ESCO market growth linkage to Paris agreement targets discussed during COP26

PE2 special report, 4 November 2021

GLASGOW, UNITED KINGDOM, 4 November 2021 (PE2.org) –The UNEP DTU Partnership (UNEP-DTU, as parent organization for the Global ESCO Network) in collaboration with the Sustainable Energy for All (SEforALL) and the Efficiency Valuation Organization (EVO) held here earlier today a conference “The Converging Agendas of Climate Change and Energy Service Companies (ESCOs)” in the SDG7 Pavilion at the United Nations Climate Change Conference (COP26).

UNEP-DTU provided the market context that ESCOs are not always well recognized as an industry, nor entrenched in national policies. Nowhere has their full potential been unleashed and in many places they struggle to find foothold. Where they are thriving, it is rarely a result of dedicated policies that see reduced energy expenses as an investable asset class.

It was said during the conference that, by 2030, the world needs to double the global rate of energy efficiency (EE) improvements through the dedicated deployment of the ESCO business model, ensuring that EE investments are made to pay for themselves.

The Global ESCO Network, through UNEP-DTU, raised the urgency of inspiring government actions for scaling up the contribution of ESCOs to the global response for mitigating the threat of climate change and the goals set out by the Paris Agreement. It cast the spotlight on the Energy Service Company as a single, unifying business concept for energy efficiency, and on the global imperative to overcome the fragmentation of the EE agenda while requiring only a few, coherent policy initiatives to thrive.

SEforALL Principal Specialist on Energy Efficiency and Cooling, Ben Hartley moderated the interactive panel discussion with  Merete Pedersen of UNEP DTU Head of Section, Business Models and Finance, Sara Laerke Meltofte Traerup, UNEP DTU’s Head of Section of Technology -Transitions and System Innovation, Ahmed Samir Elbermbali, UAE Managing Director  of Clean Energy Business Council of the Middle East and North Africa, Mark Lister, Managing Partner at Asia Clean Energy Partners and Tariye Gbadegesin, Managing Director and Chief Executive Officer ARM Harith Infrastructure Fund Managers.

Ben Hartley of SEforALL kicked off the panel discussion with a shared mindset that ESCOs can respond directly to climate change. A dedicated effort to grow the ESCO market involves building trust in the ESCO business model, building capacities of ESCOs, providing end-use sectors with procurement and contracting tools, and finding ways to ensure that investors find technologies available and that they get a commercially viable return on EE project investments.

UNEP DTU’s Merete Pedersen believes in the economic impact and professional expertise that ESCOs can bring to the table especially while the world nurses a post-pandemic recovery. She said that EE is labor-intensive and it quickly create jobs to fill the unemployment vacuum. While some 85% of nationally determined contributions (NDCs) include an EE component, it is alarming to note that only 10% of these countries are seriously looking at how exactly to implement their EE activities. Most countries plainly identify EE and the vague need for technology. Pedersen explained that ESCOs bring technical expertise and knowledge to energy markets. They have the skill set needed to determine what kind of investments are needed. She quipped, “ESCOs are not like magic and there’s a need to shine a light on ESCOs.”

Mark Lister of Asia Clean Energy Partners construed that ESCOs rely on project cash flows to secure loans and there is a clear need for financial institutions to place a lot of trust in these project cash flows. He explained that there are a few reasons why such trust from financial institutions is in deficit and that it is high time for ESCO associations to step up, like having accreditation of ESCOs, and establishment of standards and procedures that they can follow. There is also a strong role for government policy, such as the mandated requirement for energy audits.

Tariye Gbadegesin of ARM Harith said that from a commercial standpoint, there are three key opportunities that can give ESCOs leverage to drive a demand for ESCO solutions from corporate and commercial players. Several large end-user sectors, such as telecom companies, are now seeking to work with ESCOs to reduce energy consumption across their frontline and backend operations. The public sector is another customer class that can quickly create a demand for ESCO services.

She added that in the infrastructure and project finance space, the capitalization capacity of ESCOs is often determined by the bankability of the project they are developing. Loan security and asset ownership are also critical to adding credibility to the trust relationship. A lot of debt or equity providers prefer to own the EE project assets procured and installed by the ESCO. It continues to be very difficult for financiers to lend to a company without a security framework and without assets.

Capitalization of ESCOs may involve giving them a balance sheet that allows them the financial backing of an ESCO project aggregator. Aggregation is extremely critical and to be able to create an aggregation framework is to ensure that these investments are sound. The problem on why disrupted energy is so fragmented lies on the difficulties surrounding the aggregation of ESCOs and project assets that share the same risk profile.

Gbadegesin also explained that, related to the common requirement of lenders for securitized instruments, a lot of ESCO players are typically anxious about assigning their fixed asset investments. Some larger ESCO projects may however consider the opportunity to create project special purpose vehicles (SPVs) to keep securitization within the confines of the project.

She added that a technical assistance framework in many markets for corporates and ESCOs would be need to be established and funded to enable various ESCO services across project phases such as energy audits, project design, performance contracting, procurement of energy efficiency measures or services (including through private ESCOs), installation, measurement and verification (M&V) of energy savings and project operations and maintenance.

Ahmed Samir Elbermbali stressed that the need for EE has been grossly overlooked. A historical lack of importance assigned to EE led to a continued lack of ESCO capacities and immaturity of the legal system. He explained that the Gulf Region has seen a Super-ESCO, in this specific case a government entity, able to develop and build up the ESCO sector and market size.

Sara Traerup concluded that the largest challenges concern the financial aspects of the ESCO business model. Markets and policymakers are starting to recognize a significant role of ESCOs for the technological diffusion in support of the SDG7 objective of the United Nations Framework Convention on Climate Change (UNFCCC). UNEP-DTU also sees a much larger potential at enhancing the visibility of ESCOs. She added, “Every unit of energy we can save depends on how we can build trust, capacity and what the public sector needs.”

Through this event, UNEP-DTU hopes for an outcome of understanding among participating stakeholders of their responsibility of delivering their respective roles and inputs to an ESCO ecosystem that will set in motion a wave of energy efficiency investments. The regulators’ task is to provide the right space for ESCOs and other energy efficiency professionals to deliver their services.

The COP26 event brought together experts and policymakers leading the implementation of climate action and the Sustainable Development Goals around the world for a series of discussions on how to accelerate action across both the 2030 Agenda and the Paris Agreement.