Instrument Overview
Energy service companies (ESCOs) deliver energy efficiency projects that are financed based on energy savings [1].
Why it matters for cities
ESCOs can help deliver energy efficiency improvements in the case that cities lack energy engineering skills, manpower or management time, technology information, capital funding, or understanding of risk.
Key features [2]
- 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.
How It Works
A municipality enters into contracts with Energy Service Companies (ESCOs) for power supply options for all residents and businesses within its jurisdiction.
Energy service companies (ESCOs) design, install, and in some cases, finance energy efficiency projects through a contractual agreement with the energy-using customer, usually using an energy performance contract (EPC). EPCs incentivise ESCOs to identify and implement energy efficiency opportunities, the financial returns from which are subsequently shared with the customer. Under many EPCs, the ESCO can also provide ongoing operation and maintenance services for energy efficiency projects, further reducing the risk to the customer.
The ESCO market is not immune to the issue of uncertainty associated with the performance of efficiency projects, which inhibits greater levels of third-party finance. To reduce this uncertainty, a small number of financial institutions and private companies are now offering energy savings insurance (ESI).
Benefits & Challenges for Cities
Benefits
- ESCOs can help provide services in energy audits, feasibility studies, engineering design, equipment procurement, subcontractor management, construction, measurement and verification, operation and maintenance, as well as project financing [4].
Challenges
- There are many opportunities for ESCOs to improve their offering with access to data. However, access to data from utilities is often hard to obtain [1].
Use Cases
ESCOLIMBURG2020 (Infrax ESCO) [3]
ESCOLIMBURG2020 is a joint project of the Province of Limburg, Infrax (the provincial energy grid operator) and Dubolimburg, a provincial consultancy institute specialized in sustainable buildings. ESCO Limburg 2020 aims to accelerate the energy renovation of municipal properties in order to reach faster the Near Zero Energy (NZE) standard in the Province and to contribute to the achievement of the Province and 44 Municipalities’ climate objectives.
Through the involvement of Infrax’s existing public Energy Service Company (ESCO), created in 2010, a package of energy services to enhance the energy efficiency of buildings is offered to Limburg municipalities, which include free services (telemetry and monitoring, a feasibility study and an energy register for the properties) as well as a series of consulting services (including dynamic simulations and measurement campaigns), and eventually a fully implemented project. The ESCOLIMBURG2020 project aims to support, optimise and expand these ESCO activities. Proposed interventions can regard all aspects of energy consumption: heating, ventilation, air conditioning, lighting, renewable energy, insulation, and they are characterized by high ambitions (savings > 30%, average 40%). The ESCO identifies the most optimal solution for the building, taking into account payback periods, available budgets and the requirements and needs of the administration.
To help local authorities gain an insight into their energy consumption, ESCOLIMBURG2020 provides – via Dubolimburg and during the course of personal discussions with policy makers – a Sustainable Energy Action Plan (SEAP) for the various municipalities in Limburg. This report contains figures that are suitable for use for the follow-up measurement under the Covenant of Mayors. With the help of this follow-up measurement, the municipality can view, assess and verify CO2 emissions within its territory in relation to the impact of actions based on the municipal climate action plan.
The ESCO division of Infrax acts as the programme delivery unit for the ESCOLIMBURG2020 programme.
ESCOLIMBURG2020 is supported by the Intelligent Energy Europe programme through the MLEI-PDA assistance (Mobilizing Local Energy Investments). In 3 years the project is expected to mobilize EUR 19.8 million investments in sustainable energy.
Financing of energy renovation measures is a key aspect of the project. Municipalities can choose a pre-financing by the Infrax ESCO, in which the investment is repaid through savings in energy costs, or an own financing or bank loan via Infrax. ESCOLIMBURG2020 can also identify other possible financing options and techniques through a financial study, e.g. leasing, investment support, grants, or also the Limburg Climate Fund, which is supported by citizens and businesses. The Limburg Climate Fund (Limburgs Klimaatfonds) is a cooperative capital fund created on January 30, 2012 by the LRM investment fund, the Limburg climate company NUHMA and the cooperative company LIMCOOP, to invest in climate friendly projects. Both citizens, organisations and companies can by shares, that are used to provide loans to project developers. The profits from the fund are redistributed to the fund’s shareholders. The goal is to provide a return of 1% above the one of a classical savings account.
When to Use It
Cities can use ESCOs when they need to:
- Implement energy efficiency projects without upfront capital.
- Access technical expertise and project management support.
- Reduce risk through guaranteed energy savings.
- Achieve energy or climate goals efficiently.
- Leverage third-party or innovative financing options.
- Competitive advantage in the tender process by bundling project design, financing, implementation, and performance guarantees into a single contractual framework, thereby reducing complexity and risk for the contracting authority.
References
[1] https://citiesclimatefinance.org/financial-instruments/instruments/energy_services_companies_esco
[2] https://e3p.jrc.ec.europa.eu/en/groups/energy-service-companies-escos
[3] http://www.citynvest.eu/?q=content/escolimburg2020
[4] European Roundtable Financing Energy Efficiency in European Buildings
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