APEIA, PE2 head seeks removal of SEA ESCO market barriers in regional ESCO gab

Date Published: 
September 24, 2021
  • From left: Tetsuya Maekawa of JAESCO, Yoon Seok Jae of KAESCO, Zulkifli Zahari of MAESCO, Alexander Ablaza of APEIA/PE2, Vincent Low of SEAS and Hung-Yao Chao of TESA. (Images: TGPF, PE2)
    From left: Tetsuya Maekawa of JAESCO, Yoon Seok Jae of KAESCO, Zulkifli Zahari of MAESCO, Alexander Ablaza of APEIA/PE2, Vincent Low of SEAS and Hung-Yao Chao of TESA. (Images: TGPF, PE2)

NEW TAIPEI CITY, 24 September 2021 – The founding convenor of the Asia-Pacific ESCO Industry Alliance (APEIA) and the Philippine Energy Efficiency Alliance (PE2) pushed today for the removal of policy, market and financing barriers impeding the scale-up of the energy service company (ESCO) market growth in Southeast Asia. Wearing his APEIA and PE2 hats, Alexander Ablaza made this presentation during the 2021 International ESCO Webinar hosted earlier today by the Taiwan Bureau of Energy and the Taiwan Green Productivity Foundation (TGPF).

To welcome the guests and participants on behalf of the hosts, Director General Cheng-Wei Yu of the Bureau of Energy under the Ministry of Economic Affairs, Dr. Sheng-Long Kuo of TGPF, Dr. Bing-Chwen Yang of the Taiwan Association of Energy Service Companies (TAESCO) and Dr. Bill Chen, founding Chairman of TAESCO and the Taiwan Energy Service Association (TESA), opened the bi-annual international ESCO event.

TESA president Hung-Yao Chao kicked off the country ESCO presentations with an update and outlook of the ESCO market in Taiwan. He reported that TESA has more than 360 registered members. The annual turnover of energy savings performance contracts (ESPC), energy efficiency (EE) improvements, measurement and verification (M&V) and other ESCO support services and sale/leasing of EE technologies continued to climb steadily from 2005 to 2020. However, TESA observed a 1.4% market contraction from last year due to the COVID19 pandemic. Chao also said that in 2020, the average ESCO contract was about NT$ 269.9 million in size and 5.9 years in duration. Last year, the EE sales portion averaged 19.8% of total contract flows, but profitability dipped to 8.3% compared to the double-digit figures before the pandemic.

Shifting to the Japanese ESCO market, Japan Association of Energy Service Companies (JAESCO) vice president and head of international affairs Tetsuya Maekawa reported that the ESCO market was estimated to be about JPY 49 billion in 2019, although the market volume fluctuations in the last few years suggest that the market is not necessarily growing but maintaining a steady average. Maekawa gave a brief history of ESCOs in Japan dating back to 1996 when the new business model was introduced from the United States, to the establishment of JAESCO and how three ministries, namely, the Ministry of Environment, Ministry of Economy and Industry and Ministry of Land, Infrastructure and Transportation supported the ESCOs. He explained that while the association is trying to promote ESCOs again to transition toward a low-carbon future, Japanese ESCOs remain flexible in providing services to their clients, and do not adhere to the traditional definition of a savings-based business model as a survival strategy. The JAESCO official also explained that local governments demand ESCO services more than central government agencies.

Azbil Corporation representative Misumi Totsuka showcased how advanced, state-of-the-art energy management technologies could be deployed to address energy and environmental issues. Azbil is one of the leading ESCOs in Japan that provide energy savings solutions by utilizing measurement control technologies cultivated over decades in the field of automatic controls. Triggered by climate change and historical power crises caused by a major earthquake, Totsuka explained how a fully automated demand control mechanism, called AutoDR, is effectively filling the technological pull for internet-of-things (IoT), demand response (DR) and virtual power plant (VPP) technologies, and how Azbil’s AutoDR is able to link well with building energy management systems (BEMS) and a remote energy monitoring and control technology called BOSS-24, which can be building blocks toward broader smart infrastructure. Azbil has over three decades of experience of remotely monitoring energy use in over 550 buildings in Japan.

APEIA founding convenor and co-chair and PE2 president Alexander Ablaza identified the policy, market and financing gaps in the ESCO market of Southeast Asia that will serve to impede the mobilization a significant portion of the USD 0.9 trillion in EE capital in the region through 2040. He explained each of the 8 major barriers: (1) EE consumption thresholds for EE obligations are too high; (2) Delayed phase-out of energy subsidies; (3) MSMEs and ESCOs have limited access to EE debt finance; (4) ESCO markets have no EE equity and guarantee providers; (5) ESCO accreditation system needs to be strengthened; (6) ESCO sector need to build capacities; (7) ESCO project investments need access to fiscal incentives; and, (8) Government procurement and budgeting disallow ESCO contracts.

Because ESCOs will need broadened access to EE capital, Ablaza explained the different on-balance sheet and off-balance sheet financing modalities that will need to flow debt, equity and guarantee financing toward ESCO project investments in the next two decades. While business-as-usual financing has been demonstrated largely as on-balance sheet debt and lease financing flowing through regulated financial institutions, it is imperative that non-bank equity vehicles be created and strengthened to flow off-balance sheet capital through more innovative financial structures. He theorizes that some two-thirds of Southeast Asia’s EE investment requirement by 2040, or roughly USD 600 billion will need to flow through these innovative, off-balance sheet structures.

