2018/92 K NKONW A A WELDEGDEG E OL N ONTOET E S ESREI R E ISE S F OFRO R P R&A C T HTEH E NEENREGRYG Y ETX ITCREA C T I V E S G L O B A L P R A C T I C E THE BOTTOM LINE Transforming Energy Efficiency Markets in Developing Over the past decade, Super ESCOs have emerged as a viable Countries: The Emerging Possibilities of Super ESCOs alternative to private sector ESCOs. These government- established entities are well What is at stake here? particularly high in the public and residential sectors, where energy positioned to address market savings are dispersed, and where decisions are driven by multiple Improving energy efficiency is one of the most cost- actors and complex ecosystems. In large industries, meanwhile, barriers and realize energy efficiency potential of the public effective ways to mitigate global climate change energy efficiency interventions can focus on specific, high-impact sector even as they facilitate Significant energy efficiency contributions at a global level are nec- industrial processes (figure 1). the development of private essary not only to limit the increase in global average temperatures Global interventions that have successfully boosted demand-side sector ESCOs. The concept, to 2° C, but also to help countries enhance energy security, increase energy efficiency have involved five main areas, as shown in figure structure, and functions of Super competitiveness, generate employment, reduce poverty, and protect 2 on page 3. All five areas aim toward the development of effective ESCOs are still evolving, but the environment. Energy efficiency contributes to the World Bank’s and scalable financing and delivery mechanisms, and encourage the experience to date has shown twin goals of poverty reduction and shared prosperity.1 switch to new technologies and consumer behaviors in support of that Super ESCOs can unlock Energy efficiency investments may entail higher up-front costs investments for energy efficiency improvements. Interventions range energy efficiency markets facing (relative to standard equipment and appliances, for example), but from utility demand-side management programs (such as allowing challenges with financing, they are generally financially viable and cost-effective on a life-cycle consumers to finance efficiency improvements over time, on their delivery, and implementation. basis. Importantly, energy cost savings can repay initial investment bill2) to dedicated credit lines and venture capital investments.3 costs over time. For example, the investment required to replace While some of these mechanisms may be best suited for certain conventional incandescent or compact fluorescent lamps with sectors (e.g., credit lines for promoting the energy efficiency of large efficient light-emitting diode (LED) bulbs pays off in 6–12 months, and and medium industrial enterprises), others can be flexibly adapted to investment in high-efficiency air conditioners may have a payback serve multiple sectors. Choosing the appropriate mechanism and its period of 6–8 years. Short payback periods are typical for industrial design involves several factors, including: (a) the current legislative, equipment, building materials and equipment, and common house- regulatory, and institutional frameworks relevant to energy efficiency Ashok Sarkar is a hold appliances. within the country; (b) the maturity of financial and credit markets; (c) senior energy specialist in the current state of local energy efficiency service markets, including Yet shifting consumers to more-energy-efficient products the World Bank’s Global the availability of energy service companies (ESCOs) and energy Energy Practice and works remains a challenge. Evidence from several countries, both devel- oped and developing, shows that realizing markets’ energy efficiency auditors; and (d) stakeholders’ technical and financial capabilities to in the Middle East and North Africa, and potential, particularly on the end-user or demand side, is difficult, due develop and implement energy efficiency projects. South Asia regions. Sarah Moin is an to market failures and barriers at the macroeconomic and project energy consultant in transaction levels. Obstacles to scaling up energy efficiency are 2 Sometimes referred to as “On Bill-Financing” in demand side management (DSM) literature. the World Bank’s Global 3 The range of possibilities may be conceptualized as a “ladder” of options for financing 1 Over the past few decades, the Bank’s energy efficiency financing has increased to $1–1.5 Energy Practice. energy efficiency, as Aditya Lukas argues in Live Wire 2018/88. See the “Make Further Connec- billion annually. tions” section for the reference. 