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Smart Cities: Energy Efficiency Projects and the case for the Super ESCO

In recent times, energy efficiency has become a key priority for both public and private sector entities. A 2019 study by the International Energy Agency (IEA) showed that energy efficiency is a key resource for economic and social development across all economies. To this end, customers around the world have increasingly enlisted the help of specialist Energy Saving Companies ("ESCOs") to design and implement energy savings measures ("ESMs") at their premises.

 

ESCOs & Performance Contracting

ESCOs offer a range of services to customers such as:

  • energy auditing and identification of potential ESMs (typically under a detailed facility study agreement ("DFSA")); and
  • design, equipment procurement, installation, measurement and verification (M&V) and operations and maintenance (O&M) under an energy savings performance contract ("ESPC").

While there are many different variations in the specific approaches to ESPC contracting, these can generally be characterized into two basic arrangements:

  • Shared Savings in which the ESCO self-funds the project. The energy cost savings realised by the ESMs are shared between the ESCO and the asset owner over a set period of time at a pre-agreed percentage to allow the ESCO to recover its implementation costs and obtain the desired return on its investment.
  • Guaranteed Savings in which the customer funds the project and the ESCO guarantees certain performance parameters (such as efficiency, energy saving and/or cost saving) in return for a fixed payment. The customer typically retains all of the savings achieved as a result of the ESMs. If the performance guarantees are not achieved and the savings are not enough to cover debt service, then the ESCO covers the shortfall (typically via payment of liquidated damages).

Challenges

Large-scale implementation of energy efficiency projects by independent ESCOs is constrained by a number of factors. Customers often lack an understanding of the opportunities available for, and long-term benefits of, increasing energy efficiency at their premises and have limited technical capacity, budget and resources for implementing such projects or contracting with and managing independent ESCOs to implement such projects on their behalf.

Many organisations are also often poorly incentivised to increase long-term energy efficiency at their premises and find it difficult to deploy operating budgets for projects of this nature, particularly in the public sector, where a lack a commercial orientation is common. Furthermore, public sector contracting and procurement rules are often restrictive making it difficult for public sector entities to contract with independent ESCOs.

The case for Super ESCOs

The difficulties faced by both independent ESCOs has prompted the need for, and enabled the role of, government-backed super energy savings companies ("Super ESCOs") as a mechanism for overcoming some of the limitations hindering the large-scale implementation of energy efficiency projects, particularly in the public sector.

A Super ESCO is an entity established by a government or via a public-private partnership to function as an intermediary between the government, facility owners and ESCOs to coordinate the large-scale implementation of energy efficiency projects, primarily in hospitals, schools, municipalities, government buildings and other public facilities, where the efficiency potential is substantial, but the implementation of energy savings programs is complicated by numerous factors, such as those set out in the "Challenges" section above.

A Super ESCO is uniquely positioned to overcome a number of the barriers faced by independent ESCOs. Being government-backed, where public agencies may otherwise lack interest in ESMs and provided a limited budget for such projects, Super ESCOs can conduct their own market campaigns, create incentive mechanisms for public agencies to execute such projects and gain funding through project financing. Contracting with a Super ESCO may also overcome any public sector procurement related restrictions, as public agencies find it easier to contract with government-backed entities.

In turn, with their size and credibility as a public institution and their contacts with public agencies which assists in obtaining access to public premises, Super ESCOs also have the capability to support the growth of the private ESCO market, utilising private ESCOs as implementation agents on Super ESCO projects, connecting them with customers and assisting them in accessing project financing and developing standard contracting models and agreement templates for use in both public and private sector energy efficiency projects. Under a typical Super ESCO project structure, the Super ESCO contracts with the customer in order to set out the parameters for the energy efficiency project, and then separately contracts with private ESCOs under a DFSA and ESPC to identify and implement the ESMs for the customer.

Conclusion

Super ESCOs have the potential to provide a much needed stimulus to the implementation of energy efficiency projects by overcoming some of the typical problems that independent ESCOs face in public sector energy efficiency projects, as well as providing training and technical assistance to independent ESCOs. They can provide support for independent ESCOs in their respective countries, develop their capacities, create market opportunities for them, and monitor the quality assurance of their interventions, therefore raising the confidence level of end use consumers and financiers dealing with ESCOs and energy saving projects.

In recent years, the Middle East has seen an increase in the utilisation of Super ESCOs as one of the most effective instruments to support energy efficiency market transformation. A recent energy savings project at Riyadh's National Information Centre by Tarshid, Saudi Arabia's Super ESCO, led to a 28% reduction in electricity consumption, demonstrating the impact such measures can have in the move towards more sustainable and affordable energy systems and for delivery on the related sustainable development goals. We therefore expect to see a growth in such projects in the region in the years to come.

 

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