Ablaza proposed that, as a region, Southeast Asia should work together to enable barrier removal interventions: (1) Review and amend EE laws to capture more mandatory action from end-users across more sizes and sectors; (2) Accelerate phase-out of subsidies or mobilize Viability Gap Funding for EE projects; (3) De-risk EE bank lending with risk sharing facilities and guarantee mechanisms; (4) Design, establish or enable EE equity providers, ESCO guarantee funds (public or private) or facilitate entry of energy savings insurance products; (5) Create or strengthen ESCO accreditation, registration or certification systems; (6) Intensify training and certification of CEMs, CMVPs and other EE/ESCO professionals and develop industry performance contract templates; (7) Government EE subsidies or tax incentives should be rolled out to ensure improved equity returns and debt service or de-risk long-term capital investments; and, (8) Correct Government procurement rules to allow procurement and budgeting for ESCO performance contracts, PPP transactions and JV agreements.

A video grab shows Alexander Ablaza of APEIA and PE2 during his talk “Removing ESCO Market Barriers Southeast Asia to Help Bridge a USD 892 Billion Energy Efficiency Capital Gap” during the TGPF International ESCO Webinar on 24 September 2021. Insets show Stella Tu of the TGPF events team, Tetsuya Maekawa of JAESCO, Vincent Low of SEAS, Zulkifli Zahari of MAESCO and Yoon Seok-Jae of KAESCO. (Image: PE2)
A video grab shows Alexander Ablaza of APEIA and PE2 during his talk “Removing ESCO Market Barriers Southeast Asia to Help Bridge a USD 892 Billion Energy Efficiency Capital Gap” during the TGPF International ESCO Webinar on 24 September 2021. Insets show Stella Tu of the TGPF events team, Tetsuya Maekawa of JAESCO, Vincent Low of SEAS, Zulkifli Zahari of MAESCO and Yoon Seok-Jae of KAESCO. (Image: PE2)

Ablaza concluded that Southeast Asia will need to mobilize close to USD 0.9 trillion in EE capital through 2040 by removing barriers to innovative financial modalities. He said, “A robust EE and ESCO policy and incentive framework and strengthened ESCO industry can flow debt, equity, and guarantees to propel ESCO market growth.” The APEIA head also explained how expanded government procurement, accelerated public EE spending and financing modalities can jumpstart the ESCO industry in the region.

Vincent Low, chairman of the EE committee of the Sustainable Energy Association of Singapore (SEAS), shared how Singapore’s net zero target is impacting the ESCO market. He proposed a 5-step pathway toward achieving a net zero target through ESCO involvement: (1) Develop a net zero management plan; (2) Establish your baseline and understand how far you are from your target and how to meet your target; (3) Budget net zero milestones by considering alternative approaches to achieve the target and evaluating the costs based on affordability and impact; (4) Engage IoT-enabled ESCO services for EE energy use index (EUI) reductions, renewable energy (RE) EUI reductions and RE certificate EUI reductions; and, (5) Institute long-term real-time net zero carbon compliance while optimizing compliance certifications.

Malaysia Association of Energy Service Companies (MAESCO) president Zulkifli Zahari disclosed that while legislation for Malaysia’s anticipated comprehensive EE policy framework has been delayed due to the pandemic, the local EE and ESCO sectors have to rely on existing policies that regulate electricity use for the time being. He explained that ESCOs do not yet have access to some policy tools like the granting of pioneer status and tax allowance for EE components, institutional regulations and a comprehensive EE Act.  In the meantime, the EE and ESCO sector will have to develop more professionals such as certified energy managers, certified energy auditors and monitoring EE specialists. MAESCO believes that the improvement of technical capacities through the training and certification of specialists will certainly improve bankability of EPC projects before the financial institutions. Zahari also reported that MAESCO entered into partnership with Universiti Teknologi Malaysia (UTM) for a national energy benchmarking study for the building sector. The MAESCO head also discussed the USD 20 million allocation for the five-year Energy Audit Conditional Grant, the USD 20 million allocation for ESCO projects under the USD 230 million allocation of Malaysia Debt Ventures and MAESCO’s work in promoting the ESCO industry through an EE awards program.

Korea Association of ESCO (KAESCO) general manager Yoon Seok-Jae delivered an update on Korea’s ESCO policy and market developments. He reported that in 2020, the 2050 Carbon Net Zero scenario was declared by their government as part of the country’s global climate response. The 2050 Carbon Net Zero scenario, will involve a major transition toward sustainable energy sources and decarbonizing actions in the mobility, industrial, building, agricultural and waste sectors. In addition, the government is updating the 2030 roadmap toward the updated Nationally Determined Contributions under its Paris climate agreement obligations. Yoon underscored the role of ESCOs in delivering greenhouse gas (GHG) emission reduction by combining its abilities in energy audits, planning, financing, construction, and measurement and verification (M&V).

During the Q&A portion, Ablaza was asked about the fiscal incentives available to ESCOs in the Philippines. Ablaza explained that the commercial viability of EE projects implemented through ESCOs will be improved by 4-6 year income tax holidays and a suite of applicable enhanced deductions. When asked about the role of third parties in the growth of ESCO markets, Ablaza explained that third-party project developers are able to flow more equity capital through ESCOs, without the normal constraints associated with traditional EE lending from banks. These third-parties can take the form of either a fund-like structure, a Super-ESCO or a privately owned portfolio investor. In addition, local policies now allow third-party project developers to avail of fiscal incentives. Also, the recently signed EE law removes foreign ownership restrictions and grants foreign-owned EE projects equal access to fiscal incentives.

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