Monday 11 March 2013

The term ESCo, or Energy Service Company is widely used to describe companies that develop energy efficiency projects in clients facilities and then either invest themselves, less and less common by the way as balance sheets are constrained, or bring a third party source of finance to fund the projects. In a classic Energy Performance Contract, EPC, the ESCo provides a guarantee that savings will exceed a certain level and the savings should exceed the repayments such that the client is cash flow positive from day one.


The ESCO EPC concept grew out of work in the US public sector, and even today 75 to 80 % of the total market in the US is in the MUSH, Municipal, Universities, Schools and Hospitals market. The US government did a great job of exporting the idea around the world with USAID and other agencies promoting it widely. The concept was enthusiastically picked up throughout the world but the truth is it has never taken off to the extent that people expected. Why?


Fundamentally the US only exported half of the idea, the contract form. They didn’t export the low cost municipal bond market or central budgets that most users of ESCo EPCs in the USA take advantage of. Secondly a major problem is that the real incentive for the ESCo is not the shared savings they use to promote the idea, rather the real incentive is on the ESCo to maximise capex. They make their margin on capex not the savings. Interestingly there seems to be growing dissatisfaction with the EPC model even in the US public sector. When ESCOs have tried to expand into the private sector they have met resistance due to the complexities of contracts, the split incentive, lack of transparency and perceived excessive margins.


The ESCo term is widely used but there are many different understandings of the word. Is it a company that developers EPC contracts, or does it deliver energy services in the form of heat and power, or does it deliver warmth, light and motive power directly? Even at the recent ESCO Europe conference there were many different definitions.


It may sound radical but the time is right to ditch the term ESCo altogether and just talk about project developers, project delivery companies, financiers and underwriters. Project developers, just like in renewable or conventional energy can be a variety of types of organisations from small, independent entrepreneurial companies, to large multi national energy companies or equipment vendors. They can also be, and increasingly are, community groups., This is no different to the renewable industry. Being brave enough to ditch the term ESCo and adopting the standard language of energy projects would be a sign of maturity of the energy efficiency industry and be a useful step towards scaling the energy efficiency markets.

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Dr Steven Fawkes

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