2 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 1. The complexities of nudging markets toward greater energy efficiency Macroeconomy Energy prices, economic growth, population change Government/society Policies and technological change Policies and consumer preferences In developing countries, energy efficiency projects Investment in production and Procurement of efficient goods Financing producers of efficient goods have fallen short of their $ and services $ and services true potential owing to $ $ market failures. In some $ $ cases, private sector ESCOs have attempted Market assets to address some of these Equipment manufacturers Appliance Commercial sector failures, but their success Research and development Service contracts Industry remains limited, especially Utilities and ESCOs Software Households/consumers in improving the energy Construction industry Buildings Public sector efficiency of public sector Market actors Financial institutions Financial institutions Vehicles facilities in developing Equipment Supply of Demand for countries. efficiency measures energy efficiency Source: IEA, 2013. Note: ESCOs = energy service companies. Where do ESCOs fit in? a performance-based contract under which the payments from the energy user to the ESCO are contingent upon achieving certain ESCOs have long been recognized for their strong pre-specified performance levels. Also, the ESCO generally allows potential to scale up investments in energy efficiency energy users to pay for its services using the energy cost savings ESCOs are among the most feasible models for scale-up based on that result from the energy efficiency project. This approach allows their early successes in the 1990s in North America, Australia, and energy users to transfer much of a project’s technical, construction, Europe, and in the 2000s in countries such as Japan, the Republic and performance risks to the ESCO. of Korea, and China. An ESCO is an organization that provides a full The concept of energy savings performance contracts (ESPCs) range of services to energy users to design and implement energy implemented by ESCOs has been recognized as a promising efficiency options. The services may also include providing or approach to overcome some of the most intractable market barriers. arranging financing. Such services are provided by the ESCO using Under an ESPC, an ESCO develops, implements, and finances an 3 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 2. Key elements of successful energy efficiency programs Institutions Policy and regulations Dedicated entity with EE mandate Overarching EE legal framework (EE law) Clear institutional roles/accountability Cost-reflective energy pricing The concept of energy Codes/standard with enforcement mechanisms Interministerial coordinating body Assignment of roles for monitoring and savings performance EE incentive schemes with funding sources compliance enforcement EE targets by sector Authority to formulate, implement, evaluate, contracts (ESPCs) Public budgeting/procurement encourages EE and report on programs Tracking on progress for EE targets implemented by ESCOs has been recognized as Successful Information and awareness a promising approach to Database on energy consumption energy efficiency Financing Commercial bank lending (credit lines, guarantees) overcome some of the Industrial and building stock programs Cash-flow-based EE financing Information center/case study database Commercial ESCO financing most intractable market Database of service providers, EE technologies, Public sector EE financing and equipment providers barriers. Yet despite Broad, sustained public awareness Residential home/appliance credit Equipment leasing the potential of ESPCs, Appliance labeling Technical capacity Energy auditor/manager training and certification programs the growth of the ESCO Private sector training programs (banks, ESCOs/EE service providers, end users) industry globally has been EE project templates (audits, M&V plans, EPC bidding documents, contracts) rather slow. Energy management systems developed Source: Adapted from World Bank, 2014; 2016a. Note: EE = energy efficiency; EPC = energy performance contract; ESCO = energy service company; M&V = measurement and verification. energy efficiency project (at the customer level), and uses the stream • An immature energy efficiency market implies high project of income from the cost savings to repay the costs of the project, development costs. including the costs of the investment (figure 3).4 • The ESCO model lacks credibility among energy users due to its However, despite the potential of ESPCs, the growth of the ESCO relative novelty and undeveloped measurement and verification industry globally has been rather slow (Hofer, Singh, and Limaye (M&V) protocols. 2016). There are many reasons for this, including the following. • Domestic financial institutions perceive energy efficiency projects • A lack of available commercial financing and a small capital base as inherently more risky than other investments, and set high make it difficult for most independent ESCOs to access project equity requirements for project financing. funding from commercial finance institutions. 4 The terms EPC (Energy Performance Contracts) and ESPC (Energy Service Performance Contracts) are used interchangeably in the literature. 