ESCO Market Barriers & Opportunities:

the IPEEC Experience Amit Bando, Executive Director, IPEEC

December 2012; Istanbul, Turkey

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What is IPEEC?1.

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IPEEC is an Autonomous Entity

4

IPEEC was established in 2009 at the G8 summit in Italy

Reports to G20 Summit, Clean Energy Ministerial & others

The IPEEC Secretariat is located in Paris, France

Members account for over 75% of world GDP and energy use.

Italy

Russia

Japan

Republic of KoreaChina

India

Australia

GermanyUnited

KingdomFrance

Canada

USA

Mexico

Brazil

EU

8 Task Groups Dedicated to EE

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Finance

Energy Manageme

nt

Policy Making/Capacity Building

Capacity Building, Training

EE Indicato

rs

Energy Performan

ce

Appliances

Compilation of National and International Initiatives

Energy Performance

Energy Management

Commercial/ Residential

Sector

Industrial Sector Utilities Sector

Energy Provider

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ESCOs & Performance Contracts

2.

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Types of EE Financing Mechanisms

Financing Mechanism Delivery Channels/Frameworks1. Subsidies & Grants Grants, susbsidies, tax incentives, other2. Lending Programmes

Bank window, low-interest lending, guarantee funds, other

3. Performance Contracting

Guaranteed savings, shared savings, other

4. Carbon Financing CDM funding, Joint Implementation, other5. Energy Saving Certificates Trading

White certificates, ESCerts, EE credits, other

Source: IPEEC Report on the Assessment of EE Finance Mechanisms

Energy Performance Contracting (EPC)

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Issues Measures to improve effectiveness

• Relatively new mechanism • Lack of ESCO’s credibility/ability• In some countries (such as India): lack of standardised protocols

• Accredition programmes• Demonstration projects showing the benefits of EPC• Formation of ESCO associations

Definition: Loan from the Energy Service Company (ESCO), paid out of the savings or benefits of the EE projects.

Benefits: the ESCO: shares the energy savings with the customer (shared saving

model), or assumes the performance risk, not credit risk (guaranteed

savings model)Possible use:

Super ESCOs operated by the government (India, USA)

Source: IPEEC Report on the Assessment of EE Finance Mechanisms

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ESCO: With or Without EPC?EPC No EPC, or simple one No EPC

Countries & Regions

North America, Europe

Australia, China, Mexico

Less developed economies

Type of services

Technical and financial services

Simple projects with little M&V (e.g.: China) management & upgrade of equipment

Purchasing, installation & maintenance of equipment

Remuneration Based on energy saved; ESCO assumes risks

Specified fee Specified fee

Sector All All Mostly rural electrification

Source: IISD (2010) Energy Service Companies (ESCOs) in Developing Countries & others

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Financial Institution ESCO Customer

Loan & interest payments

Loan(s)

Remuneration

Source: Berlin Energy Agency

Different Types of Energy Performance Contracting (EPC)

Customer Financial Institution

Loan(s)

ESCORemuneration

Services

Customer

Loan(s)

ESCO

Remuneration

Services

Loan & interest payments

Financial Institution

Sales of Receivables

Cash Advance

Remuneration of ESCO Investment

Services

The IPEEC Experience3.

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Germany: Strong Legal Framework Providing Solid Basis for Complex Project Structure

RemunerationPublic Authority/Building Owner

ESCO

UtilitiesGas, Electricity and/or

Fuel Supply Companies

Remuneration

Facilities/Sites

General Maintenance Energy Saving

Services

Natural gas, district heat, electricity, oil

Source: Berlin Energy Agency

CoordinationSupply

Technical Issues

Saving guarantee

EPC Structure in the Berlin Energy Saving Partnership

Korea: Shared Savings & Guaranteed Savings

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RecommendationContract

Loan

Customer

Financial Institution

ESCOKEMCO

(Korea Energy Management

Company)

As of September 2012, there are 226 ESCOs in Korea

First Korean ESCOs were established in 1992,ESCOs can benefit from:

An Energy Conservation Fund, An « ESCO Activation Plan ».

Source: KEMCO (2012), Presentation at IPEEC EE Finance Webinar

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China (1 of 2): Role of the Government

In 2010, EPC represented $4.24 billion

¾ of them are used in industry 3 types of EPC:

1. Shared Saving Contracts,2. Guaranteed Energy Savings

Contracts,3. Outsourcing Contracts.

Common examples of basic EPC involve: Focus on specific technology, Simple services, Less-than-3-year payback.

Government & Market

The government played a crucial coordination role:

• In April 2010, new legislation on ESCOs:• Tax incentives,• Favorable

taxation,• Clarification of

accounting principles;

• 12th Five-Year Plan: ESCOs used as a market instrument to promote EE.

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China (2 of 2) The Role of International Organisation Support

In 1998, « Energy Conservation » project (Phase 1) establishing 3 ESCOs: $15 Million-grant from the GEF, $63 Million-loan from IBRD;

Grant from the European Commission for: Technical Assistance, Support to the immediate implementation of small projects;

In 2001, « Energy Conservation » (Phase 2): $ 26 Million-grant from GEF;

In 2001: support from the UK to establish the future Energy Management Companies Association (EMCA);

ESCOs also benefit from the IFC training programme (CHUEE)

Source: Sun, Zhu, Taylor (2011); China’s ESCO Industry

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Conclusion & Recommendations

4.

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What is Needed for ESCOs to be Successful?

1. Strong legal framework a) Contract enforcement,b) Market transparency,

2. Monitoring & Verification procedures (M&V),

3. Possibly, fiscal incentives or other policies supporting ESCOs,

4. Rational energy prices .Without these conditions, ESCOs

have to focus on basic services:• Purchasing, installation & maintenance,• Management & upgrade of equipment.

The complexity of the EPC depends on the type of

market

1. Technical & practical experience

2. Capacity to arrange & manage financing, and to mitigate financial risks

3. Business entrepreneurship & project/client management skills

Source: Sun, Zhu, Taylor (2011)

ESCOs need Specific Skills