PE2’s Ablaza joins emerging markets panel in IEA-WB discussion on ESCOs

Date Published: 
July 28, 2021
  • Screenshot of the hosts and panelists of the IEA-WB webinar on Evolving Energy Service Companies (ESCOs) in Emerging Economies held on 28 July 2021. (Image: PE2)
    Screenshot of the hosts and panelists of the IEA-WB webinar on Evolving Energy Service Companies (ESCOs) in Emerging Economies held on 28 July 2021. (Image: PE2)

PARIS, FRANCE, 28 July 2021 -  Philippine Energy Efficiency Alliance (PE2) president and Asia-Pacific ESCO Industry Alliance (APEIA) founding convenor and co-chair Alexander Ablaza was invited by the International Energy Agency (IEA) to be one of the 5 panelists for a webinar on Evolving Energy Service Companies (ESCOs) in Emerging Economies held earlier today in cooperation with the World Bank (WB).

The IEA and the World Bank set the stage with their introductory presentations, with Melanie Slade, Senior Programme Manager, Energy Efficiency (EE) Division, IEA, opening the webinar.

Jihyun Selena Lee, Policy Analyst, EE Division of the IEA presented an overview of major trends and lessons learned from the global ESCO markets. Lee showed that a significant mobilization of private capital is needed for a global transition toward an energy-efficient future. The ESCO market has been growing steadily since 2015 but the full potential of the industry remains hindered by persistent ESCO market and financing barriers and the economic slowdown due to COVID-19. She revealed that boosting ESCO investments requires an improvement in customer trust in the industry as well as hurdling the technical challenges related to asset ownership and contracting arrangements.

Dr. Ashok Sarkar, Senior Energy Specialist and Energy Efficiency Task Team Leader of the World Bank delivered his views on how ESCOs can scale-up demand-side energy efficiency financing. He opined that it is difficult to scale-up the cheapest "first fuel" because EE market ecosystems are complex and scaling up EE implementation faces multiple barriers. While supply-side options involve larger investments, fewer stakeholders, standardized solutions, lower transaction costs, homogenous markets and asset or revenue-based financing, demand-side EE measures are typically small and dispersed, have multiple stakeholders with no "one-size-fits-all" solutions, and have high transaction costs in a heterogenous market with financing based on savings. Different EE barriers require multi-pronged efforts in policy and regulations, information and awareness, institutions, technical capacity and finance. In unlocking private capital for large scale EE market transformation, financing mechanisms should be selected based on the relative stage of market development and financing gaps. Public financing should be used judiciously to develop markets and attract commercial financing. Over time, EE programs should climb the ladder of financing modalities starting from grants, moving up to government funding and concessional loans and graduating to full ESCO financing as the market builds capacities.

Dr. Sarkar said that evolving energy systems of the future will unlock new opportunities for innovative ESCO business models with megatrends or the so-called "5 D's" - Disruption, Decarbonization, Decentralization, Democratization and Digitalization. Finally, he added that the key lessons learned from ESCO/Super ESCO Development Efforts include: (1) existence of a clear policy and ecosystem support by the government provides a strong signal for the consumers and incentivizes to make EE investments; (2) potential for scaling-up ESCO investments can be strengthened using standardization of ESPC/EPC contractual arrangements, financing models and simpler M&V protocols. The super-ESCO model can facilitate and demonstrate this approach; (3) the shared savings model (ESCO is the borrower) is more popular, which also allows to build a track record for ESCO in accessing commercial financing in future EE projects; (4) technical assistance efforts to improve capacity of ESCOs, FIs and end-users are important to unlock market potential; and, (5) public sector institutions and financing (along with development and climate financing) can help leverage and unlock private ESCO and capital mobilization. The disruption and all these trends will change the landscape of the energy sector and

ESCOs will have to think big beyond energy efficiency.

Moderated by IEA’s Melanie Slade, the panel discussion sought to solicit emerging markets’ views on the role of government and policymakers in supporting the ESCO industry, on promoting ESCOs through public-private partnerships and super-ESCO structures, and on the evolution of different ESCO models and practices.

