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Energy Performance ContractingEnergy Services Companies (ESCO)

Webinar 5 April 2012

Pierre LangloisPresident - Econoler

Course on Regulation and Sustainable Energy in Developing Countries –Session 9

www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-countries

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Energy Performance ContractingEnergy Services Companies (ESCO)

By Pierre LangloisPresidentEconoler

Webinar April 5, 2012

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PRESENTATION STRUCTURE

1. EE benefits and barriers2. The EPC concept3. EPC contractual approaches4. EPC financing structures5. Measurement and verification6. ESCO: different models and examples

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1. EE PROJECTSBENEFITS AND BARRIERS

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END USER BENEFITS

› Lower operational costs› Optimization of equipment operation› New and modern equipment (increased value)› Improved competitiveness› Improved product quality› Higher comfort level› Green image

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BARRIERS

AwarenessKnowledge

Lack of capacityLack of confidence in project results

and

Financing

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2. ENERGY PERFORMANCE CONTRACTING

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ENERGY PERFORMANCE CONTRACTING

A contractual arrangement between a beneficiary and a provider (called an Energy Service Company) for the implementation of an EE project, where the global investments have to be paid for through a contractually agreed level of energy cost reduction.

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A firm that provides integrated solutions for enhanced energy cost reductions and whose payments are directly linked to project performance.

ENERGY SERVICE COMPANY

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Professional consulting

engineer

Equipment manufac-turers

Governments

Financial institutions

Energy Suppliers

Client

Guarantee•Analysis•Concept•Installation•Financing•Monitoring•Training

ESCO

ContractorsTHE EPC APPROACH

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THE SKILLS OF AN ESCO

TechnicalIGA

EngineeringM&V

Training andManagement

Support

ProjectManagement

ConstructionManagementor execution

FinancialDirect financingor arrangements

Operation &Maintenance

(Occasionally)

Risk ManagementFor guarantee of savings

and for cost and delaycontrol

DevelopmentSales

Marketing

LegalContracts

Local regulations

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Verification of energy savings methodology,

procurement process, customerspending categories and

financial needs

Customer verifiesESCO findings

ESCOunderstandsand validates

customerconcerns and

issues as well asother projectparameters

Preliminary proposal

ESCO createsproposal summarizingall info from previous

step; preliminarybudget estimates

used

Customer reviews

Customer signs ESCO signs Letter of Intent (LOI)

Figure 1: Overview of Comprehensive Project Service Sales Process (continued)

Preliminary survey andwalk-through of customer

facility

Customer providesenergy bills and

operating cost data

ESCOestablishes

preliminary scopeand budget for

potential project

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Proposal presentationESCO preparespresentation with

final projectparametersand benefitstatements

Customer reviews contract and

financing

Energy ServiceAgreement (ESA) Customer signs ESCO signs

Projectimplementation

Risk reviewESCO conducts

a completereview of job

estimates and risks;contract finalized

Figure 1: Overview of Comprehensive Project Service Sales Process (continued)

ESCO finalizesall project

parameters incl.:ops, energy, & cap

(if any); financing;

implementationschedule; contractdevelopment starts

Customer reviewspreliminary

contract

Conduct detailed engineering study, ;

initiate contract and start financing discussions

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3. EPC Contractual Approaches

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Guaranteed Savings Concept

BANK

Financial institution

Achieved energy savings

Client pays ESCO during implementation

ESCO

Client

Client reimburses loan directly to the bank

Client retains 100%of savings

ESCO reimburses for underperformance of the project

Bank loan to client which provides guarantees

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Financialinstitution

ESCO

Client

Shared Savings Concept

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Customer

BANK

Lending institution

ESCOBank lends 70% -90% of project costs to ESCO ESCO is the borrower

ESCO implements project and owns the energy facility Typically pays 10% -30% equity share

ESCO assigns receivables from customer directly to bank (sometimes pays via bank)Loan is usually secured with energy assets

Energy facility

Customer pays ESCO for energy

ESCO supplies energy from

facility

“Chauffage” Concept

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CURRENT USE OF THE CONCEPTS

The more the country is developedGuaranteed savings

The less the country is developedShared savings

It should actually be the reversed

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EPC AROUND THE WORLD

More used around the worldGreatly underdeveloped world wideImportant barriers in the public sector du to procurement issues