4 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 3. ESCO implementation models Public sector energy use varies widely across countries, but gen- erally represents a major cost for government at all levels (central, Shared savings model state, city, etc.) even as it competes with other uses of the govern- ESCOs take both performance and credit risk ment’s limited resources. Since public sector buildings (administra- Financial tive offices, schools, hospitals, etc.) often constitute the largest single institution Not until the last decade largest energy user within many countries, the bundling of many have Super ESCOs small and dispersed investments to improve these facilities’ energy Repayment from efficiency may be a highly attractive business opportunity, enticing emerged as a practical Loan portion of savings share commercial suppliers to enter the energy efficiency market. Investing means of addressing the in the energy efficiency of public facilities can also help lower future Project development, barriers to large-scale financing, and implementation operating costs, create local jobs, and offer a high-visibility model for ESCO End user implementation of energy Payment based on savings other sectors to follow. share according to ESPC To date, however, ESCOs have played a very limited role in the efficiency projects in the implementation of energy efficiency projects in both public facilities public sector. Guaranteed savings model and the residential sector in developing countries. Barriers to their ESCOs take performance risk use in the public sector are outlined in figure 4. Financial institution Figure 4. Barriers to using ESCOs to implement energy efficiency projects in the public sector Repayment with Loan funds according to ESPC Private ESCOs perceive higher risks of getting Separation of capital and Project development paid for their investment operating budgets makes it and implementation through energy cost savings difficult to capture budget End user ESCO by the public sector savings to repay the ESCO Fee payment for services according to ESPC Restrictive public sector Borrowing restrictions Savings guarantee procurement rules. Public sector of public agencies and Focus on the lowest bid rather barriers unwillingness of banks to than the best value for money. provide project financing Energy supply contracting or chauffage Limited technical capacity Lack of incentive of public buildings to for public sector staff Operations and maintenance understand and implement to save energy of the equipment energy efficiency programs ESCO End user Sells the energy output Source: Adapted from Limaye, Singh and Hofer, 2014. Note: ESCO = energy service company. Assumes costs for all equipment Ownership upgrades Source: Adapted from Sarkar 2018. Note: ESCO = energy service company; ESPC = energy savings performance contract. 5 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 5. An illustrative model of a Super ESCO Government energy efficiency agency Government (capitalization/ownership) (of the country) The functions of the Financing (banks/FIs, leasing Super ESCO companies, equipment suppliers) full-service Super ESCO can potentially cover Private ESCOs Public sector projects Private sector projects all the building blocks of an energy efficiency Subcontracts for services ESPC for energy savings Cofinancing, leasing companies, ESPC, M&V ecosystem. Services Source: Authors’ compilation. Note: ESCOs = energy service companies; ESPC = energy savings performance contract; FIs = financial institutions; M&V = measurement and verification. Can “Super ESCOs” help ESCOs fulfill their potential? The functions of the full-service Super ESCO (figure 5) are multifaceted and can potentially cover all the building blocks of an Super ESCOs have succeeded where previous energy efficiency ecosystem, from energy audits to project design ESCO development did not to performance contracting, procurement of energy efficiency The concept of a so-called Super ESCO—designed for markets measures or services (including through private ESCOs), installation, where traditional ESCOs have failed to expand their reach—has been and M&V of energy savings to operations and maintenance. Thus, the discussed for years in policy circles. But not until the last decade, has Super ESCO not only moderates stakeholders’ risks but also helps the entity emerged as a practical means of addressing the barriers to build trust, including between private ESCOs and public sector end large-scale implementation of energy efficiency projects in the public users. In some cases, the Super ESCO provides credit or risk guar- sector (Singh and others 2009). antees for ESCO projects, leases energy efficiency equipment, and The terms “Super ESCO” and “public ESCO” are often used facilitates interactions among policy makers, private sector ESCOs, interchangeably, but there is a fine line between the two. A public financial institutions, and end customers. ESCO is owned by the government and deals almost exclusively with Even in the face of financing, delivery, and implementation the public sector. A Super ESCO is established by the government challenges, the Super ESCO has succeeded where private sector and supports not only the public sector (hospitals, schools, munic- ESCO development has had limited results.6 ipalities, government buildings, and other public facilities) but also private sector ESCOs through capacity building, project development, and facilitation. For example, it may implement public sector projects 6 Amid a rapid decline in costs and wider availability of solar photovoltaic (PV) and informa- with the support of private ESCOs, and, in some cases, even provide tion and communication technology (ICT)-based technologies, the solutions offered by both them with financing.5 ESCOs and Super ESCOs include renewable-energy-based technologies (like rooftop solar PV, solar [absorption] cooling, and solar LED street lighting) and energy conservation gadgets (like thermostats, motion sensors), packaged together with traditional energy efficiency measures 5 In this context, a public ESCO may be considered a subset of a Super ESCO. like efficient LED lights, and efficient air conditioners and heating equipment and systems. 