ESCO Definition

1. Energy Service Companies (ESCOs) in EuropePaolo Bertoldi European Commission Joint Research Center, Institute for EnergyBrussels 16 November 2010

2. ESCO Definition • ESCOs guarantee the energy savings (a performance guarantee can revolve around the actual flow of energy savings from a project, or can stipulate that the energy savings will be sufficient to repay monthly debt service costs). • The remunerationof ESCOs is directly tied to the energy savings achieved; • ESCOs can finance, or assist in arranging financing for the operation of an energy system by providing a savings guarantee. • Retains an on-going operational role in M&V over the financing term

3. Energy Performance Contracting • Under an energy performance contracting (EPC) arrangement, the ESCO develops, implements and finances (or arranges financing of) an energy efficiency project, and uses the stream of income from the cost savings, to repay the costs of the project, including the costs of the investment. • Essentially the ESCO will not recover all of its costs unless the project delivers all of the energy savings guaranteed.

4. Role of ESCOs A means to deliver infrastructure improvements to facilities that lack any of the following: • Energy engineering skills • Manpower or management time • Capital funding • Understanding of risk • Technology information

5. Typical ESCO Services • Energy audits, feasibility studies • Engineering design • Equipment procurement • Subcontractor management • Construction • Measurement and verification • Operation and maintenance • Project financing

6. / participation model Share of customer Contracting rate Energy Services - Third Party Financing

7. Third Party Financing ESCO Financing

8. Third Party Financing User Financing

9. Energy Contracting (Chauffage) • Provision of a set of energy services (mainly heating and cooling, street lighting, etc.) with quality criteria • Include the supply of fuel/electricity; • The client pays a fee that ‘guarantees’ the savings; • Strong incentive for ESCO to provide services in an efficient way; • Very often limits to the energy conversion efficiency;

10. ESCO in Europe • Most popular form of contract and service is still Energy Contracting or Chauffage with the supply of energy (dominant in France, Italy, Spain) and very popular in Germany and UK; • EPC is increasing market share in most EU-15 countries, in particular Germany, UK, Italy, France; • BOOT is common for CHP projects mainly in industry, very popular in Italy, UK, and other markets.

11. Main Sectors and Projects • Traditionally the public sector (buildings) is in primary focus (trustful, large systems, short payback time, open for outsourcing, often augmented by governmental or IFI aid); • Industrial sector is more important in certain countries (Italy, Finland, Ireland, Slovenia); • Residential buildings (multifamily buildings) sector is starting up in some countries (e.g. Germany, Estonia, France, Italy, Norway, Hungary), including some deep retrofits. • ”low hanging fruits” have been addressed (public lighting, HVAC, control systems renovation); • CHP (and DH in NMSs) still plays a major role; • Deep retrofits (e.g building insulation), not commonly done by ESCOs (done in combination with incentives!). ESCOs invest in the projects that offer appropriate profit at an acceptable level of risk.

12. Selected Important Barriers • Low awareness and lack of information about the ESCO concept; • Trust and skepticism on the clients’ side and little understanding of the opportunities ESCO projects and EPC offer; • High perceived risk of the ESCO investment, lack of expertise and experience on the financial market; • Non-supportive procurement rules; • Accounting problems (investment vs. operating costs); • Lack of ”off-balance sheet” solutions, need more commercial banks financing; • Public budgeting rules (”pressure to spend” and yearly budgets); • Reluctance to outsource; • Lack of M&V protocols + baseline data; • Administrative hurdles, high transaction costs (especially for saving guarantees); • Split incentives.

13. Facilitate the access to financing • Guarantee programmes that expand access to debt, thereby lowering the cost of financing and enabling more comprehensive EE project development; • Special purpose credit lines or revolving funds to mitigate liquidity constraints in the banking sector and/or provide long-term credits to finance institutions and subordinated debt instruments to close an existing equity gap. • Engaging DFIs – including public banks – as they are able to structure and competitively fund customized EE programs and financing initiatives; • Expanding partnerships between financing sources and utilities, city agencies, and ESCOs, which have longstanding relationships with customers, to rapidly identify EE opportunities.

14. Bankable ESCO project pipelines • Targeted communication about the profitability of EE investments; • Programmes and TA to build the capacities of market participants to develop and structure finance for projects, including training for business plan preparation across a range of possible project • MS specific packages to assist and guide project proponents through procedures related to e.g. energy performance contracting and public procurement in their national context. One communication channel for such an option can be the Covenant of Mayors. • Further supplementary policies, such as energy audit or monitoring of energy consumption of public entities and large private energy users with a possible commitment and/or incentive to implement economically feasible projects. • Improving the legal basis for the removal of specific barriers has been shown to affect the perceived risks of contractual arrangements.

15. Main Enabling Factors • Standard procedures and documents to help setting up an ESCO project; • Dissemination of information for potential clients, financial market; • Demonstrational sites/projects; • Pooling, reduction of transaction costs; • Policies: White Certificates system, and CRC; • Mandatory audits, voluntary agreement systems; • Quality labeling, certification; • Liberalization of the energy markets; • Energy price increase and/or higher consciousness (CC); • Access to finance or technical aid; • Guarantee schemes and ESCO assurance; • Improved regulatory background (e.g. green procurement).

16. Conclusions • ESCOs have been long considered an important instrument for delivering improved energy efficiency and establishing a market for energy savings; • However, ESCOs are not a “magic carpet” and there are other means to deliver energy efficiency solutions. • ESCOs are for-profit organizations, they should not be expected to tackle projects with too high level of risk and/or low expected profit. Public ESCO role. • In Europe, ESCO markets have mostly expanded, nevertheless, significant barriers still prevail (including financing) and they are far from exploiting the full potentials; • Active promotion (public bodies’ role!), legislative changes, financial and technical aid, IFIs or DFI, and increasing energy prices have been significant in developing the markets lately.

17. The JRC is monitoring the ESCO market: • Monitoring of the market development • Update reports • ESCO database • ESCO projects database • ESCO status report 2005 • Our first report gave all the basic info • about ESCOs, reviewed EU markets. • ESCO Update Report 2007 and 2010The reports review, update and extend the information in the previous publication. • The reports are available on the web: http://re.jrc.ec.europa.eu/energyefficiency/ESCO/index.htm

18. Thank you! More information about the new 2010 update and the European ESCO database can be obtained from Paolo Bertoldi Paolo.bertoldi@ec,europa.eu http://re.jrc.ec.europa.eu/energyefficiency