to analyze the CSFs. First,carry out critical literature review to understand EPC, successfactors for construction project and those factors relevant to BEER.Second, interviews are conducted with some EPC practitionersand professionals with experience in retrofit projects of hotelbuilding, through which a list of nominated factors is identified.Then, a questionnaire survey is carried out with experts withadequate experience of EPC to solicit opinions regarding each ofthe nominated factors. Based on the data gathered from thesurvey, a scaled rating is employed to establish the importanceranking of these factors. Then, factor analysis method is used toinvestigate the underlying relationship among the identified CSFsto find out the clusters that can better represent all the CSFs.

Fig. 1. Basic concept of energy performance contract.

2. Literature review

2.1. Energy performance contracting (EPC)

Energy performance contracting (EPC), also known as energyservice performance contracting, is a financing package fromEnergy Service Companies (ESCOs) that include energy savingsguarantees and associated design and installation services forenergy efficiency projects, which was emerged in North Americain the 1970s after the first oil crisis. Energy performance

contracting is a mechanism for procuring and implementingcapital improvements today that are self-funded over timethrough guaranteed operational savings. Performance contractinguses operational savings and avoided capital expenditures to fundrepayment of capital for building/infrastructure improvements.However, EPC principle is not only a financing tool but also amarket mechanism for conducting energy efficiency projects.Energy Performance Contract in the ESCO business may be broadlydefined as a contract between an ESCO and its client, involving anenergy efficiency investment in the client’s facilities, the perfor-mance of which is somehow guaranteed by the ESCO, withfinancial consequences for the ESCO (Taylor et al., 2007). Underan energy performance contract, the ESCO will provide financingfor a specified set of measures for energy efficiency retrofit, alongwith associated design, engineering, and installation services.Through such contracting, the owner or user can achieve high-energy efficient facilities and get potential savings with little oreven no front investment. The basic concept of energy perfor-mance contracting is shown in Fig. 1. The first bar represents thetotal utility costs of one facility before performance contract. Inthe second bar, after retrofitting the energy savings are shared byclient and ESCO during performance contract period. After perfor-mance contract, all the cost savings belong to client after theperformance contract period, which is shown in the third bar.

According to the concept of EPC mechanism, EPC mechanismhas lots of advantages for delivering energy efficiency projectcomparing with other traditional procurement systems. Energyperformance contracting offers a streamlined approach to makingfacility improvements because, with a single contract, clients cantackle multiple energy-efficient projects throughout the contract-ing period for their facilities, rather than doing one project at atime. ESCO can provide a full range of services and continueworking with clients once the projects are completed to ensurethat clients get optimal long-term energy performance. EPC as afinancing mechanism can provide financing, which transfers non-core staff from a client’s organization, and can free up a client’scapital, allowing a client to focus on its primary business function(Zhao, 2007). EPC also provides technology and expertise supports.Today ESCOs use industry-standard practices and proven energy-saving technologies and have excellent track records for satisfyingtheir customers. ESCOs can specialize in finding the best oppor-tunities for improving energy efficiency (Alliance to Save Energy,2006). The other advantage in an EPC is that ESCO companiesundertake almost all the investment risks, technical risks, marketrisks, and performance risks, leaving ‘‘zero risk’’ to customer.

EPC was introduced to China in 1996 in partnership with WorldBank and Global Environment Fund. The program aims to intro-duce EPC, improve energy efficiency, reduce greenhouse gas emis-sions, and to protect global environment in China (Shen, 2007). Theprogram is divided into two stages. During Stage I (from 1998 toJune 2003), three pilot energy service companies (ESCOs, alsocalled energy management companies in China—EMCs or EMCOs)were created. They are Beijing ESCO, Liaoning ESCO, and Shandong

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ESCO. They altogether have established client�provider relation-ships with 405 users, implemented 475 projects, and invested 1.33billion RMB. The projects have brought in both energy conservationand environmental benefits: capacity of an annual energy savingof 1.49 million tce plus capacity of an annual carbon dioxidereduction of 1.45 million ton-c. Stage II refers to the period of2003–2008. The objective of Stage II is to promote the adoption ofEPC energy saving mechanism, foster and develop energy conser-vation service industry, expand investment in energy efficiencyprojects, and reduce carbon dioxide emissions and other pollution.Stage II includes two subprojects: (1) A Loan Guarantee SpecialFund was established to help EMCos secure loans from commercialbanks to implement energy efficiency projects. (2) The EnergyManagement Company Association (EMCA) was created in April2004 to facilitate the operation of EPC and development of energyconservation industry in China. Investment in energy conservationprojects using energy performance contracting in 2007 up to overUSD 1 billion was four times the 2005 level. Meanwhile, EMCAmembers increased from 59 to 308 (including 185 ESCOs) in theend of 2007 and they implemented many energy conservationprojects in the nation’s industrial, construction, and transportationsectors (Taylor, 2009).

