System and method for increasing yield from performance contracts

A method for increasing yield from a performance contract for a project, the method comprising:

• establishing performance contract requirements that define a not-to-exceed total installed cost (TIC), a minimum threshold internal rate of return (IRR), and an option period;
• establishing a total return for the project;
• distributing to bidders an invitation to bid for an option, wherein the invitation conveys the performance contract requirements and the total return;
• receiving bids for the option from the bidders, wherein the bids are based on the total return, on a probability of achieving the IRR for the TIC within the option period, and on an estimated intrinsic volatility, and wherein the estimated intrinsic volatility involves elements affected by changes that are controllable;
• and
• selecting the highest bid for the option.

A method for increasing yield from a performance contract for a project, the method comprising:

• receiving an invitation to bid for an option, wherein the invitation defines a not-to-exceed total installed cost (TIC), a minimum threshold internal rate of return (IRR), an option period, and a total return for the project;
• assessing a probability of achieving the IRR for the TIC within the option period;
• estimating an intrinsic volatility, wherein the intrinsic volatility involves elements affected by changes that are controllable;
• calculating a highest value of the option based on the total return, the probability, and the estimated intrinsic volatility;
• and
• submitting the highest value as a bid in response to the invitation.

A method for increasing yield from a performance contract for a project, the method comprising:

• establishing performance contract requirements, wherein the performance contract requirements define a not-to-exceed total installed cost (TIC), a minimum threshold internal rate of return (IRR), and an option period;
• establishing a total return for the project;
• distributing to bidders an invitation to bid for an option, wherein the invitation conveys the performance contract requirements and the total return;
• for each bidder,
• assessing a probability of achieving the IRR for the TIC within the option period,
• estimating an intrinsic volatility, wherein the intrinsic volatility involves elements affected by changes that are controllable,
• calculating a value of the option based on the total return, the probability, and the estimated intrinsic volatility, and
• submitting the value as a bid in response to the invitation;
• and
• selecting a bidder with the highest bid value.

A system for increasing yield from an energy performance contract for a project, the system comprising:

• an owner of the project;
• a third party financier that lends money to the owner to pay for the project;
• an insurance provider that provides the owner with volatility insurance that, during the performance contract, hedges against changes in future extrinsic volatility, wherein the future extrinsic volatility involves risks that are hedgeable;
• and
• an energy service company that pays the owner for an option, wherein the option=a total installed cost (TIC)×a gross margin×an option factor.