Abstract
Competitive bidding is an important policy tool for governments to procure goods and services at the lowest possible cost in the market. Under the traditional public procurement system, however, it is difficult to purchase a highly customized object, such as energy efficiency services, because not only prices but also other nonmonetary aspects need to be taken into account. Multidimensional auctions are useful in such cases. The paper examines the cluster of characteristics of the winning bids of multidimensional auctions for public energy service company (ESCO) projects in Japan. As theory predicts, it is found that the competition effect is significant. Other institutional aspects—such as preannouncement of an energy savings target—are also found important to promote energy efficiency. The results also indicate that the public sector should absorb the regulatory and institutional risks that are related to ESCO projects.
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Notes
The weights differ substantially from project to project. For instance, a Czech ESCO project attached 6 % of weight to bid prices. In Germany, the weight of the monetary component is as high as 75 % (Singh et al. 2010).
Asker and Cantillon (2008) show that a single pseudotype of contractor is sufficient to characterize the equilibrium outcome in any multidimensional auction with more than one dimension of private information.
ESCO projects are normally implemented under performance-based contracts.
In our data, the total score data are available for only 38 ESCO projects. Many municipalities do not release individual scores for confidentiality reasons. But the agreed contract terms and general evaluation method are normally widely available.
Detailed criteria may not be exactly the same across auctions. Several criteria, of which the concepts are similar, are aggregated, such as the criteria of high annual revenue and high energy savings. They are different but almost the same from the evaluation perspective, because revenue is linearly dependent on how much energy is saved.
The weights and scoring data are sometimes not disclosed. The availability depends on the public information disclosure rules and guidelines of individual municipalities. The sample selection issue will be discussed in Sect. 6.
Endogenous entry auction theory suggests that given a fixed positive cost of participating in an auction, bidders will enter until their expected profits are driven to the entry cost. At this level no more firms can expect nonnegative profits from new entry.
The reliability and validity of instruments needs to be tested with actual data. See the following section.
In total 171 buildings and facilities are covered by these 100 ESCO projects, because some projects are composed of more than one building (i.e., packaged contracts).
A Heckman procedure is included in our robustness tests, to address the potential problem of the “response bias” that might arise because of the missing data.
Other types of facilities, such as schools, museums and pools, are used as a baseline. The potential effects of these facilities are found to be insignificant, thus these are altogether used as a baseline.
In our data there is an indication that some technologies, such as cogeneration systems, can save more energy than others. However, once the size of project is controlled, technology does not seem to matter much to the bidding strategy. The hypothesis that the coefficients of the major four technologies used in the Japanese ESCO market (i.e., lighting, air condition, hot water boiler and power cogeneration system) are zero cannot be rejected. Thus, the following analysis excludes these technology variables.
The figure counts only leading companies if firms form a bidding coalition, which is a common business practice in the ESCO market.
The shared savings scheme may have other practical advantages. For instance, it may allow the release of governments from some budgetary and operational duties, because ESCO projects can fix energy spending for the long term. In addition, governments do not have to be concerned about daily operations of energy facilities. ESCOs are responsible for operating installed equipment and fixing any mechanical breakdowns.
In the United States, the two models have been used equally, because sub-national governments particularly prefer to finance through low-cost instruments, such as tax-exempt bonds.
Similarly, the City of Montreal is also using disclosure of reserve prices to improve outcomes in snow-removal auctions (Flambard et al. 2007). In French timber auctions, it is estimated that the winning bids would be twice as high if optimal reserve prices were set and announced, rather than using the random reservation prices (Li and Perrigne 2003). However, there seems to be a general hesitation in Japan, perhaps because there is a perceived risk of fostering collusion among bidders (e.g., Saijo et al. 1996; Ohashi 2009).
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Acknowledgments
I would like to express my special thanks to the Jyukankyo Research Institute (JYURI) and the Japan Association of Energy Service Companies (JAESCO) for their collaboration in data collection. I am grateful to the Ministry of Economy, Trade and Industry (METI) and many seminar participants at the Institute of Developing Economies-Japan External Trade Organization (IDE-JETRO) and the Japan International Cooperation Agency (JICA) for their comments and suggestions on an earlier version of this paper. I also acknowledge Matias Herrera Dappe, Antonio Estache, Marianne Fay, Jas Singh, Luis Tineo and Yabei Zhang for their various suggestions. I would like to thank two anonymous referees as well as Lawrence White for their insightful guidance toward publication.
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Iimi, A. Multidimensional Auctions for Public Energy Efficiency Projects: Evidence from Japanese Esco Market. Rev Ind Organ 49, 491–514 (2016). https://doi.org/10.1007/s11151-016-9510-7
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DOI: https://doi.org/10.1007/s11151-016-9510-7