Navigant Research Blog

ESCOs See Opportunity Growing Across Europe

Eric Bloom — February 19, 2013

Source: ESCO EuropeEnergy service companies (ESCOs), which offer performance guarantees and financial assistance to building owners making energy efficiency retrofits, employ a compelling model for reducing energy consumption with minimal capital costs for end-users, known as energy performance contracting (EPC).  Despite the theoretical appeal of low-capital energy cost reduction, the market for energy efficiency remains largely untapped in Europe.  Assessing the state of the current European ESCO market was the focus of discussion at ESCO Europe 2013, the annual conference that gathers leaders and experts in the ESCO market, including service providers, government officials, and financiers.

In the past, access to financing instruments was often described as a barrier to broader adoption of energy efficiency services.  Today, however, it seems that financiers are eager to invest in energy efficiency opportunities in Europe.  Firms such as Sustainable Development Capital LLP and ENVESTCO are creating financing instruments with risk and return expectations specifically suited to ESCOs and energy performance contracting and are “greasing the skids” for a wider range of customers to engage in deep energy efficiency retrofits using third-party financing resources.

Europe benefits not only from the presence of these new financiers, but also from a range of funds and mechanisms for efficiency at the EU level.  For example, the European Investment Bank, the world’s largest international public lending institution, is currently lending €1 billion ($1.4 billion) per year to energy efficiency projects.  In addition, the European Energy Efficiency Fund (EEE-F), established in 2011, is a €265 million ($358 million) fund, managed by Deutsche Bank, which invests in small-scale, €5 million to €25 million ($7 million to $34 million), clean energy and energy efficiency projects for local governments across Europe.

Raising Awareness

So if financial resources aren’t the issue, then what are the barriers to wider adoption in Europe?  One persistent issue facing energy performance contracting in Europe is the low level of awareness among local governments and building owners regarding the availability of ESCO services and their benefits.  At first glance, many potential municipal customers see energy performance contracting as an unattractive type of off-balance sheet municipal debt.  In some cases, they assume it’s not allowed due to tender law (which is sometimes but often not the case).  In others, they shy away from ESCOs because they doubt that promised energy efficiency gains will be delivered.  Groups such as the European Association of Energy Service Companies are actively trying to change tender laws to allow for energy performance contracting and assuage concerns about the model among government officials.

Still, most of the ESCOs I spoke with in Copenhagen reported that business has been good over the last few years, despite the gloomy economic conditions in Europe overall.  In fact, some ESCOs said that concerns about operating budgets among governments and industrial firms have in fact boosted their businesses.  As awareness of energy performance contracting grows, the financial markets for energy efficiency mature, and policies such as the EU Energy Efficiency Directive transform decision-making on energy efficiency, I expect that ESCOs will continue to tap more of the latent potential that exists in this market.

To learn more about innovative energy efficiency financing instruments, you can view the replay of our Pike Research webinar on “Financing Energy Efficiency.”

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