There are many ways to structure an EPC model. The twocommon EPC models are shared savings contract and guaranteedsavings contract (Han, et al. 2006; Bertoldi and Rezessi, 2005;Hui, 2002; Hansen 2003, Poole and Stoner 2003). The sharedsavings contract means that the ESCO designs, finances, andimplements the project, verifies energy savings, and shares anagreed percentage of the actual energy savings over a fixed periodwith the customer. This is also referred as the ‘‘Full-Service ESCO’’.In guaranteed savings contract, the ESCO designs and implementsthe project but does not finance it, although it may arrange for orfacilitate financing. The ESCO guarantees that the energy savingswill be sufficient to cover debt service payments (Bertoldi andRezessi, 2005; Hui, 2002; Hansen 2003). Besides the two mainmodels, various models of EPC process have been implemented

Fig. 2. EPC p

according to the needs of energy efficiency projects in differentareas. The general process of EPC mechanism may be similar,which is comprised of three phases: Phase I Selecting contractor;Phase II Making an EPC agreement; and Phase III ImplementingEPC agreement. The common process can further be divided intothe following seven steps: identify project, planning assessment,select a contractor, project design, arrange financing, negotiateEPC contract, construction and implementation, and measure-ment and verification of savings (see Fig. 2).

2.2. Success factors for EPC

There has been no systemic research to investigate the criticalsuccess factors (CSFs) of EPC in delivering sustainable BEERprojects. However, there are many lists of critical success factorsfor construction project introduced by various researchers in theprevious decades. Contractual arrangement, which defines thecontracting parties’ obligations and rights in various ways, hasbeen identified as one major factor for the success of constructionprojects (Chan and Yu, 2005; Chan and Suen, 2005). Chua et al.(1999) maintain that success of a construction project is deter-mined by four aspects, namely, project characteristics, contractualarrangements, project participants, and interactive processes.Belassi and Tukel (1996) classified the factors into 5 distinctgroups according to which element they relate to the projectmanager, the project team, the project itself, the organization, andthe external environment. Chan et al. (2004) identified 5 groupsof factors, namely, project-related factors, procurement-relatedfactors, project management factors, project participants-relatedfactors, and external factors. All the above classification methodshave some similarity. The critical success factors can be dividedinto 5 categories: external factors, project related factors, leader-ship and team factors, contracting factors, and project manage-ment factors. External environment can include the political,economic, socio-culture, and technological (PEST) context inwhich the project is executed. Factors like the weather, work

rocess.

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Table 1Selected success factors of EPC for sustainable BEER in hotel buildings.

Groups Factors

External factors Economic environment

Social environment

Policy support

Nature environment

Available technology

Project-self factors Hotel operation status

Project complexity

Building age

Site and location limitation

Tourism season and operating time limitation

Leadership and teamfactors

Clients’ awareness of to EPC

Organizing skill of leader

Team members’ technical background

Communication skill

Sustainabledevelopment factors

Clients’ and ESCOs’ awareness of to Sustainable

Development (SD) theory

Sustainable development strategy planning

Control mechanism of sustainable development

strategy

Financing factors Available financing market

Awareness of financing institute to EPC

Credit of ESCOs and clients

Project financial status

Contracting factors Savings share

Task and risk allocation

P. Xu et al. / Energy Policy 39 (2011) 7389–73987392

accidents or the government’s favorable or unfavorable legislationcan affect the project in all phases of a project (Dimitrios, 2009).Project type and size underline some factors that are important tosuccess. Capability of project manager and team members influ-ences project success. The contracting factors contain contracttype, contract award method, and tasks and risk allocation.Equitable risk allocation dictates both the content and the typeof the contract (Gordon, 1994; Diekmann and Girard, 1995; Chanand Yu, 2005). Project management factors are related to thecommunication, planning, monitoring and control, and projectorganization to facilitate effective coordination throughout theproject life (Chua et al., 1999).