6 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs How do they work? Figure 6. How a Super ESCO can work with private ESCOs to implement projects Typically, the government capitalizes a Super ESCO with sufficient Shared savings model funds to undertake public sector ESPC projects and to leverage private sector/commercial financing. The Super ESCO then has a dual Super ESCO role of supporting the capacity development and project develop- Shared Shared savings The ideal, full-service ment activities of existing private sector ESCOs, and helping to create M&V fees savings to ESCO Energy audit ESPC Super ESCO helps meet new ESCOs. and MOU Independent ESCO the energy efficiency In sum, the ideal, full-service Super ESCO helps meet the energy M&V agency (private) Super/master efficiency needs of public agencies and the development needs of needs of public agencies ESPC the private sector ESCO industry in parallel. It works directly with the M&V service Invest and implement and the development public sector to: End user EE measures (public building, street lighting, needs of the private sector • Identify energy-savings opportunities in public facilities; water pumping) ESCO industry. • Design technical solutions (that is, energy efficiency measures ranging from simple equipment replacement to complex Guaranteed savings model systems-based approaches) and specifications; Super ESCO • Aggregate the demand for energy efficiency measures, entering into ESPCs (shared or guaranteed savings contracts through M&V fees Guaranteed Fee payments Investment savings to ESCO pay-as-you-save [PAYS] schemes) with end users (municipalities, Energy audit in EE ESPC and MOU measures public building authorities, etc.); Independent ESCO M&V agency (private) • Conduct joint (with end users) or independent M&V of energy Super/master Shared ESPC savings savings (as per the protocol agreed to in the ESPC7); M&V service Implement • Recover its investments from end users’ monetized energy End user EE measures savings, as realized through PAYS schemes; (public building, street lighting, water pumping) • Operate and maintain the equipment and systems for a few years, the entire period of the ESPC, or the entire lifetime of the Source: Authors’ compilation and adapted from World Bank, 2018b. equipment (as agreed with the end user). Note: EE = energy efficiency; ESCO = energy service company; ESPC = energy savings perfor- mance contract; US$ - US dollar; M&V = measurement and verification; MOU = memorandum of The Super ESCO can help create an enabling environment for understanding. private sector ESCOs by: • Demonstrating ESPCs’ viability to public sector decision makers • Directly engaging ESCOs as contractors in the implementation of and investors, and helping these actors become more familiar large projects in public facilities (such as for installation, commis- with shared and guaranteed savings models and PAYS schemes; sioning, and performance monitoring), thereby helping to build • Standardizing technical specifications and transaction templates their capacity through either shared or guaranteed savings (as and tools (e.g., ESPC and M&V protocols, risk-sharing platforms) shown in figure 6); and making these available to private ESCOs (e.g., to be used • Arranging access to or guaranteeing/de-risking financing for for public energy efficiency projects) and end users, thereby small, private ESCOs to help them implement projects and build reducing the perceived risk of working with ESCOs; their capacity and credentials; • Raising consumers’ awareness of energy efficiency concerns, 7 Depending upon the sector, end user, and energy saving measures being used, the M&V resulting in increased demand for energy efficiency investments protocol could range from simple (similar to Option A of the International Performance Mea- to be met by the private sector ESCO industry. surement and Verification Protocol [IPMVP]) to complex (similar to Option D of the IPMVP). 7 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs What has been the global experience with With the objective of increasing its profitability and positioning itself as a market leader, the HEP ESCO entered new market segments, Super ESCOs? including greenfield renewable energy projects—a notable example Countries have created Super ESCOs to help tap was the Hrast biomass cogeneration project. their public sectors’ energy efficiency potential Being a utility-based ESCO had both positive and negative The U.S. Federal Energy and facilitate the development of domestic energy consequences. On the positive side, the HEP ESCO benefited from Management Program HEP’s positive corporate image and gained access to HEP’s cus- services and private sector ESCOs tomer database for data mining and customer-sector identification. is one of the earliest The examples reviewed here span a quarter-century, from the Additionally, loans to the HEP ESCO were made through