In recent years there has been an increased interest in the provision of energy services to achieve energy and environmental goals. In particular companies providing energy services to final energy users, including the supply and installations of energy efficient equipment, and/or the refurbishment of the building, have started to operate on the European market.
These Energy Service Companies (ESCOs), differently from the traditional energy consultants or equipment suppliers can also finance or arrange financing for the operation and their remuneration is directly tied to the energy savings achieved. The JRC analyses their activities to provide accurate information to policy makers, experts and other interested parties.
The three main characteristics of an ESCO are:
- ESCOs guarantee energy savings and/or provision of the same level of energy service at lower cost. A performance guarantee can take several forms. It can revolve around the actual flow of energy savings from a project, can stipulate that the energy savings will be sufficient to repay monthly debt service costs, or that the same level of energy service is provided for less money.
- The remuneration of ESCOs is directly tied to the energy savings achieved;
- ESCOs can finance, or assist in arranging financing for the operation of an energy system by providing a savings guarantee.
Therefore ESCOs accept some degree of risk for the achievement of improved energy efficiency in a user’s facility and have their payment for the services delivered based (either in whole or at least in part) on the achievement of those energy efficiency improvements.
Go to the JRC database of Energy Service Companies operating in the European market and their projects.
Energy Performance Contracting
Energy Performance Contracting (EPC) is a form of financing for capital improvement which allows funding energy upgrades from cost reductions. Under an EPC arrangement an external organisation (ESCO) implements a project to deliver energy efficiency, or a renewable energy project, and uses the stream of income from the cost savings, or the renewable energy produced, to repay the costs of the project, including the costs of the investment. Essentially the ESCO will not receive its payment unless the project delivers energy savings as expected.
The approach is based on the transfer of technical risks from the client to the ESCO based on performance guarantees given by the ESCO. In EPC ESCO remuneration is based on demonstrated performance; a measure of performance is the level of energy savings or energy service. EPC is a means to deliver infrastructure improvements to facilities that lack energy engineering skills, manpower or management time, capital funding, understanding of risk, or technology information.
Leasing can be an attractive alternative to borrowing because the lease payments tend to be lower than the loan payments; it is commonly used for industrial equipment. The lessee makes payments of principal and interest; the frequency of payments depends on the contract. The stream of income from the cost savings covers the lease payment. The ESCO can bid out and arrange an equipment lease-purchase agreement with a financing institution. If the ESCO is not affiliated to an equipment manufacturer or supplier, it can bid out, make suppliers competitive analysis and arrange the equipment. There are two major types of leases: capital and operating. Capital leases are installment purchases of equipment. In a capital lease, the client (lessee) owns and depreciates the equipment and may benefit from associated tax benefits. A capital asset and associated liability appears on the balance sheet. In operating lease the owner of the asset (lessor – the ESCO) owns the equipment and essentially rents it to the lessee for a fixed monthly fee; this is off-balance sheet financing source. It shifts the risk from the lessee to the lessor, but tends to be more expensive to the lessor. Unlike in capital lease, the lessor claims any tax benefits associated with the depreciation of the equipment. The non-appropriation clause means that the financing is not seen as debt.