Kellen (2003) and Flanagan (2005) argue that critical successfactors need to be identified in order to provide focus forperformance management and measurement. Haktanir andHarris (2005) support their views and have highlighted thediscernible link between critical success factors, industry contextand performance measurement. Critical success factors (CSFs)should be discussed in the context of performance measurement.This research focus on the sustainability of BEER projects andsustainable development strategy should be considered whenorganizing the EPC mechanism. Although, most categories ofcritical success factors for general construction projects may suitthe EPC projects, some specific success factors and their impor-tance under each category will be changed. For example, becausemore organizations are involved with an existing building andnew technologies are introduced, external environment andproject characteristics have greater influence to the success andperformance of energy efficiency projects. The most criticalelement for success in an EPC project is developing a mutuallybeneficial contract for both the owner and the ESCO. Humanrelated factors and organizational factors indeed have impact onthe project result. Besides these factors, some special issuesrequire more effort to consider the characteristics of EPC project.There is not much research studying the CSF for EPC or retrofitprojects. Sanvido and Riggs (1991) concluded 10 success factorsfor retrofit project management: project team characteristics,team member characteristics, contracting, information manage-ment, planning, communications, time management, space man-agement, management of working environment, and resources/support. Zhang et al. (2008) identified four categories of CSF forEPC in China: external factors, internal technology factors, inter-nal management factors, and internal financing factors. Thefinancing package and arrangement is a key task in EPC project,which alone can affect success of a project. Besides, partnershipbetween client and ESCO will be a fundamental ingredient forproject success as good partnership help create a situationconducive to the success of performance contracting (Yik andLee, 2004). Davies and Chan (2001) also indicate that partnershipis one of the key ingredients for performance contracting success.In China, statistical data about energy consumption is lacking andhotel energy consumption varies from one building to anotherand thus reference standards for measuring energy performancecould be problematic. After retrofit, measurement and verification(M&V) is concerned with quantifying the result of retrofit project.The purpose of M&V is to verify that the predicted and contrac-tually specified energy savings are being achieved and to accountfor any changes to the energy retrofit (Guide to EPC, 2000). Insummary, this part of review provides an outline for selectingnominated success factors of EPC for sustainable BEER projects.

Partnership factors Trust

Effective coordination

Project process factors Develop appropriate organization structure

Project objectives control mechanism

Accurate M&V

3. Research methodology

In order to achieve the objectives of this study, firstly,literature review and in-depth interview with industry experts

and academic researchers are carried out, which identifies thenominated success factors of EPC for sustainable BEER in hotelbuildings. Secondly, questionnaire survey is conducted to collectdata from various groups of experts for analyzing the significanceof the nominated success factors using the five-point Likert scale.Finally, CSFs are extracted according to the importance of eachfactor and are analyzed using SPSS to find out the underliningrelationships of the CSFs.

3.1. In-depth interview

In order to identify success factors of EPC for sustainable BEERin hotel buildings, a series of semi-structured interviews with17 professionals was conducted. Nine of the professionals wereengineering managers from hotels, five were project managers fromcontractor organizations, and three were academic researchers.As the interviewees were senior personnel who could providediverse and rich information on EPC, the interviews were purpose-fully not structured to encourage free flow of ideas. The interviewswere focused on 4 issues: (1) feature of good retrofit projects(projects process and output), (2) understanding sustainable devel-opment theory, (3) problems in EPC process, and (4) EPC projectsorganization. Questions were open-ended and interviewees wereencouraged to add any details that they considered relevant.The interviews were conducted between April and July 2010.Each interview lasted from 1 to 2 h and the interviews were taperecorded and fully transcribed. After using the Qualitative DataAnalysis (QDA) method to analyze the collected informationand previous literature review, 28 performance indicators wereidentified, which is presented in Table 1.

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P. Xu et al. / Energy Policy 39 (2011) 7389–7398 7393

3.2. Questionnaire survey

Further data were collected through questionnaire survey datafor analyzing the significance of the list of selected factors inTable 1. In responding to the questionnaire, respondents wereinvited to indicate the level of significance of each of the factors.The level of importance is measured on a 5-point Likert scale,where 5 denoted extremely important, 4 important, 3 neutral,2 unimportant, and 1 extremely unimportant. At the beginning ofthe questionnaire, basic information of respondents was alsocollected, such as their position, experience, type of enterprise,etc. The survey was conducted during Oct.-Nov. 2010. The ques-tionnaires were distributed via e-mail, MSN, and personal deliv-ery to increase the rate of response and sample representation.A total of 400 questionnaires were delivered to the respondents, 91valid copies were retrieved (22.75% return rate), among which 22respondents (24.2%) were from hotels (project owner), 39 (42.8%)from energy service companies (ESCOs) (project contractors),30 (33.0%) respondents were professionals from governments,academics, consultancies, etc.