HEP , which examples of a public early 1990s (U.S. Federal Energy Management Program) to the early is a creditworthy client. But one of the major drawbacks of being institutional model close to 2000s (Belgium’s FEDESCO, Croatia’s HEP ESCO, and Fakai in China’s a subsidiary was the need to apply HEP’s human resources and the Super ESCO concept. Hebei Province), to more recently established Super ESCOs in India, compensation policies, which were not adapted for a fast-growing Armenia, Saudi Arabia, and the United Arab Emirates. Others not company that needed experienced staff. profiled here are still on the drawing board. For example, the World India’s Energy Efficiency Services Limited (EESL). Energy Bank is currently discussing possible Super ESCO models in the Efficiency Services Limited (EESL) was established in 2009 as a state- Philippines and Turkey. owned ESCO, a joint venture of four public sector enterprises under The U.S. Federal Energy Management Program. Even the Ministry of Power.8 EESL has emerged as an important entity in though the U.S. Federal Energy Management Program, (FEMP , https:// India, financing and delivering energy efficiency solutions, especially www.energy.gov/) which came into existence in the 1990s, predates in the residential9 and public sectors. India’s energy efficiency market the term “Super ESCO,” it is one of the earliest examples of a public is estimated to be $12 billion per year. Unlike most Super ESCOs, institutional model close to the Super ESCO concept. The FEMP lever- EESL’s early success started with the residential sector under its ages government performance contracting to help federal agencies UJALA program (figure 7). EESL’s approach involves aggregating work with private ESCOs to implement energy-saving projects that demand for energy-efficient appliances and equipment, providing build optimization, resilience, and security. The FEMP provides federal up-front financing using a combination of financing sources (includ- agencies with a broad range of information and tools to foster ing equity capital from promoters, along with loans from develop- building optimization, affordable and replicable solutions, and project ment partners and commercial lenders), and using competitive bulk development guidance. To date, the FEMP has helped government procurement to improve affordability while ensuring the quality of agencies reduce the energy intensity of their facilities by approxi- high-efficiency appliances. EESL has been able to mitigate up-front mately 49 percent. financing risks for its customers by making the entire up-front capital The HEP ESCO in Croatia. The World Bank supported investment, through PAYS under an on-bill financing approach the creation of the HEP energy service company (ESCO) within (Option 2 in figure 7) or a direct up-front payment by the consumer Hrvatska Elektroprivreda d.d. (HEP—the national power utility) with the objective of developing, financing, and implementing energy 8 The four public sector enterprises are the National Thermal Power Corporation (NTPC), Rural efficiency projects on a commercial, for-profit basis, using local Electrification Corporation (REC), Power Finance Corporation (PFC), and Power Grid Corporation businesses as key delivery agents (World Bank 2010). The HEP ESCO of India (PGCIL). 9 Like public sector facilities, the residential sector has relatively homogeneous end-use found a niche market, financing energy efficiency projects for the consumption patterns, but, here, energy efficiency measures entail higher transaction costs public buildings of local authorities (administration buildings, schools, because of the dispersed nature of residential consumption—and the relative low impact of measures at the individual household level. Thus, the residential sector offers great potential etc.), hospitals, or universities, and street lighting. It implemented 31 for replicability and bundling. Efforts to realize this have been stymied by similar challenges energy efficiency projects on a commercial, for-profit basis, for a total as those seen in the public sector. ESCOs) driven by inaccessibility of credible market data, cumulative value of $29.5 million in energy efficiency investments. absence of standardization of technology-specific solutions, and tight contractual frameworks and legal enforcements. 8 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 7. Operating model of EESL’s UJALA Program (tube lights, EESL’s role as a facilitator of projects implemented by private LED bulbs, efficient ceiling fans) ESCOs has been limited to date. Recently, the World Bank approved a loan that aims to help EESL develop sustainable business models Electricity Loan from Financial distribution using private ESCOs (World Bank 2018b). O institution pt financial Saudi Arabia’s Tarshid. Saudi Arabia’s Public Investment Fund io utility n institution 2 Energy Saudi Arabia created Loan Monthly saving (PIF 2017) created the National Energy Services Company (NESCO), repayment Payments payment the National Energy also known as Tarshid, http://www.tarshid.com.sa/) in October 2017 with an initial capitalization of over $500 million, to increase the Services Company to EESL Consumer ion1 Upfront energy efficiency of government and public buildings, public street Opt diversify