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Investigation of the options available for setting up an
Energy Services Company (ESCO)
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Investigation of the options available for setting up an Energy Services Company (ESCO)
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AP Benson Ltd
Investigation into ESCOs
TABLE OF CONTENTS
1) INTRODUCTION ........................................................................................................ 3
2) DEFINING THE RANGE OF ESCO OPTIONS .................................................................. 4
3) A REVIEW OF EXISTING ESCO PROJECTS .................................................................... 7
Aberdeen Combined Heat and Power Scheme ..................................................................... 7
Southampton Geothermal Project ........................................................................................ 8
Woking District Energy System .............................................................................................. 9
London Development Agency Projects ................................................................................ 10
4) FEASIBILITY OF INVESTMENT IN ALTERNATIVE TECHNOLOGIES ............................... 14
5) STAKEHOLDER IDENTIFICATION AND ENGAGEMENT ............................................... 18
6) CONTRACTING MODELS AND FINANCING ............................................................... 20
7) BARRIERS TO IMPLEMENTATION ............................................................................ 23
8) LEGISLATIVE MATTERS ............................................................................................ 24
9) RISKS ...................................................................................................................... 25
10) CONCLUSIONS..................................................................................... ................... 26
APPENDIX I ................................................................................................................. 27
© AP Benson 2011, Investigation of ESCOs
Page 2 of 30
AP Benson Ltd
Investigation into ESCOs
1) Introduction
As organisations strive to reduce their carbon footprint, improve energy efficiency and reduce
costs, many are looking to new and innovative ways of generating energy. One solution has been
the use of Energy Services Companies, (ESCOs) to create innovative business and technological
strategies for energy generation.
In an effort to assist organisations find the best ESCO solution; AP Benson has conducted an
investigation of the different options available. This investigation covers;
I.
Definition and Range of ESCO Options
II.
A Review of Existing ESCO Projects
III.
Feasibility of Investment in Alternative Technologies
IV.
Contracting Models and Financing
V.
Legislative Matters
VI.
Barriers to Implementation
VII.
Risks
The aim of this document is to give interested parties an overview of ESCOs and their
deployment in the UK. We would be happy to work with organisations to develop their
understanding of the topic further and indeed to develop new ESCO projects in the UK.
© AP Benson 2011, Investigation of ESCOs
Page 3 of 30
AP Benson Ltd
Investigation into ESCOs
2) Defining the Range of ESCO Options
Define an ESCO
There are a wide variety of options that can be deployed as ESCOs and the interpretation of what
is an ESCO differs across Europe. An ESCO is, however, generally accepted as having the
following characteristics with the specific the aim of maximising energy efficiency and cost
savings:
1. Comprehensive Energy Service
An ESCO provides a comprehensive service to enable the delivery of energy savings, energy
efficiencies or generally low cost energy supply to buildings or facilities. The ESCO
implements a customised energy service which includes the planning, building, operation
and maintenance of the energy service.
2. Assumption of Commercial and Other Risks
The ESCO will generally take on all or most of the commercial and operational (widely
defined) risks associated with the energy service and will provide a guarantee of all costs and
commercial risks associated with implementation of the service. In some cases these risks
may need to be shared with other stakeholders/partners in the ESCO.
3. Enhancing the Sustainable Use of Energy
The ESCO’s primary aim is often seen as enhancing the sustainable use of energy through
promoting energy efficiency and renewable energy sources. 1
4. Optimal Supply of Services
The ESCO will provide an optimal (i.e. efficient and low cost) supply through, for example
fuel purchases and joint venture arrangements with energy suppliers etc. 2
5. Risk Based Charging
The payment for the energy service provided by the ESCO is based, either wholly or in part,
on the achievement of energy efficiency improvements and on the meeting of other agreed
performance criteria. 3
1
http://www.lep.org.uk/uploads/lep_making_escos_work.pdf
http://www.ieadsm.org/Files/Tasks/Task%20XVI%20%20Competitive%20Energy%20Services%20(Energy%20Contracting,%20ESCo%20Services)/Publications/091018_GEA_Energy%20Con
tracting%20Definitions-Discussion%20paper.pdf
3
http://www.energy.eu/publications/LBNA22927ENC_002.pdf
2
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
The full range of ESCO options across a variety of different services include: 4
Energy Service provided by
the ESCO
Illustration of Value
Energy generation
The ESCO could build and operate an alternative energy generation facility from say
wind farm technology to provide efficient energy services to a specific organisation
or facility
Energy analysis and audits
and monitoring and
evaluation of energy
savings
The ESCO could be organised as an “energy consultancy” that completes energy
audits across an organisation’s facilities and recommends and implements low cost,
efficient energy services. It could do this by completing more beneficial supply
agreements with energy suppliers.