4. Data analysis and findings

The data were analyzed using the Statistical Package for theSocial Sciences (SPSS). The reliability of the five-point scale usedin the survey was determined using Cronbach’s coefficient alpha,which measures the internal consistency among the factors. Thevalue of the test was 0.879, which was greater than 0.7, indicatingthat the five-point scale measurement was reliable. Two statis-tical analyses, namely, scale ranking and factor analysis, wereundertaken on the data. The procedure, findings, and relevantdiscussion of the analyses are detailed in the following sections.

4.1. Ranking of CSFs

The first analysis ranked the nominated factors according totheir mean values of the responses. If two or more factorshappened to have the same mean value, the one with the loweststandard deviation would be assigned the highest importanceranking among these factors. The factors with means exceeding or

Table 2Ranking of CSFs for EPC in sustainable BEER in hotel buildings.

Success factors Total (N¼91)

Mean SD R

CSF1 Accurate M&V 4.45 0.68

CSF2 Trust 4.32 0.75

CSF3 Control mechanism of sustainable development strategy 4.27 0.74

CSF4 Available technology 4.27 0.79

CSF5 Effective coordination 4.26 0.69

CSF6 Sustainable development strategy planning 4.25 0.70

CSF7 Savings share 4.25 0.76

CSF8 Project financial status 4.23 0.76

CSF9 Credit of ESCOs and clients 4.21 0.82

CSF10 Task and Risk allocation 4.20 0.71 1

CSF11 Project objectives control mechanism 4.19 0.68 1

CSF12 Hotel operation status 4.18 0.72 1

CSF13 Economic environment 4.18 0.82 1

CSF14 Clients’ and ESCOs’ awareness to SD theory 4.12 0.72 1

CSF15 Policy support 4.12 0.89 1

CSF16 Clients’ awareness of to EPC 4.09 0.91 1

CSF17 Organizing skill of leader 4.04 0.75 1

CSF18 Technical background of project team 4.03 0.70 1

CSF19 Appropriate organization structure 4.03 0.78 1

CSF20 Financing institutes’ awareness to EPC 4.03 0.82 2

CSF21 Availability of financing market 4.00 0.78 2

equal to 4 were recognized as CSFs based on the consensus of therespondents. Twenty-one factors were recognized as CSFs thatsignificantly influenced the success of EPC for sustainable BEER.Table 2 shows the ranking of these factors based on mean values.

From Table 2 it was found that the most important five factorsare accurate M&V, trust, control mechanism of sustainable devel-opment strategy, available technology, and effective coordination.Measurement and Verification (M&V) is to identify the projectresult and energy savings. The reliable and undisputable M&V isvery important for EPC projects success (Xu and Chan, 2010).During the interview, nearly all the interviewees mentioned thisissue and believed it is one of the most important factors. Trust isan important success factor for partnering (Cheng and Li, 2002;Chan et al., 2008). EPC mechanism is one type of partneringbetween clients and ESCOs in nature. Both experts from hotelsand ESCOs worried about their partners’ credit. There is still a lackof credit history for ESCOs and customers in China. This willimpact project financing from the third party institute. Lacking ofcredit and trust during project organization also causes projectfailure. As there is no reliable standard for M&V, it is also difficultto agree with each other about the result of energy saving, if theydo not trust each other (Xu and Chan, 2011). All the respondentsfrom the three categories gave a high priority to this factor. Thegoal of sustainable BEER is to achieve sustainability in projectlevel. Control mechanism of sustainable development strategy asa success factor was proposed by an expert in academics duringinterview. However, it was only given higher priorities by expertsfrom ESCOs and hotels than other professionals. Retrofit technol-ogies reflect new equipment, new energy resources, new energyaudit technologies, and new technologies of improvement mea-sures. Affordable and appropriate technologies in BEER decide thefeasibility of these projects and the energy savings potential,which is indeed a key factor for EPC project success. Effectivecoordination is another import success factor for achievingsustainable BEER under EPC mechanism. Coordination is a toolto eliminate gaps and duplication in service, which determines anappropriate division of responsibility and establishes a frameworkfor information sharing, policy agreements, program collabora-tion, and joint planning (IFRC, 2000). The study also found thatthe Top 5 success factors in ESCO category and hotel categorywere the same as the final general Top 5 success factors. Only the