the economy LED bulbs, tube lights, payment lighting, etc., and stimulate growth of the country’s energy efficiency and fans and drive environmental LED bulbs, tube lights, industry, in line with the objectives of the Government’s Vision 2030 Distribution and fan distribution sustainability. agency to diversify the economy and drive environmental sustainability (Al Arabiya English 2017). All government bodies are mandated to Source: Adapted from Bhatt, 2017. contract with Tarshid on an exclusive basis as per a royal decree. Note: EE = energy efficiency; EESL = Energy Efficiency Services Limited; LED = light-emitting This Super ESCO will cover 70 percent of all projects in the country’s diode. energy efficiency sector, estimated to be an over $11 billion market. Tarshid has set up a framework for competitively procuring the services of private sector ESCOs through ESPCs to deliver energy (Option 1 in figure 7). In case of public sector projects (like LED public efficiency equipment and solutions in public buildings across the street lighting), EESL has demonstrated the viability of the deemed country. In this process, Tarshid is also helping build the capacity of savings M&V approach as the basis for ESPC-based contracts, paving local ESCOs, and preparing transaction tools and ESPC templates as the way for use of similar contractual models by private ESCOs. In well as developing guidance for the measurement and verification addition, by procuring large volumes from a variety of suppliers that of energy savings as per international benchmarks. Since early 2018, meet strong technical standards, EESL is credited with helping spur Tarshid has started the process of developing and implementing development of manufacturing capacity in India and lowering the energy retrofit projects in dozens of public office buildings, schools, price of energy efficiency measures to make them affordable and and mosques, and has also started developing a LED street lighting financially more viable. In its Street Lighting National Program (SLNP), program. The initial deployment of LED street lights in Riyadh is the entire up-front investment for street lights is made by EESL and under way. recovered from the energy savings of municipalities over the project Armenia’s Renewable Resources and Energy Efficiency duration, using the deemed savings M&V approach. Over 6 million Fund (R2E2 Fund). The Armenian government established the street lights have been deployed so far. R2E2 Fund, in 2005 with the mandate to promote the development EESL’s initiatives have helped avoid over 8.5 gigawatts (GW) of of Armenia’s renewable energy and energy efficiency markets and to new electricity generation capacity. Under its LED initiative, called facilitate investments in these sectors. Under the World Bank–Global UJALA, EESL has successfully deployed over 300 million (7 and 9 Environment Facility’s Energy Efficiency Project, the R2E2 Fund watt) LED bulbs over four years to households and institutional provides turnkey services (energy audit, procurement, detailed consumers (as of May 2018) through bulk procurement, distribution, design, financing, construction, and monitoring) for energy efficiency quality control, M&V of savings, and after-sales and warranty upgrades in public buildings using output- and performance-based servicing, and has driven the procurement price of LEDs from $4.60 contracts. The project was designed to develop, test, and dissemi- per bulb in 2014 to $0.56 in 2017, triggering the retail market price to nate replicable and sustainable models for the provision of energy also go down from $8.20 to $2.20 during the same period. 9 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 8. End user’s cash flows under the ESA in Armenia Figure 9. Implementation arrangements of FEDESCO in Belgium EE retrofit Owns or manages Federal Baseline payments to escrow account for 5–10 years building agency Agency cash flow Investment Exclusivity (2) (1) repayment EPC without Capital for competition project Baseline FEDESCO Overall, a Super ESCO energy costs Reduced New energy Public buildings (public) (3) repayment Banks energy bill Cost-saving bill sharing lends credibility to energy Imp Service fee Subcontract competitive basis (4) lem ent efficiency investment, Baseline During contract After contract (5) EE r etro fit ESCOs/service provider (private) addresses barriers such Source: World Bank, 2016b. as high transaction Contractual arrangement Fund flow costs, enables the efficiency services through the use of energy service agreements (ESAs) as explained in figure 8.10 Source: World Bank, 2018a. public sector to improve Note: EPC = engineering, procurement, and construction; ESCOs = energy service companies. At the end of the project in 2016, 62 ESAs totaling $9.89 million efficiency in buildings were signed by the fund.11 The fund more than doubled the project’s and infrastructure, builds key indicator targets, with energy savings of 520 million kilowatt-hours FEDESCO cooperates exclusively with the Federal Building Agency local ESCOs’ capacity, and (kWh) and greenhouse gas (GHG) savings of 137,569 tons of carbon and enters into engineering, procurement, and construction (EPC) ensures the accountability dioxide (CO2) (versus the project targets of 215 million kWh and contracts