Abstract: Nowadays, energy service based on energy performance contracting (EPC) is developing fast as an emerging industry, which has made considerable benefits from energy conservation and reflected the huge market demand and development potential. However, most of China's energy service companies (ESCO) are small and medium-sized self-financing companies so that it is difficult for them to obtain bank loans due to lack of guarantee and credit history, and a long project cycle. To deal with this problem, from the view of relational contracts, the long-term relationship between small and medium-sized ESCOs and banks is examined in this paper. The incentive mechanism is designed to solve double moral hazard problem by sharing the potential gains of loan demand compensation. Relational contract programming model is established to determine the optimal level of participation and effort in cooperation between ESCOs and banks. Then, the incentive effect of the discount rate is further analyzed. The model analysis shows that "Self-enforcing" restraint is the key to the implementation of relational contract. With the discount rate increasing, the optimal level of participation and effort in cooperation between ESCOs and banks can be achieved by the increasing incentive effect of the relational contract. Moreover, both bank's earnings and system revenue under the relational contract are always not less than that under the formal contract. The conclusions demonstrate the feasibility of establishing long-term relational contract between banks and small and medium-sized ESCOs. The relational contract is suitable for small and medium-sized ESCOs and banks to establish long-term strategic partnership and achieve "win-win" situation in the long run.

Key words: relational contract, energy service, incentive mechanism, small and medium-sized enterprises, double moral hazard