Energy performance contracting helps companies implement sustainable energy technologies in their processes without having to go through the investment risks.
By FENWICKS SHOMBE
Even as businesses implement the sustainable energy initiatives, they still have to meet the investors’ bottom-line, operate within provisioned budgets and give priority to their most pressing capital and operating expense needs. In this context therefore, most business cite financial constraints as the primary reason that hinders them from adopting the initiatives.
Energy performance contracting is an emerging business model that can help companies implement sustainable energy technologies in their processes without having to go through the investment risks.
In energy performance contracting, service providers, known as energy service companies (ESCOs), assume the responsibility of carrying out energy use assessment, energy project planning, financing and implementing the sustainable energy projects. As well as implementation, the ESCOs maintain the installed sustainable energy technologies on behalf of the businesses.
These service companies became prevalent in Europe and North America in 2000s. This was in response to the rise of energy costs in industries.
The energy performance contracting model was adopted by ESCOs as a way of allaying doubts about the profitability of sustainable energy measures.
Use of technology
Sustainable energy technologies can be capital intensive. Risk-averse businesses might not opt to pursue such technologies on their own. ESCOs come in handy. They help businesses by identifying and carrying out an assessment of opportunities for sustainable energy. For example, an ESCO can evaluate lighting needs in a shopping mall, then come up with a solution to install light emitting diodes (LEDs) on behalf of the client. This solution will include managing the project from design, installation, training of staff and monitoring the savings.
How do ESCOs earn their pay then? Sustainable energy technologies are, in the fullness of time, profitable. The sustainability is in terms of finance and costs. ESCOs guarantee that the projects they implement will have financial savings within a specified period. The avoided energy costs are used to pay them back. In some arrangements, the business can share the capital costs with the service company.
After a specific period, when the service company has regained its capital with interest, the technology can either be left for the business to operate, or the ESCO can continue with the maintenance. An ESCO therefore operates like a credit facility but absolves the borrower from the project risk.
Weighing the benefits and challenges
Businesses can significantly benefit from partnering with ESCOs to adopt more sustainable energy technologies and conserve energy. The businesses transfer the aspect of project risk management to the service company and help bridge the technology gap in implementing such projects. Given that the project is based on performance contracting, the ESCOs are under pressure to deliver savings, proceeds of which are used to recoup their investment.
There are inherent challenges of energy performance contracting and players have to find ways of dealing with them. The business and the ESCO have to prove and agree on the savings realised after the project has been implemented. This requires prudent measurements and verification methods.
Measurement and verification is a systematic method of analysing the benefits accruing from an energy conservation project. Many tools are employed in this method and there may be differences in the way the ESCO and the business approach it. This can however be mitigated by setting the performance metrics during contract negotiation. Given that ESCOs get their returns from the savings realised after project implementation, they may tend to avoid high risk projects. ESCOs have a propensity to go for projects whose returns they are sure of, that is, projects that are predicted to have a high rate of success.
There are no outright ESCOs in Kenya although some companies offer energy solutions based on energy performance contracting. Some of the services offered include installation and maintenance of biomass boilers for hotels and factories, installation of solar photovoltaic power plants, installation of power factor correction banks and stabilisers, and retrofit of lighting systems, where energy saving bulbs are used to replace fluorescent tubes.
There is therefore need for financial institutions and other interested companies to explore the situation and provide the needed help to conserve energy in industries. Banks can come up with business divisions that can fully focus on energy performance contracting as a way of expanding their credit market.
Fenwicks Shombe is a mechanical engineer, a certified energy manager and a PhD Candidate in Energy Technology at JKUAT.