No good information on the market size available

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EPC AROUND THE WORLD

Concept is expending in many countries

North America still the biggest market

EPC is used in many different forms

Europe will use more EPC base on the current CC objectives and regulations (EC directives)

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4. MEASUREMENT AND VERIFICATION

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A NATIONAL BASELINE

250,000

500,000

750,000

1,000,000

Ener

gy

Baseline Period Reporting Period

Baseline + Adjustments

Metered Energy

Savings

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INTERNATIONAL PERFORMANCE MEASUREMENT AND VERIFICATION PROTOCOL

› The most known protocol on M&V› Produced and disseminated by the Efficiency Value Organization

› Can be downloaded for free from EVO

www.evo-world.org

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5. ESCO: Different Models

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ESCO: DIFFERENT MODELS

› Utility-based ESCO (the cases of Croatia and Uruguay)

› Government-based ESCO (the case of India) › Private sector ESCO (the case of China)

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ESCO: UTILITY BASED ESCO

› Utility-based ESCO (the cases of Croatia and Uruguay)

› Owned by Utility› Targeted sectors: all sectors but mainly focusing on

government facilities and institutions (schools, offices, universities, hospitals, industries, etc)

› Maximum payback period : Variable, Private 5 years, Public 8 years(Croatia)

› Project’s range: USD 100,000 to 2 Million (Croatia) › Utility financing:

› Croatia : 7 million › Uruguay: 7.1 million

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ESCO: UTILITY BASED ESCO

› Advantages› Client data base available› Available financing source› Easy access to clients› Client trust utility› Access to all sectors especially government

› Disadvantages:› Not flexible and could not follow the fast changes

as it is a part of big system› Difficulties to stimulate staff

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ESCO: GOVERNMENT BASED ESCO

› Government-based ESCO (EESL: the case of India)

› Established by Government to facilitate implementation of energy efficiency projects

› Targeted sectors: Demand Side Measures including municipal functions, agriculture, public building, lighting etc.

› EESL work as ESCO, as Consultancy Organization for CDM, as a Resource Centre for capacity building of State Designated Agencies, Utilities, financial institutions, etc.

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ESCO: GOVERNMENT BASED ESCO

› Advantages› facilitate preparation of energy efficiency projects› Partner with private ESCO’s and other companies

to promote energy efficiency.› Assists and help for project financing› Capacity development and activities support to

potential ESCOs in the market

› Disadvantages:› Longer delay for project development and

implementation› Rigid procedure

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ESCO: PRIVATE SECTOR ESCO

› Private sector ESCO (the case of China) › Owned by private companies: vendors of energy-

efficient equipment or subsidiaries, companies with innovative proprietary technology, companies with special skills in diagnosis of energy efficiency. Some ESCOs have evolved from local energy conservation technical centers, etc

› Targeted sectors: industrial enterprises are the dominant clients with building sector and commercial

› Payback period : The focus on commercial clients has helped lead to a fast-paced business centering on projects which can conclude within three years or less

› Number: registered ESCOs in China reached over 900 by the end of 2010

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ESCO: PRIVATE SECTOR ESCO

› Advantages› Very flexible EPC following client criteria› Ability to develop and adjust to a win-win

approach› Full services project or focus on a single

technology or system renovation

› Disadvantages:› Required important fianancial capacity› Limited access to gouvernement facilities› Limited support form governemental institutions

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6. EPC: Public procurement

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PUBLIC PROCUREMENT FOR EPC

Although EPC may be well suited to address the challenges of improving public sector energy efficiency, rigid administrative systems are quite poorly suited to efficient procurement of energy services

Helping public agencies manage the EPC process is a difficult task

Solutions must be country specific

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PUBLIC PROCUREMENT FOR EPCA COMPLEX ISSUE

HTTP://www.esmap.org/filez/news/7272009105811_P2E2_presentation_REV_3.pdf

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7. Conclusion

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CONCLUSION: IS EPC IS THE SOLUTION FOR EE?

Limitation of the concept› Size is an issue› Credit risk in the private sector is a limitation

Focused Markets› Public sector has always been the favorite› Limited use in the industrial sector

Case studies› Successes: Canada, China, Croatia, Germany› Failures: Egypt, Tunisia, Poland› Mixed successes: Brazil, India

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THANK YOUPierre LangloisPresidentEconoler

planglois@econoler.com