ESCO (N¼39) Hotel (N¼22) Professionals (N¼30)

ank Mean SD Rank Mean SD Rank Mean SD Rank

1 4.37 0.86 1 4.67 0.52 1 4.09 0.79 9

2 4.24 0.90 2 4.41 0.78 3 4.36 0.64 2

3 4.20 0.88 3 4.36 0.73 5 4.09 0.79 9

4 4.20 0.93 4 4.44 0.67 2 4.14 0.69 7

5 4.19 0.86 5 4.38 0.66 4 4.41 0.58 1

6 4.18 0.86 6 4.33 0.65 6 4.05 0.64 11

7 4.18 0.90 7 4.26 0.81 11 4.09 0.73 8

8 4.16 0.89 8 4.33 0.76 7 3.91 0.79 16

9 4.14 0.93 9 4.26 0.87 12 4.00 0.85 14

0 4.12 0.86 10 4.26 0.67 10 3.86 0.87 18

1 4.11 0.83 11 4.28 0.68 9 4.23 0.73 4

2 4.10 0.86 12 4.31 0.65 8 3.95 0.82 15

3 4.10 0.94 13 4.21 0.94 13 4.05 0.71 12

4 4.05 0.86 14 4.13 0.76 18 4.18 0.72 5

5 4.05 0.99 15 4.13 0.91 19 3.77 0.85 19

6 4.02 1.00 16 4.15 0.77 16 3.91 0.95 17

7 3.98 0.88 17 4.10 0.67 20 4.27 0.75 3

8 3.96 0.84 19 4.15 0.70 15 4.00 0.74 13

9 3.97 0.89 18 4.15 0.66 14 4.18 0.89 6

0 3.96 0.93 20 4.08 0.69 21 3.73 0.75 20

1 3.93 0.90 21 4.13 0.69 17 3.59 0.72 21

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P. Xu et al. / Energy Policy 39 (2011) 7389–73987394

order of these factors is different. However, for other profes-sionals, apart from effective coordination and trust, those factorsincluding organizing skill of leader, project objectives controlmechanism, and policy support were given much higher prioritiesthan other factors. This is probably because people of the otherprofessionals from governments, academics, consultancies, etc.,paid more attention on the macro-factors, rather than micro-factors preferred by experts from industry.

4.2. Factor analysis

A long list of 21 CSFs is not very helpful to succinctly explainthe success of a project. Factor analysis was used to explore anddetect the underlying relationships among the identified CSFs.This statistical technique can recognize a relatively small numberof factors that can be used to represent relationships among setsof many interrelated variables. The appropriateness of the factoranalysis for the factor extraction needs to be tested in variousways. Factor analysis can be used either in hypothesis testing orin searching for constructs within a group of variables(Bartholomew and Knott, 1999). Factor analysis is a series ofmethods for finding clusters of related variables and hence anideal technique for reducing a large number of items into a moreeasily understood framework. It focuses on a data matrix pro-duced from the collection of a number of individual cases orrespondents. In this paper, factor analysis is applied to explore theunderlying constructs of the identified CSFs of EPC for sustainableBEER in hotel buildings.

In this research, 21 CSFs were subjected to factor analysisusing principal components analysis and varimax rotation. Prin-ciple components analysis is a common method in factor analysis,and involves the generation of linear combinations of variables inthe way of factor analysis so that they account for as many of thevariances present in the collected data as possible. Such ananalysis summarizes the variability in the observed data bymeans of a series of linear combination of ‘‘factors’’. Each factorcan, therefore, be viewed as a ‘‘super-variable’’ comprising aspecific combination of the actual variables examined in thesurvey. The advantage of this method over other factor analyticalapproaches is that the mathematical representation of the derivedlinear combinations avoids the need for the use of questionablecausal models (Johnson, 1998).

