Int. J. Engineering Management and Economics, Vol. 3, No. 4, 2012 305 Copyright © 2012 Inderscience Enterprises Ltd. A real options-based approach in guaranteed energy savings contracting Nicola Costantino and Giovanni Mummolo Department of Mechanical and Management Engineering, Politecnico di Bari, Viale Japigia 182, 70126, Bari, Italy E-mail: costantino@poliba.it E-mail: mummolo@poliba.it Claudio Pascarelli Department of Engineering for Innovation, University of Salento, Via per Monteroni – Ecotekne 73100 Lecce – Italy E-mail: claudio.pascarelli@hotmail.it Roberta Pellegrino* Department of Mechanical and Management Engineering, Politecnico di Bari, Viale Japigia 182, 70126, Bari, Italy Fax: +39-080-596-2788 E-mail: r.pellegrino@poliba.it *Corresponding author Luigi Ranieri Department of Engineering for Innovation, University of Salento, Via per Monteroni – Ecotekne 73100 Lecce – Italy E-mail: luigi.ranieri@unisalento.it Abstract: The full development of the energy services company (ESCO) industry is still inhibited by the difficulties during the negotiation between customers and ESCOs. Contractual arrangements are traditionally based on energy performance contracting (EPC). Improvements on EPC schemes are required in order to achieve the success of the negotiation. This work focuses on a particular type of EPC, named guaranteed savings (GS) contract, where a minimum energy saving is guaranteed to the customer by the ESCO. A model based on real options theory to share risks among contractual parties is proposed in order to estimate the fair value of main contractual parameters. A Monte Carlo simulation is adopted for evaluating the most critical factors influencing the overall risk sharing. A numerical example concerning a cogeneration plant of a paper mill is presented. A two level full factorial design of experiments (DOE) analysis is carried out in order to estimate single and compound effects of model parameters.