Energy Service Companies

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In recent years there has been an increased interest in the provision of energy services to achieve energy and environmental goals. In particular some new companies providing energy services to final energy users, including the supply and installations of energy efficient equipment, and/or the building refurbishment, have started to operate on the European market.

What characterises these companies, defined as Energy Service Companies (ESCOs) from the traditional energy consultants or equipment suppliers is the fact that they can also finance or arrange financing for the operation and their remuneration is directly tied to the energy savings achieved. This page offer some information about ESCO operating in the European market and their projects.

The European Commission DG JRC analysis and research the activities and development of ESCO as part of Scientific & Technical Reference System on Renewable Energy and Energy End-use Efficiency in order to provide accurate information to policy makers, experts and other interested parties.


Energy services

Energy services include a wide range of activities, such as:

Ø       energy analysis and audits,

Ø       energy management,

Ø       project design and implementation,

Ø       maintenance and operation,

Ø       monitoring and evaluation of savings,

Ø       property/facility management,

Ø       energy and/or equipment supply,

Ø       provision of service (space heating, lighting, etc.)

 

What is an ESCO?

An ESCO is a company that offers energy services which may include implementing energy-efficiency projects (and also renewable energy projects) and in many case on a turn-key basis. The three main characteristics of an ESCO are: 

  • 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.

Therefore ESCOs accept some degree of risk for the achievement of improved energy efficiency in a user’s facility and have their payment for the services delivered based (either in whole or at least in part) on the achievement of those energy efficiency improvements.

Another category of companies that offer energy services to final energy users, including the supply and installation of energy-efficient equipment, the supply of energy, and/or building refurbishment, maintenance and operation, facility management, and the supply of energy (including heat), are Energy Service Provider Companies (ESPCs). They may be consultants specialised in efficiency improvements, equipment manufacturers or utilities. ESPCs provide a service for a fixed fee or as added value to the supply of equipment. ESPC may have some incentives to reduce consumption, but these are not as clear as in the ESCO approach. Often the full cost of energy services is recovered in the fee, so the ESPC does not assume any risk in case of underperformance. EPSC is paid a fee for their advice or equipment rather than being paid based on the results of their recommendations.

 

ESCO project elements

The typical ESCO project includes the following elements:

Ø       Site survey and preliminary evaluation;

Ø       Investment grade energy audit;

Ø       Identification of possible energy saving and efficiency improving actions;

Ø       Financial presentation and client decision;

Ø       Guarantee of the results by proper contract clauses;

Ø       Project financing;

Ø       Comprehensive engineering and project design and specifications;

Ø       Procurement and installation of equipment; final design and construction;

Ø       Project management, commissioning and acceptance;

Ø       Facility and equipment operation & maintenance for the contract period;

Ø       Purchase of fuel & electricity (to provide heat, comfort, light, etc.);

Ø       Measurement and verifications of the savings results;

Ø       Operation and maintenance.

The Investment Grade Audit (IGA) deserves special attention. The traditional energy audit does not sufficiently consider how implemented measures will behave over time. An IGA builds on the conventional energy audit because auditors must consider the conditions under which measures will function during the life of the project. Unlike the traditional energy audit, which assumes that all conditions (related to e.g. system, payback, people) remain the same over time, IGA attempts to more accurately predict a building's future energy use by adding the dimension of a ‘risk assessment component’ which evaluates conditions in a specific building and/or processes. Aspect of the IGA, including risk management, the “people” factor, measurement and verification, financing issues, report presentation guidelines, and master planning strategies.

An IGA should therefore serve as a financial investment guide as to how the physical assets of an organization can be improved.