When should an ESCO be considered?

Answer by Alejandro Morell (Creara)

One of the main obstacles for implementing energy efficiency projects is the financial barriers associated with improvement measures (i.e. purchase of new equipment, refurbishment or integration of renewable technologies). Ultimately, EPC constitutes a financial scheme that contributes to the mobilization of funds from the financial sector to EE projects. 

Consequently, EPC might be advisable when a large-scale potential for savings has been identified but the scarcity of funds may undermine initiating the project.

This leads to a second consideration. Due to the level of complexity of EPC, a certain volume of investment will be necessary to ensure the success of the project. Generally speaking, EPC only make sense when the energy efficiency project requires a major expenditure that will bring significant benefits.

The underlying logic of EPC implies that the savings generated and the related financial benefits will be used to reimburse the costs of the energy improvement measures. Due to the fact that the ESCO is usually committed to achieving a minimum amount of savings by contract, interests of the different parties (ESCOs, Client and financing agent if different) are aligned. To sum up, EPC constitutes an optimal solution when the following conditions are present:

  • High potential of savings
  • High volume of energy consumption
  • Lack of financial capacity for disbursing the investment cost

Common examples from real life include hospitals, hotels, sports facilities with old equipment (and weak energy efficiency performance).

As a client

EPC may enable the development of large projects through a financial model that encompasses the financing, planning, implementation, and supervision of energy saving measures. It can be applied wherever energy is utilized, including among other things lighting, heating, or cooling of buildings, street lighting, and other areas such as specific industrial applications.

Always take into account that it is very important to find an appropriate ESCO to develop the EPC project. There are certain key criteria to consider when making this selection:

  • Quality and warranty of materials and equipment to be implemented
  • Maintenance and management to be provided
  • Economic criteria: savings sharing, penalties, invoicing plan, et cetera

As an ESCO

Although the potential to develop ESCO projects is considerable, there are barriers that make it difficult to reach the project implementation stage. High transaction costs, regulation provisions, lack of general awareness and understanding of performance contracting and outsourcing are only some of the barriers.

In particular, most ESCO companies in Southern Europe lack the necessary capital for financing the EE investments. If it is already difficult for the companies benefitting from the EE investments to obtain financing on their own cash flows, it is likely to be even harder for the ESCOs. This is because in many countries ESCOs are still at the infant industry stage and are still evolving from being in just a core business of providing engineering services to being EE project investors and implementers.

EPC projects are characterized by complexity, risk and—depending on the country—scarcity of mature markets for the full realization of the EPC potential. A high level of technical and financial expertise in needed to overcome these issues.