The first stage of the factor analysis is to determine thestrength of the relationship among the variables, namely, the 21identified CSFs, measured by the correlation coefficients of eachpairs of the variables. Table 3 gives the matrix of the correlationcoefficients among the CSFs. The correlation coefficients showthat the CSFs share common factors. The Bartlett test of sphericityis 807.409 and the associated significance level is 0.000, suggest-ing that the population correlation matrix is not an identitymatrix. The value of the Kaiser�Meyer�Olkin measure of sam-pling accuracy is 0.752, which is higher than 0.5 and hence isconsidered acceptable. The results of these tests show that thesample data is appropriate for factor analysis.

In order to avoid confusion between the extracted factors andthe CSFs, it is necessary to rename the extracted factor as a‘‘cluster’’ in the interpretation of the results of the analysis.Six clusters with eigenvalues greater than 1 are extracted. Table 4lists the cluster matrix after varimax rotation. Table 5 shows thefinal statistics of the principal component analysis, and the clustersextracted account for 66.618% of the variance.

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For further discussion, it is necessary to rename each of thegroupings. Based on an examination of the inherent relationships

Page 7

Table 4Cluster matrix after varimax rotation.

Component

1 2 3 4 5 6

CSF19 0.848

CSF5 0.771

CSF18 0.687

CSF17 0.652

CSF2 0.612

CSF11 0.599

CSF9 0.819

CSF12 0.766

CSF20 0.700

CSF8 0.612

CSF16 0.771

CSF1 0.770

CSF14 0.587

CSF6 0.775

CSF4 0.641

CSF3 0.548

CSF15 0.450

CSF7 0.755

CSF10 0.746

CSF13 0.862

CSF21 0.532 0.539

Table 5Final statistic of principle component analysis.

Clusters Eigenvalues Percentage

of variance

Cumulative percentage

of variance

1 3.794 18.065 18.065

2 2.788 13.276 31.341

3 2.117 10.082 41.424

4 2.071 9.860 51.283

5 1.789 8.520 59.804

6 1.431 6.814 66.618

Table 6Six clusters extracted based on factor analysis.

Clusters CSFs

Cluster1 project organization

process

� CSF19 appropriate organization structure

� CSF5 effective coordination

� CSF18 technical background of

project team

� CSF17 organizing skill of leader

� CSF2 trust

� CSF11 project objectives control

mechanism

Cluster2 EPC project financing

for hotel retrofit

� CSF9 credit of ESCOs and clients

� CSF12 hotel operation status

� CSF20 financing institutes’ awareness to

EPC

� CSF8 project financial status

Cluster3 knowledge and

innovation of EPC, SD, and M&V

� CSF16 clients’ awareness of to EPC

� CSF1 accurate M&V

� CSF14 clients’ and ESCOs’ awareness to

SD theory

Cluster4 implementation

of SD strategy

� CSF6 sustainable development strategy

planning

� CSF4 available technology

� CSF3 control mechanism of sustainable

development strategy

� CSF15 policy support

Cluster5 contracting � CSF7 savings share

� CSF10 task and risk allocation

Cluster6 external economic

environment

� CSF13 economic environment

� CSF21 availability of financing market

P. Xu et al. / Energy Policy 39 (2011) 7389–7398 7395

among the CSFs under each of the clusters, the six extractedclusters can be reasonably interpreted as follows: project organi-zation process, EPC project financing for hotel retrofit, knowledgeand innovation of EPC, SD, and M&V, implementation of SDstrategy, contracting, and external economic environment. Thesix clusters and their respective constituents are presented inTable 6. The associated explanations regarding these clusters inorder of importance are as follows.

4.2.2. Cluster 1: project organization

The six extracted CSFs significant for cluster 1 are all related tothe requirement of project organization including, appropriateorganization structure, effective coordination, team members’technical background, organizing skill of leader, trust, and projectobjectives control mechanism. These ingredients required for EPCproject success are similar to those required for most constructionprojects. The first step to organize a project is to establish a team.A team leader, here project manager, is the person who providesguidance, instruction, direction, leadership to a group of otherindividuals for the purpose of achieving a key result or group ofaligned results. Effective project managers are essential forproject success (Belassi and Tukel, 1996; Chua et al., 1999; Chanet al., 2004). The project manager is in charge of the project andhas sufficient authority, personality, and reputation to ensurethat everything that need to be done for the benefit of theproject are done (Chua et al., 1999). Besides, technical backgroundand skill of team members is stressed by researchers as one ofthe key reasons for project success (Belassi and Tukel, 1996;Chan et al., 2004).

