Ecotimes ESCO Article1

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Ecotimes ESCO Article1
  Sudnya Industrial Services Pvt. Ltd. ESCOs: The need of the hour for Energy Efficiency in India  Abstract:  An ESCo is a company that provides integrated energy services to its customers (mainly large energy users, but also utilities), which may include implementing energy-efficiency improvement projects, on a turney basis! An ESCo provides performance and savings guarantees, and its remuneration is directly tied to the energy savings achieved!  An ESCo ensures that savings are achieved through its projects because they are focussed on and motivated to ensure large savings that can be sustained! Since energy efficiency improvement is their primary business, projects are moreliely to be implemented than through in-house teams where such activity is a secondary or even a tertiary responsibility! here are some barriers to the growth of ESCos in #ndia, but these can be overcome! ESCos can help #ndian industry become cost competitive in the global maretplace! Barriers to Energy Efficiency Improvement: here has been a great interest in energy efficiency improvement since the first oil price shoc in the early seventies, and recently interest has heightened further because of the global warming effects of high energy use! his three decade long e$perience in implementing energy efficiency projects in the %EC& countries has provided substantial documentation of both the economic and the environmental benefits of adopting energy efficiency improvement measures! 'et, even in these developed economies, there remain a number of barriers to more widespread application of energy efficiency measures! hose associated with energy efficiency related wor in #ndia will identify similar barriers here! hese include! Customer inertia : *any facility owners and managers reali+e that opportunities to save energy and lower costs may e$ist, but they never move forward with them! %thers do not perceive the need, or feel a sense of urgency, to implement energy efficiency measures! #t is a low priority compared with other mission objectives!! Lack of technical resources :  *anagers often lac detailed energy consumption information about their facilities to help them understand their own energy and infrastructure needs as well as to identify and implement more beneficial energy savings choices! hey also may lac the analytical tools to determine whether their facility is a good candidate for an energy efficiency retrofit and the technical e$pertise to implement a retrofit using e$isting staff!  Sudnya Industrial Services Pvt. Ltd. !  Absence of focus :  Energy efficiency is not a core functional area! *any organi+ations have competent and nowledgeable technical staff that can successfully implement energy efficiency improvement programmes! .owever, their core functions and responsibilities are /uite different maintenance, or production! 0iven this emphasis they do not have the time or other resources necessary to successfully develop and implement energy efficiency improvement projects!1! Poor understanding of project synergies :  *ost facility owners and managers are not aware that comprehensive energy efficiency projects can meet multiple objectives! Energy efficiency retrofits not only decrease energy use and costs2 but they also improve the facility infrastructure, lower operating and maintenance costs, reduce environmental impacts and improve comfort levels! #n many instances energy efficiency helps a facility owner to improve its competitiveness by lowering operating costs!3! Capital Constraints and Unattractive Hurdle Rates :  %ften, facility owners are leery of taing on long-term debt! 4ecause of this, they are unwilling to undertae energy efficiency projects even though the debt re/uired to finance the projects would be paid out of the energy savings!  Additionally, many facilities, particularly in the commercial and industrial sectors, e$pect a higher rate of return on capital invested in energy efficiency projects than that of projects undertaen as a part of the facility5score mission! #n many cases this means an energy efficiency project will be rejected outright, though the financial returns on the investments are similar!6! CEs ! C s are not interested in Energy Efficiency #mprovement  :  7erhaps the greatest barrier to energy efficiency improvement in #ndia is that this is still considered to be the engineer5s domain, and CE%s and C8%s are not yet aware of the potential that energy efficiency improvement has to improve the profitability of their companies! A study inthe late 99:s showed that the average energy cost of companies listed on the 4ombay Stoc E$change was 3; on sales2 the average profit before ta$ of these companies was also about 3; on sales< #t is possible to reduce energy costs by 3; or more through concerted efforts! his translates as a 3; (or greater) improvement