Methodological and Technological Issues in Technology Transfer

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5.6.3 Energy Service Companies

Energy service companies (ESCOs) are a specific form of technology intermediary that has gained widespread acceptance in developed and developing countries and countries in transition. Due to the previously discussed barriers to conventional financing, innovative financing schemes are needed. A financing scheme is a particular institutional arrangement that determines who pays what to whom and who bears the risks of the transaction(s). An energy service company "ESCO" addresses the financial capability, and other institutional market issues. An ESCO is a company that offers energy services to customers with performance guarantees. Typical performance contracting arrangements provide customers with feasible means of improving their competitiveness by reducing energy consumption costs. Additionally, companies' cash flows are enhanced, which add value to their financial worth.

Historically, ESCOs evolved in three broad categories as follows:

  • Technology based (technology suppliers).
  • Financial and legally based, with sub-contracting for the technical aspects of projects
  • Technically based such as engineering consultancy firms

Two common ESCO approaches in the United States are guaranteed savings and shared savings approaches. In the guaranteed savings structure, the end-user finances the project's initial investment costs from a third financier and, in turn, the ESCO guarantees that the energy savings will at least cover the debt services. Then the ESCO receives a share of the net savings after debt services and the operations and maintenance costs. However, if the savings fall short of the customer's financial obligations as stated in the performance contract the ESCO assumes the shortfall. In this respect, the ESCO assumes all the risks associated with the project's performance and the third party financier assumes the end-user's credit risk. In the second approach, the shared savings structure, the ESCO finances the project's initial investment costs, usually by borrowing from a third party financier. In turn, the ESCO is compensated by a higher share of the project savings. Given the current market situation in most of the developing countries, ESCOs are most likely to evolve in one of the following forms:

  • Local engineering consultancy firms expanding their portfolio of services to include energy efficiency as one of their activities.
  • Local engineering consultancy firms entering into joint ventures with foreign technical partners.
  • Local equipment suppliers expanding their services to include energy efficiency services.
  • Financial and legal firms creating specific companies for this purpose.

ESCOs have been successful in many developed countries, in particular the United States, United Kingdom, France, Germany, Australia and Brazil. However, the risks and the absence of clear success in developing countries are still issues. While there have been one or two successes in the former communist countries with specific injection of bilateral grant funds, the ESCO concept is still emerging. Nevertheless, energy service companies are operating or being formed in several developing countries and countries in transition, including Brazil, Mexico, China, Thailand, India, Russia, Hungary, and the Czech Republic (see Case Studies, Chapter 16). With assistance from USAID, two or three ESCOs are now operating in India, with efforts underway to increase the number of operations as well as to sensitise the consumers to take advantage of the services provided by the ESCOs. A pilot project by the World Bank and the Global Environment Facility is pioneering parastatal ESCOs in China by developing standard contractual models, providing financing and technical assistance to a group of pilot government-owned ESCOs (which may be privatised over time), and disseminating information about energy efficiency measures to industry (World Bank, 1998).

Energy service business associations have been recently formed in Egypt and Brazil. They represent groups of private companies offering energy efficiency products and services. Their members share the common goal of providing solutions that reduce energy costs, improve productivity, and enhance operating conditions of energy users. The associations will address current market barriers facing the energy service business community, and will provide a forum for energy efficiency development. Members of the associations include companies providing turn-key services as energy service companies (ESCOs), equipment vendors and service suppliers, support vendors such as legal firms and consultants, and other interested organisations.

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