with public facilities without competition, using either of equipment suppliers 50,549 tons CO2). Energy savings averaged almost 51 percent, and internal funds or financing from commercial banks (with a state payback periods ranged from 2.6 to 8.8 years. The repaid amount is and contractors through guarantee) (figure 9). It then subcontracts energy efficiency retrofit $2.6 million, and there are no defaults—in fact, several have made the introduction of work to private ESCOs or service providers on a competitive basis. early repayments. In addition to energy savings, the procurement In these implementation arrangements, FEDESCO bears a direct performance-based scheme encouraged the development of a local ESCO industry and contractual obligation to repay loans from the banks and assumes payments. introduced new technologies, such as LED bulbs, condensing boilers, performance risks for thermal retrofits. solar photovoltaic (PV), and heat pumps. Many beneficiaries have In 2012, FEDESCO reported total energy savings of 19,883 reported substantial improvements in their building conditions and in megawatt-hours (MWh), which it valued at €1,937,159. The forecast operations and maintenance savings, which they have used to invest was for annual savings of €1,109,681.61 and the average payback for in extending service and completing internal repairs and renovations the measures was estimated to be 2.25 years. Total greenhouse gas (World Bank 2016b). (GHG) savings totaled 9,400 tons of CO2. FEDESCO offers lessons in Belgium’s FEDESCO. As a 100 percent subsidiary of the Federal the importance of taking a long-term perspective and working with Participation and Investment Corporation, FEDESCO facilitates and other stakeholders to spread knowledge and experience. In a short finances energy efficiency projects in federal government buildings time, it has evolved from a third-party financer offering all services to throughout Belgium. It was founded in September 2005 as a public a company that provides a range of services and acts as a facilitator limited company with a capital investment of €6.5 million and an to bring in the private sector as much as possible (World Bank 2018a). additional €10 million in state guarantees. To implement projects, The Etihad ESCO in the United Arab Emirates. In the 10 Under an ESA, the financier (in this case, the R2E2 Fund) offers a full package of services United Arab Emirates, the Etihad ESCO12 was established in 2013 by to identify, finance, procure, implement, and monitor energy efficiency projects for clients. The the Dubai Electricity and Water Authority (DEWA) as a Super ESCO client is asked to pay only what it is currently paying for energy, that is, its baseline energy costs. The financier then uses this to make the new (lower) energy payments and recover its invest- to make Dubai’s built environment a leading example of energy ment costs and associated fees until the contract period ends. 11 As of today, 64 ESAs (representing 164 facilities) have been completed and commissioned. 12 http://www.etihadesco.ae. 10 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs Figure 10. Etihad ESCO model in the UAE What have we learned? Building In developing countries, energy efficiency projects owner have fallen short of their true potential owing to Payments Energy efficiency Equipment and services market failures. Super ESCO’s can help It is important for a Super Guarantee of savings Overall, a Super ESCO lends credibility to energy efficiency invest- Audit and consulting ESCO to have an exit Investment Tendering and bid negotiation ment, addresses barriers such as high transaction costs, enables the Etihad Project management strategy after triggering Investor ESCO Verification of savings public sector to improve efficiency in buildings and infrastructure, Profit transformation in energy Reporting builds local ESCOs’ capacity, and ensures the accountability of equipment suppliers and contractors through the introduction of efficiency markets. Suppy of retrofit work Payments Guarantee of savings performance-based payments. To achieve these successes, the Chiller retrofit Super ESCO must be overseen by a strong, dedicated institution with ESCOs Lighting retrofit a clear mandate, well-trained and motivated staff with adequate BAS installation, etc. compensation, dedicated management, and a strong marketing plan Source: Michaud, 2016. to raise awareness and promote understanding of energy efficiency. Note: BAS = building automation system; ESCOs = energy service companies. Since the success of Super ESCOs in scaling up energy efficiency investments requires a continuous influx of financing, it is critical that follow-on financing be secured before development financing (e.g., efficiency for the region and the world. Etihad ESCO aims to develop from the World Bank) ends, to ensure that there is no disruption in energy efficiency projects targeting more than 30,000 buildings in operations. Also, the model must be adapted to the country context, Dubai with a goal of 1.7 terawatt-hours (TWh) in energy savings by and may not be the right fit for all institutional setups. 