Invited to share ESCO market views from emerging economies were:

  • Lily Zhao Ming, Executive Vice President, Energy and Environment Service Industry Alliance (EESIA), Beijing
  • Alexander Ablaza, Founding Convenor and Co-Chair, Asia-Pacific ESCO Industry Alliance (APEIA), Singapore, and President, Philippine Energy Efficiency Alliance (PE2), Metro Manila
  • Saurabh Kumar, Executive Vice Chairman, Energy Efficiency Services Limited (EESL) Group, New Delhi
  • Barry Bredenkamp, General Manager, Energy Efficiency, South African National Energy Development Institute (SANEDI), Johannesburg
  • Raul G.  Ortega, President, Mexican Association of Energy Efficiency Companies (AMENEER), Mexico City

Alexander Ablaza of APEIA and PE2 declared that the Asia-Pacific has been a very strong growth bed for the ESCO business model, as the regional ESCO market has breached USD 23 billion in size. He explained that in spite of the strong comeback of the ESCO business model in the region, there remains so much to be done in the policy front such as the review of energy consumption threshold in EE laws, and attracting more private sector investments through fiscal incentives and innovative procurement modalities such as government procurement of ESCO contracts, public-private partnership transactions, joint-venture agreements and large-scale EE replacement programs. Ablaza also emphasized, “Through the last few decades, governments and financial markets have overly relied upon debt finance to mobilize EE capital through ESCOs. While debt finance may be appropriate to jump-start ESCO markets with the more credit-worthy end-use sectors, economies should be ready to flow more equity capital through new financial structures, vehicles and products as a key scale-up strategy.”

Ablaza likewise opined that no less than 8 of the 10 economies in Southeast Asia will have to accelerate the phase-out of energy subsidies to improve the commercial viability of private sector investments in EE projects.

Barry Bredenkamp of SANEDI pointed out that EE scale-up efforts have to bridge the gaps of smaller ESCOs as they need nurturing and improved access to end-user markets. As catalyst, we need to play the matchmaker role between ESCOs and the market. He explains that the market needs a suitable balance between what financial institutions are ready to support and the capacities that will be needed in the financial and ESCO sectors to deploy debt capital through more EE projects. EE information gaps across market stakeholders will likewise have to be filled.

Raul Ortega of AMENEER shared that Mexico is currently going through an interesting transition and are expecting an evolution. Although the policy is not very clear in EE savings, they are lacking policies that promotes EE, not only in fiscal incentives but also incentives that will generate value to the end-users.                                               

Lily Zhao Ming of EESIA shared her insights on how the transition toward a robust, market-driven ESCO industry in China was supported through the last two decades. Numbering over 6,000 in China, ESCOs will have venture to newer markets with the strengthening of policy and regulatory frameworks. Having been busy improving efficiency in the industrial sector, ESCOs will also have to exhaust EE opportunities in the building sector. Zhao shared her view that ESCOs will need a regulatory framework that would help the market discern between the qualified and poorly-performing ESCOs.

Saurabh Kumar of EESL believes that EE and ESCO markets can be developed further with the improved availability of data and the promoted adoption of the deemed savings approach using fixed annuities to enable ESCOs to recoup investments with reduced cash flow-related risks. The EE market needs best practices and a standard model with very simple instruments that are easily understandable by all stakeholders. He declares that it is high time that economies look into creating an equity fund for ESCOs to be able to leverage more debt finance for EE projects.

In organizing this webinar, IEA stated that the world is a long way from unlocking the full potential of energy efficiency. Despite ample evidence of their cost-effectiveness, investments in efficiency have not grown significantly since 2017. While this stems in large part from slow progress in strengthening efficiency policies, the challenges associated with access to finance remains a constraint. ESCOs are businesses that provide energy solutions, which can include generation and supply, energy efficiency, or retrofitting projects. Typically, they deliver efficiency based on contracts tied to energy performance and are key enablers of investments. They help consumers identify, finance and implement projects, thereby lowering the threshold to invest. In particular, ESCOs can reduce the burden of making upfront capital expenditures and facilitate access to commercial financing.

IEA reports that in 2020, the size of the global ESCO market increased by 6% to USD 33 billion, continuing steady growth since 2015. Most of this stemmed from China, where estimated revenues rose 12% despite the pandemic. The United Arab Emirates and the United States also saw growth, while European markets and those in emerging Asia contracted. Without appropriate policy support, ESCOs, particularly the ones that remain in the early development stage, could further lag behind.

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