EPC model is meant to create a win�win situation in energyefficiency projects. Collaboration and partnership are crucial forproject success organization, which need trust and effectivecoordination. Trust can be defined as the belief that a partycan reliably fulfill its obligations in an exchange relationship(Chen and Chen, 2007). One reason for partnering failure is poorcoordination of activities. In order to achieve project objective,effective coordination is necessary, which is also a requirement toproject manager’s organizing skill. In questionnaire survey, boththese two factors were considered in high level significance.

Good planning and objective control are obviously importantfor project organization. Chua et al. (1999) indicated ‘‘interactiveprocess’’ as one of the project success factors and refers toplanning, communication, monitoring and control, and projectorganization throughout the project life. Identifying project orga-nization structure and project objectives control mechanism isthe key mission of project organization, which directly affectsproject success performance.

4.2.3. Cluster 2: EPC project financing for hotel retrofit

The four CSFs in this cluster indicate financing package for EPCproject in hotel retrofit, including credit of ESCO and client, hoteloperation status, awareness of financing institute to EPC, andproject financial status. According to the concept of EPC mechan-ism, EPC is a financing mechanism. A number of financial instru-ments may be used in project financing, such as debt, equity,mezzanine finance, contractor and clients credit, or sureties.Revenue stream of the project is the basis of project finance; sofinancial status of project is important for project financing fromfinancing institute.

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P. Xu et al. / Energy Policy 39 (2011) 7389–73987396

The development of EPC industry is relatively late in China.Financing institutes are not familiar with this mechanism. Finan-cing for EPC project often is impeded because of the lack ofawareness for financing institute to EPC mechanism and lack ofcredit history of clients and ESCOs. Another CSF, hotel operationstatus, is a long term financial situation and operation status.Although project capital is recovered by energy and cost savingafter building retrofit, the long-term operation situation of thehotel itself is an important economic factor for success of theselong-term performance contracts. This factor is proposed byseveral interviewed experts, which is related to investment riskand project financing.

4.2.4. Cluster 3: knowledge and innovation of EPC, SD, and M&V

This cluster consists of the awareness of clients to EPC,accurate M&V, and awareness of clients and ESCOs to sustainabledevelopment theory. This cluster is named as knowledge andinnovation of EPC, SD, and M&V. Measurement and Verification(M&V) is one of the most important parts of EPC procedure, whichis to identify the project result and energy savings. The reliableand undisputable M&V is one of the very key success factors ofEPC, which was selected as the most important success factor inthe questionnaire survey.

In China, customers, suppliers, engineering companies, banks,finance sector, and industry are all lacking awareness and informa-tion of EPC (Wang, 2008; Fu, 1999; Yang et al., 2004; Xie, 2008).According to the collected information from interviews, mostleaders of hotel have willingness to reduce energy consumption.However, only few of them have heard about EPC. Lack of under-standing of EPC on the part of hotel managers impedes implement-ing EPC in hotel retrofit or contributes to their failure.

This research is about delivering sustainable BEER in hotelbuildings. Highlighting and promoting awareness of clients andESCOs to the concept of sustainability could make project asuccess with sustainable development principles in planning,designing, and building retrofit.

4.2.5. Cluster 4: implementation of SD strategy

This cluster contains sustainable development strategy planning,available technology, control mechanism of sustainable developmentstrategy, policy support. In order to achieve sustainable developmentof EPC projects, sustainable development principle should be takenas a strategy to organize these projects. Business strategy manage-ment consists of strategic planning and control mechanism ofstrategy plans. Strategy management for sustainable project is a toolto guarantee sustainable objectives of project through sustainabledevelopment strategic planning and control mechanism.

Retrofit technologies reflect new equipment, new energyresources, new energy audit technologies, and new technologies ofimprovement measures. Affordable and appropriate technologies inBEER decide the feasibility of these projects and the energy savingspotential. Lack of policy incentive is a main barrier confronted byenergy efficiency improvement of existing buildings (Zhong et al.,2009; Chan et al., 2009). Although some incentive policies to EPCprojects have been issued in some areas of China, none of them aresuitable for such small-scale project in hotel buildings. More policysupports should be promulgated to clear such institute barriers aslaw, tax, and financial institutes. These are requirements fordelivering sustainable BEER in hotel smoothly.

