ESCO. Most of you may have come across this acronym at least once. For those, who have not, here is an explanation. An ESCO literally stands for an energy service company. In a broader sense, however, it also means that energy consumers do not use their own financial and other resources to improve their energy efficiency, but let an ESCO do it for them, and the latter, using its own resources, takes all the necessary measures to improve energy efficiency. For the next 2-10 years, energy consumers will continue to make payments to the ESCO in the same amount as they did before the carrying out of energy efficiency measures. Conversely, the ESCO will recover its investments and earn profits from energy savings in 2 – 10 years. Upon the expiry of this period, energy consumers will solely benefit from all the savings. In the case of an ESCO model, the ESCO and the energy consumer company jointly assume the responsibility for the successful outcome of the project.
If this definition appears to be too complicated, here is a more simple explanation. I pay 10,000 EUR a month for thermal energy and electricity consumed in my facility, but then, say, John visits me and says: ”Listen, let’s do something so that you would only have to pay 3,000 EUR a month.” Of course, I am delighted to receive an offer like that. There is, however, one condition – I will continue to pay 10,000 EUR to John for some time, because he will invest his money in my facility and take measures to improve energy efficiency. As a result, in a couple of years’ time I will no longer pay either John or energy suppliers 10,000 EUR, but only 3,000 EUR directly to energy suppliers. Consequently, John will have recovered his investments and earned some profit, whereas I will have savings in my facility during the term of its operation as well as an increase in its value.
This time, I am not going to tell you about the ESCO projects of residential buildings, but rather about industrial facilities and office buildings. I.e., this article is aimed at company representatives rather than to individuals.
What is the world’s experience really like? In theory, it is splendid. Success stories have been around since the 80’s of the last century, when many areas in the industrial field were restructured thanks to ESCO projects. The world has been viewing the ESCO model broadly as well as thoroughly. How – you would ask? Energy efficiency measures are being carried out to buildings as well as by restructuring manufacturing processes. This is to say, the provider of ESCO services may restructure the company’s manufacturing processes to achieve savings this way.
Here in Latvia, the ESCO model is presently looked at as the improving of the energy efficiency of buildings rather than of manufacturing processes. On the bright side, there have already been individual instances and stories, when the energy efficiency of manufacturing has been improved by upgrading some of the most energy-consuming manufacturing processes, such as those required for the production of steam necessary in manufacturing processes.
Why has the ESCO model not gained popularity here yet? Because it appears to be too complicated. Just think. If there are European Union funds, Climate Change Financial Instrument (CCFI), which, one may say, offer financing, why should one complicate things, why should anyone wait for the money to pour back in? EU funds and similar financing are the alternatives to the ESCO.
Our experience shows that by combining the financing of the funds and the ESCO model, the greatest possible effect can result. There are facilities, in which the payment term in the standard ESCO case is 10 years or longer, while the CCFI co-financing period is considerably shorter.
It should be noted that the ESCO legislation does present some issues – the law does not accurately define how the state and municipal institutions could participate in such a project, because it has not been prescribed how they can transfer control over their buildings, take responsibility in the long-term, etc. We do hope, however, that the legislation would soon be amended accordingly.
Why else is the ESCO model necessary? I will remind you that in order to reduce energy dependency on the goodwill of others as well as the impact on climate, a few years ago the European Parliament and Council adopted the new Energy Efficiency Directive 2012/27/EU. According to its provisions, the Latvian Parliament adopted a new Law on the Energy Performance of Buildings. The main purpose of the Energy Efficiency Directive is to make such investment so as to reach the energy efficiency goal for 2020 – to decrease the emissions of greenhouse effect gases by 20%, increase the share of renewable energy resources in the energy end-consumption by up to 20%, and increase energy efficiency by 20%. I am of the view that without the ESCO model – just with the financing of the EU funds, the objectives of this directive cannot be reached.