in the profit before ta$ without assuming maret and financial riss associated with introduction of new products or attempting to increase maret share! he #ndian cement industry, where CE%s have been interested in energy efficiency because of business reasons, in : years has transformed from being one of the world5s most inefficient cement businesses, to one where international benchmars are #ndian companies! Energy audits may draw the attention of management to areas that might /ualify for improvement and investment, but they do not ensure (for reasons mentioned above) that measures are actually implemented to save energy! Some solution other than in-house development and implementation of projects is necessary if  Sudnya Industrial Services Pvt. Ltd. the #ndian economy is to become energy efficient! (7resently the energy intensityof the #ndian economy is about 3:; more than the world average, and #ndia being a large energy user in absolute terms, contributes significantly to the world average!) %ne answer is an ESCo! What is an ESCO?  Energy Services Companies (ESCos) srcinated in 8rance before the Second =orld =ar when engineers evolved this mechanism as a means to providing e$pert services to reduce heating bills of property owners and occupiers that could be paid from savings! he concept moved from Europe to the >SA in the 9?:s! hans to the pressure from @egulators who demanded that Electric >tilities adopt &emand Side *anagement and undertae #ntegrated @esource 7lanning before sanctioning the costs of new power plants as part of the electricity rates, ESCos became popular! *any >tilities themselves established or too over ESCos and this business model became /uite successful after an initial period of evolution!  A recent estimate of the >S ESCo maret is >S 6 billion (mainly under the >S 8ederal 0overnment sponsored 8ederal Energy *anagement 7rogram (8E*7))! here are over :: active ESCos in that country! 8rom the >SA the concept hastravelled to many countries and there is a great interest in ESCos in emerging maret countries! An ESCo designs, implements and finances energy efficiency and energy conservation projects on behalf of its customers on a guaranteed performance basis! he project design is such that the savings will usually be large enough toservice the debt assumed to implement the measures and leave a surplus that is shared between the customer and the ESCo! An ESCo riss its payments on theperformance of the measures implemented and the e/uipment installed! 4ecause the payments to an ESCo are contingent upon the magnitude of the actual savings, ESCos are often called 7erformance Contractors! Some ESCos may even finance projects, recovering their investment from the resulting savings! #n other words an ESCo is a single-window solution to all aspects of energy efficiency improvement! A typical ESCo project includes the following elements ã #nvestment grade energy audit2 ã #dentification of possible energy saving and efficiency improving actions2 ã Comprehensive engineering and project design and specifications2 ã 0uarantee of the results by proper contract clauses ã Code compliance verification and guarantee2 ã 7rocurement and installation of e/uipment2 ã 7roject management and commissioning2  Sudnya Industrial Services Pvt. Ltd. ã 8acility and e/uipment operation B maintenance for the contract period2 ã *onitoring and verifications of the savings results2 and ã 7roject financing!=hile the ESCo will ensure all the above actions, the ESCo may not necessarily conduct all the wor itself! Some wor can be and is subcontracted2 however, theESCo has to ensure project implementation and be responsible for the result! Financing of ESCO projects?   A number of financing options are available for Energy 7erformance Contract 7rojects! hese include ã 4an 8inancing ã &irect Customer 8inancing ã 7ublic 8inancing (bonds) ã ESCo or third party financingo matter which option is used to finance the project, the financing of the project is ensured through two main types of contracts ã Shared Savings, and ã 0uaranteed Savings! Shared Savings: >nder a shared savings structure the ESCo finances the project, usually by borrowing money from one or more third parties! his structure is much less common than the guaranteed savings structure! #n the case of shared savings, the ESCo assumes not only the performance ris, but the financial ris as well (including the underlying customer credit ris)! he customer assumes no financial obligation other than to pay a percentage of the actual savings to the ESCo over a specified period of time! his obligation is not considered debt and does not appear on the customer5s balance sheet! he portion of savings paid to the ESCo is always higher for shared savings than the guaranteed savings projects, reflecting the ESCo5s significantly greater ris and e$pense for borrowing money!
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