4.2.6. Cluster 5: contractual arrangement

The two extracted CSFs, savings share and task and riskallocation, in cluster 5 are related to contractual arrangement.These two CSFs are also selected into one category (see Table 1).The contractual arrangement is the key mission of energy

performance contracting. The identification and the allocation ofrisks are an important issue in contractual arrangement (Gordon,1994; Chan and Yu, 2005), which include both the type and thecontent of the contract. There are several contracting models forEPC mechanism as mentioned above, equitable risk allocation andsaving share is required for delivering sustainable and successfulprojects.

4.2.7. Cluster 6: external economic environment

Cluster 6 is an external economic environment, which containseconomic environment and available financing market. Strictlyspeaking, available financing market belongs to economic envir-onment. This factor is related to project financing. Table 4 lists themax loadings of each CSF on each cluster. According to the factoranalysis result, the loading of this factor on cluster 6 is 0.539, andon cluster 2 is 0.532. Hence, this factor could also be clusteredinto cluster 2. Belassi and Tukel (1996) suggested that somefactors are external to the organization but they still have animpact on project success or failure. Various researchers support‘‘economic environment’’ as a factor affecting project success(Belassi and Tukel, 1996; Chua et al., 1999; Chan et al., 2004;Zhang et al., 2008). Economic environment factors have theirimpact on the working and decisions of business or projects areknown as economic environment. It includes inflation, interestrates, economic policy, level of income, unemployment, energyprice, etc. Economic environment is very dynamic and complex innature. It keeps on changing from time to time.

5. Conclusions

The aim of this study is to develop a set of CSFs of energyperformance contracting (EPC) for sustainable Building EnergyEfficiency Retrofit (BEER) in hotel buildings in China. Firstly, 28nominated factors were selected based on literature review andexperts in-depth interviews. Then 21 Critical Success Factors(CSFs) were indentified based on questionnaire survey. Accordingto the data collected in a questionnaire survey, importance of theranking of CSFs was presented. It was found that the mostimportant five factors are accurate measurement and verification(M&V), trust, control mechanism of sustainable developmentstrategy, available technology, and effective coordination. Afterthat, using the factor analysis technique the 21 identified CSFs inthis study were grouped into six clusters. These are projectorganization process, EPC project financing for hotel retrofit,knowledge and innovation of EPC, sustainable development(SD), and M&V, implementation of SD strategy, contractualarrangement, and external economic environment.

The results indicate that EPC team, client, ESCO, and otherrelated departments who are directly or indirectly involved in thiswork all can significantly influence the success of delivering asustainable BEER project. In order to achieve EPC success forsustainable BEER projects in hotel building, joint efforts should bemade by all the involved participants in the following items:(1) Demonstration programs, education programs, and training.The implementation of EPC mechanism is not mature in energyefficiency projects, especially in building sector. Demonstrationprojects publicize successful examples of hotel building retrofit,which could provide refereed case of EPC project organization anddelivery. Education programs should be provided by government,ESCO association, and hotel association, which could provide theknowledge of these projects and improve the awareness amongparticipants. Training of energy efficiency technologies couldimprove the skill of team members. (2) Economic incentives.Some economic incentive or policy support, such as specialfunding support, tax preferences, and loan warrant, etc., could

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P. Xu et al. / Energy Policy 39 (2011) 7389–7398 7397

make the investment environment and project financial statusbetter. (3) Develop new technologies and energy efficiencyproducts. This item could make more advanced technologiesand products available and affordable. Above result has shownthat available technology has a high priority in the CSFs ranking.(4) Establish credit system. Most ESCOs and hotel clients arelacking credit history in building retrofit project (Xu and Chan,2011). A credit system of ESCOs and clients should be establishedthrough accreditation of qualification by a third party. Thiscould promote project contractors and clients to trust each other.(5) Standard contract procedure and M&V protocol. A standardcontract procedure could share risk, task, and profit reasonably. AM&V protocol agreed by clients and contractors could make M&Vmore accurate. These would reduce disputes and make coordina-tion easier during the project process.

It should be remembered that the CSFs in this study wereidentified within the context of hotel buildings in China. The CSFscannot therefore simply be applied to other types of building.However, the research approach and analytical framework couldbe applied to investigate other building types. Further researchcould be conducted to investigate the performance of sustainableBEER and the relationship between the identified CSFs andsustainable BEER performance.

Acknowledgment

This paper is supported by research fund provided by theHong Kong Polytechnic University. The authors are thankful to allthose who contribute in the interviews and questionnaire survey.

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