2030. Etihad ESCO is fostering a viable ESPC market for ESCOs by It is important for a Super ESCO to have an exit strategy after executing building retrofits, increasing the penetration of district triggering transformation in energy efficiency markets. Partnering cooling, building the capacity of local ESCOs, and facilitating access financial institutions should bring in, not crowd out, commercial to project finance. As explained in figure 10, Etihad ESCO prequalifies financing, even as private ESCOs grow to meet the increasing market buildings from the owners’ portfolios, organizes the tendering on demand for energy efficiency improvements. behalf of owners, arranges financing if it is outside an owner’s Over the past decade, Super ESCOs have emerged as a viable budget, follows up on project execution, and follows up during the alternative to private sector ESCOs. These government-established guarantee phase. entities are well positioned to address market barriers and realize In September 2017, Etihad ESCO announced that it had initiated energy efficiency potential of the public sector even as they facilitate a project to retrofit 243 buildings in different parts of Dubai. The the development of private sector ESCOs. The concept, structure, and company is also retrofitting 8 power stations for DEWA, 1 fuel station functions of Super ESCOs are still evolving, but experience to date for ENOC, 3 buildings for Dubai Healthcare City, and 35 buildings has shown that Super ESCOs can unlock energy efficiency markets for Dubai Golf. Etihad ESCO intends to complete 6 ongoing retrofit facing challenges with financing, delivery, and implementation. projects before June 2019, including Terminals 1, 2, and 3 of the Dubai International Airport and the Airport Hotel. All 6 projects are expected to result in combined annual energy savings of $16.44 million or 131.45 gigawatt-hours (GWh) (Cerna 2018). 11 TRANSFORMING ENERGY EFFICIENCY MARKETS IN DEVELOPING COUNTRIES: THE EMERGING POSSIBILITIES OF SUPER ESCOs References and other sources Michaud, N. 2016. “Etihad ESCO, the Implementation of a Super ESCO MAKE FURTHER Al Arabiya English. 2017. “Saudi’s PIF Sets up Energy Service in Dubai.” Presentation at the Asia Clean Energy Forum, Manila, CONNECTIONS June 5–9. Firm Super ESCO.” http://english.alarabiya.net/en/business/ PIF (Public Investment Fund). 2017. “The Public Investment Fund energy/2017/10/18/Saudi-s-PIF-sets-up-energy-service-firm- Live Wire 2014/11. “Designing Establishes Super Energy Service Company—Super ESCO.” PR Credit Lines for Energy Efficiency,” Super ESCO.html. Newswire, October 18, 2017, Riyadh, Saudi Arabia. by Ashok Sarkar, Jonathan Sinton, Beyer, J. 2017. “Facilitating Finance: A Case for the Super and Joeri de Wit. Sarkar, A. 2018. “Overview of ESCO Delivery Models.” Presentation at ESCO.” EU-GCC Workshop on Energy Efficiency and Cooling the Energy Transition in Asia: South-South Knowledge Exchange Live Wire 2014/18. “Exploiting Market- Technologies, May 3–4. Workshop on Energy Efficiency, Singapore, January 24-28. Based Mechanisms to Meet Utilities’ Bhatt, N. 2017. “Success Story ‘Scaling Energy Efficiency’: An Indian Energy Efficiency Obligations,” by Singh, J., D. Limaye, B. Henderson, and X. Shi. 2009. Public Experience.” Presentation at the Asia Clean Energy Forum, Jonathan Sinton and Joeri de Wit. Procurement of Energy Efficiency Services: Lessons from Manila, June 5–9. International Experience. Washington, DC: World Bank. Live Wire 2014/25. “Doubling the Rate Cerna, F. 2018. “Etihad ESCO To Deliver Six Retrofit Projects in Dubai of Improvement of Energy Efficiency,” World Bank. 2010. Croatia—Energy Efficiency Project. Washington, by Q2 2019.” ConstructionWeekOnline.com, ITP Media Group, by Jonathan Sinton, Ivan Jacques, DC: World Bank. Ashok Sarkar, and Irina Bushueva. April 11, 2018. ———. 2013. Global Overview of ESCOs and Super ESCOs. FEMP (Federal Energy Management Program). n.d. “Small Business Live Wire 2016/53. “Why Energy Washington, DC: World Bank. Advocate Success Story.” U.S. Department of Energy and Federal Efficiency Matters and How to ———. 2014. Scaling Up Energy Efficiency in Buildings in the Western Scale It Up,” by Jas Singh. Energy Management Program. https://www.energy.gov/. Balkans. Final Report. Washington, DC: World Bank. Graves, L. 2017. “Saudi Arabia’s PIF to Save Oil with New Energy Live Wire 2016/54. “Fostering the ———. 2016a. “Delivering Energy Efficiency in the Middle East and Services Company.” The National, October 18, 2017. 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Limaye. 2011. “Scaling up Energy Efficiency: The helpful comments. Live Wire 2018/91. “Financing Case for a Super ESCO.” Energy Efficiency 4: 133–44. Energy Efficiency, Part 2: Lines of Credit,” by Yun Wu Limaye, D., J. Singh, and K. Hofer. 2014. Establishing and and Jas Singh. Operationalizing an Energy Efficiency Revolving Fund: Scaling Up Energy Efficiency in Buildings in the Western Balkans. World Bank Find these and the entire Live Wire Group, Washington, DC. http://hdl.handle.net/10986/20043 archive at https://openknowledge. worldbank.org/handle/10986/17135. An invitation to World Bank Group staff Contribute to If you can’t spare the time to contribute to Live Wire but have an idea for a topic or case we should cover, let us know! We welcome your ideas through any of the following channels: Do you have something to say? 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