This could also extend to sustainability support and environmental compliance.
Energy management
The ESCO could set up as a specialist energy management service to develop
bespoke solutions for an organisation’s facilities. The ESCO would design and deliver
more cost effective solutions for the provision of gas, water and electricity services.
This would, on the whole, require the ESCO to enter into “bulk” purchasing
contracts with energy suppliers that it would then “sell on” to the organisation or to
individual facilities operated by the organisation. A key aspect of the ESCO’s model
could be to share this service with other bodies.
An aspect of this could involve the ESCO providing some level of “guarantee” of the
achievement of service levels and energy efficiencies. This could also extend to the
management of the risks associated with design and build facilities.
Project design and
implementation
Acquisition,
implementation,
maintenance and operation
of an energy generation
project or projects
The ESCO could be involved in the design and implementation of essentially small
scale alternative energy generation facilities
The ESCO could design, commission, implement and operate several small scale
power generation facilities.
This could include the provision of service (space heating/cooling, lighting, etc.).
In order to deliver energy efficiencies and cost savings, the ESCO will need to generate scale
economies so as to drive down either the price of energy purchased in (as in the case of say an
Energy Management ESCO) or reduce the cost of energy generating equipment and feedstocks in
the case of the Project Design and Implementation ESCO model.
4
http://books.google.co.uk/books?id=ODKyADHHhlEC&pg=PA127&lpg=PA127&dq=barriers+to+ESCo&source=bl&ots=EBo7jTEmZD&si
g=8plWLrz0t5TRcV2J4Jp67EFBeH8&hl=en&ei=nldvTYuVKYnQhAeYvdEw&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGIQ6A
EwCQ#v=onepage&q=barriers%20to%20ESCo&f=false
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
ESCO Models
Different deployment models for ESCOs include:
ESCO Model
Illustrative Description
Possible Funding Model
Direct investment
An organisation could fund
the deployment of, say, a
wind farm to provide an
efficient energy supply to a
local care home.
Funding would be provided from existing funds. Given
restrictions on borrowing the funds could be raised
through a joint venture company with say a financial
institution that would benefit from sale of electricity to the
organisation’s facility with the excess sold to the National
Grid.
The JV could be owned through a spin out group
partnership and may have synergies with other parts of
the organisation such as an environmental waste services
business if a more general waste to energy facility were to
be developed.
Formation of local
community based
organisations
Set up small scale
community based micro
generation schemes
These projects could be funded by the organisation
directly through grants to, but with a payback based on
cost savings and sale of excess supply to the Grid
Formation of a joint
venture with other bodies
Work with other bodies to
create an ESCO, with each
authority having a stake in
the ESCO
The ESCO could take on the form of a “share service”
company and would therefore lend itself more directly to
a JV with a spin out company. Having set up the company
as a provider of energy supply (through say ownership and
operation of a biomass facility), the ESCO could be opened
up to other organisations to whom an equity stake could
be sold but more particularly the ESCO could provide
services on competitive terms.
Direct investment from
outside organisations
Attract funding from
private investors or
government grants to fund
and create new ESCO
In this model the ESCO would be owned by private
investors but the organisation would agree to enter into a
contract for the purchase of energy supply thereby
underpinning the new company and providing investors
with support for the company’s income model.
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
3) A Review of Existing ESCO Projects
This section includes a review of a selection of national and regional ESCO projects in order to:
1. Capture the learning from these projects and
2. Compare the ESCO models and their success in delivering their objectives
Below is a short selection of previous ESCO projects in the UK.
Aberdeen Combined Heat and Power Scheme
The Aberdeen CHP Scheme was initially developed so as to deliver heat and power to four multistorey residential blocks in Aberdeen identified as suitable for CHP type systems. CHP is the use
of a heat engine or a power station to simultaneously generate both electricity and useful heat.5
Some of the key drivers that we have formulated from research that would affect the
appropriateness of this scheme for future ESCO projects include:
Drivers
Model
Assessment
Creation of a new commercial company separate from the local authority. Had some local authority
director control alongside senior management from individuals with expertise in the delivery of
energy schemes and representatives of the community. The company is limited by guarantee and
has been deliberately set up as a not-for-profit model with the aim that any surpluses will be
reinvested in further development of the scheme.
Timing and opportunity
The opportunity brought forward plans which would have normally taken more than 10 years to
implement.
Political and local pressures
Allowed for the creation of new social housing and reduced energy costs. Largely Lib Dem and SNP
6
7
council, who have strong commitments to renewable energy and reducing energy poverty.
8
Council has own sustainable development team which is committed to reducing carbon emissions.
