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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:
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:
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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