What else should be borne in mind when thinking about the ESCO model? Measurements. Measurements. And once again – measurements. They are of utmost importance if we want the best performance out of the ESCO model. At best, these measurements should be taken early on. The measurements have to cover the previous two years, ideally – the last three or four years. It is important that the measurements are as detailed as possible. We have to know clearly and accurately what the building’s exact total consumption is, what for and how it uses the energy, how and how much it consumes in different processes etc. Here, those, who have implemented the Building Management System (BMS) while constructing the building or upgrading the engineering systems, allowing them to take detailed energy consumption measurements, benefit most. Where there is no BMS, but meters have been installed, it may be that these meters can be easily connected to the telemetry service; hence, a detailed energy consumption analysis in different sections can be obtained. Similarly, nothing will happen without a careful inspection of the building – it goes without saying. The building must be scrutinized top to bottom, basement to attic. All engineering systems need to be closely examined. If we are improving the energy efficiency of the building, an energy audit is a must. And it should not be just a formality, it has to be real! It is like a doctor’s appointment. If you leave something unsaid, the treatment will not be as successful as it could be if the doctor was aware of the full picture. It is very important for the landlord or the owner of the building to be able to give a detailed report of all the things that have been done in the recent years.
There are no two identical buildings, no two identical facilities, therefore there are no two identical solutions. Every case needs to be viewed individually. It often happens that the systems can no longer be reconstructed and have to be replaced altogether as they have been fully depreciated. Similarly, energy efficiency is one thing, but another much more important thing is the health of the people working in it. If the ventilation system does not function properly, people tend to get ill more often, get tired by lunchtime, and their productivity suffers. Similarly, when bringing the inside of a building in order one must not forget about the outside. In other words, a beautiful facade increases the value of the building. If that is neglected, you may find yourself in a situation, where the value of the building has declined to a point, where it is no longer beneficial to invest in it. All too often when subjecting a facility to an ESCO project, we only take account of energy savings, disregarding that the outdated systems would still need to be replaced without the ESCO. Conversely, with ESCO you can kill two birds with one stone. The other bird is a clear benefit to the customer, because the ESCO takes into account only with the saved resources from energy savings.
Similarly, it should by all means be mentioned that with the ESCO model the construction industry’s common bargaining on the price – expensive or cheap – is eliminated. This means there will be no discussions on unnecessary luxury, unnecessary expenses, expensive materials, etc. because both the parties are equally involved in terms of planning their own investments as well as recovering them over a particular term.
In principle, the ESCO means a long-term commitment. It is not of the came, accomplished, shook hands, left, finite type. In the ESCO case, this is a long-term commitment for five years and longer. It is a relationship, where one is close to the other and everything is being monitored. Consequently – the actions of the building’s owner as well as those of the people living in his building need to be monitored, of course, only as far as it relates to energy efficiency rates. There is no point in arranging ventilation, air-conditioning and other systems if the people in the building keep the windows wide open, do not switch off the light and so on. If the customer or the owner does not stay interested throughout the entire term of the ESCO project and does not encourage himself and his employees to be energy savings- minded, if he does not pay attention to the systems and their proper maintenance, the situation ultimately will not be a bed of roses.
What are the key conclusions? The ESCO model is a process, which is not completely prescribed by legislation, yet which is being used to successfully and economically improve the energy efficiency of buildings, which is particularly important now that we are no longer benefiting from the rich EU fund financing. Moreover, it spares us the fruitless bargaining about upgrading expenses, because the ESCO has to invest precisely the amount needed to obtain the optimal investment and economy ratio. An ESCO is a mutually beneficial cooperation model for both the party carrying it out and the customer.
At the same time, one should bear in mind that this is a cooperation model, where both the parties have to be not only energy efficiency-minded, but also act accordingly by carrying out all necessary preparatory works in terms of measurement and correctly maintaining all systems during the term of carrying out the works as well as after completing them. Thus, you have to be scrupulously accurate and patient, while taking a long-term perspective.
The ESCO is a bit like the good cop who will strictly question the owner of the building to make sure that everything that needs to be done has been done. To this end, I advise you to hear this cop out and obey him ultimately.
Miks Stūrītis, Chairman of the Board of SIA Citrus Solutions, www.citrus.lv