6.8.3.5 Promotion of energy service companies (ESCOs) and energy performance contracting (EPC)

While not a ‘policy instrument’, ESCOs have become favoured vehicles to deliver energy-efficiency improvements and are promoted by a number of policies. An ESCO is a company that offers energy services, such as energy analysis and audits, energy management, project design and implementation, maintenance and operation, monitoring and evaluation of savings, property/facility management, energy and/or equipment supply and provision of energy services (e.g., space heating, lighting). ESCOs guarantee the energy savings and/or the provision of a specified level of energy service at lower cost by taking responsibility for energy-efficiency investments or/and improved maintenance and operation of the facility. This is typically executed legally through an arrangement called ‘energy performance contracting’ (EPC). In many cases, the ESCO’s compensation is directly tied to the energy savings achieved. ESCOs can also directly provide or arrange for project financing, or assist with financing by providing an energy (cost) savings guarantee for their projects. Finally, ESCOs often retain an ongoing operational role, provide training to on-site personnel, and take responsibility for measuring and verifying the savings over the term of the project loan.

In 2006, the US ESCO market is considered the most advanced in the world (Goldman et al., 2005), with revenues reaching about US$ 2 billion in 2002 (Lin and Deng, 2004). Most US ESCO activity (approximately 75%) is in the public sector. The market for energy-efficiency services in Western Europe was estimated to be € 150 million/yr in 2000, while the market potential was estimated at € 5–10 billion/yr (Butson, 1998; Bertoldi and Starter, 2003). Germany and Austria are the ESCO leaders in Europe, with street-lighting projects among the most common demand-side EPC projects, and public buildings the most targeted sector (Bertoldi et al., 2005; Rezessy et al., 2005). Between 1998 and 2003, 600–700 public buildings were renovated in Austria using energy performance contracting by ESCOs. Austria is now using EPCs to renovate 50% of the total floor area of federal buildings (Leutgöb, 2003). In Germany, more than 200 EPCs have been signed since the mid-1990s, primarily for public buildings (Seefeldt, 2003). In Japan, the ESCO market is growing quickly, with a focus on the commercial and public sectors (office buildings and hospitals) (Murakoshi and Nakagami, 2003). In India and Mexico, ESCOs also have targeted at least 50% of their activity in the public and commercial sectors (Vine, 2005). Most ESCOs do not target the residential sector, although exceptions exist (e.g., in Nepal and South Africa).

ESCOs greatly facilitate the access of building owners and operators to technical expertise and innovative project financing. They can play a central role in improving energy efficiency without burdening public budgets and regulatory intervention to markets. However, the ESCO industry does not always develop on its own and policies and initiatives may be necessary to kick-start the market. The commitment of federal and municipal authorities to use ESCOs for their energy-efficiency projects, along with supportive policies and public-private partnerships has been crucial in countries such as Germany and Austria (Brand and Geissler, 2003). In some cases, obligations imposed on electricity companies have fostered the development of ESCO activities, as in the case of Brazil, where power utilities are required to invest 1% of their net operating revenues in energy efficiency.