In November 2010, China’s National Development and Reform Commission issued a guidance document that requires grid companies in China to carry out demand-side management (DSM) activities to achieve specified targets for reductions in electricity sales (GWh) and peak demand (MW). Chinese government support for energy service companies (ESCOs) and financial incentives for energy performance contracting have encouraged the grid companies to establish ESCOs as their main mechanism for acquiring energy and demand savings. This paper provides an explanation of various ESCO business models, describes the development of the energy services industry in China to date, and outlines international experience which shows that the ESCO business model does not necessarily work well in all situations. Recommendations for China include enabling grid companies to directly fund end-use energy efficiency projects and to engage third-party ESCOs, rather than requiring grid company ESCOs to compete with third-party ESCOs across all market segments. Implementing these recommendations will assist the grid companies to change their business models from supplying electricity to providing comprehensive energy services to their customers, thereby reducing costs and increasing economic efficiency.