Government policy and
legislation including launch
of feed in tariffs
Matches coalition commitment to reducing carbon emissions and increasing energy resilience,
currently not a renewable source of energy and not eligible for feed in tariffs. Not eligible for new
renewable heat incentive as does not use solar or biomass. could be eligible for tariffs due to micro
generation techniques
Reducing energy poverty
Energy security and
resilience
Lack of internal funding
Supplies local community housing and energy at low prices
Currently uses gas but has plans for woodchips from internal UK suppliers
Maximising income
generation & inward
investment & capital growth
Risk
The scheme received a grant from the Government’s Community Energy Programme (CEP)
managed by the Energy Saving Trust (EST)
The project does not appear to have generated high levels of revenue or inward investment due to
its structure which did not have this as an objective
High risk project for the local authority since CHP schemes have high capital costs, but significantly
lower running cost and carbon emissions
5
http://en.wikipedia.org/wiki/Cogeneration
http://www.libdems.org.uk/energy_and_climate_change.aspx
7
http://www.snp.org/node/17486
8
http://www.sustainable-scotland.net/page.asp?pg=48
6
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
The project has been generating energy for 10 years and currently operates from mains gas
supplies but expects to become a biomass facility in the near future.
Southampton Geothermal Project
The Southampton City Council created the first geothermal and CHP scheme in the UK in 1986, in
partnership with Utilicom. The project was organised by Southampton City Council which
provided the land, local resources and dealt with all property matters. The Council applied to the
European Union for financial assistance and provided a low rent guarantee to Utilicom and a
guarantee to purchase the power generated.9
Drivers
Model
Assessment
Agreement between Southampton City Council and Utilicom’s new company NEWCOP. Utilicom own and run NEWCO with support from the council.
Timing and opportunity
Created in 1986, long running and successful project which reduces carbon and
provides funds to the council through a profit share agreement. Lengthy
procurement process.
Political and local pressures
Southampton City Council believes that “it must not only advocate sustainable
development, but demonstrate its commitment” and it did so when it created the
first geothermal energy and CHP district heating scheme in the UK. Mainly
conservative and Lib Dem council, who are committed to reducing carbon
emissions.
Renewable, low carbon source should be eligible for feed in tariffs
Government policy and
legislation including launch of
feed in tariffs
Reducing energy poverty
Sells energy to energy providers such as Scottish and Southern Energy, who did not
pass on savings to customers. Installed meters into households to increase energy
efficiency.
Energy security and resilience
Uses geothermal technology from underground warm water, which is very resilient
and easy to protect. Eligible for renewable heat incentive as uses geothermal
energy.
Lack of internal funding
Received payments from the Department of Environment, Transport and the
Regions for a sum in excess of £6 million. The Energy Saving Trust for £12,500 to
fund research into legal issues. Also financial inputs from Utilicom.
Maximising income
generation and inward
investment and capital growth
Encouraged private investment through Utilicom, creating jobs in the area. The
Energy Centre where the CHP unit was installed was a derelict disused substation,
decommissioned over 20 years ago
Risk
Private sector takes on much of the risk
Whilst providing a secure source of energy, the savings have not been passed onto consumers as
cheaper fuel bills.
9
http://www.lep.org.uk/uploads/lep_making_escos_work.pdf
© AP Benson 2011, Investigation of ESCOs
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Woking District Energy System
In the 1990s Woking created a system which had a combined heat and power unit fuelled by
natural gas. This creates electricity and heat which is transferred around the area using a
complex network of heat transfer pipes. The system also has its own private electricity network.
The heat, water and electricity are supplied to hotels, conference centres, Civic Offices and other
properties within Woking area. Electricity from the energy centre is also supplied via the public
system to multi storey car parks in the town centre and other local authority and residential
customers outside Woking Town Centre. The Woking Town Centre CHP system is being extended
to other buildings currently under construction and is being supplemented by a large solar
photovoltaic canopy between Woking Railway Station and the town centre.
Drivers
Model
Assessment
Formed a separate company called Thameswey Limited (TW). TW then formed a company
called Thameswey Energy Ltd (TEL) as a public/private joint venture ESCO with a Danish
energy services company, ESCO International A/S. Recently TEL has become wholly owned
by TW, due to Danish tax regulations but ESCO International A/S are still contracted to
work on the project.
Timing and opportunity
Set up in the 1990s, less than 5 years in duration.
Political and local
pressures
In 1990 Woking Borough Council decided to create an energy efficiency policy whose aims
included both the reduction of environmental damage and fuel poverty. Carbon emissions
within the Council’s own buildings have been reduced by 77.4% and by 17% within the
borough since the policy’s introduction.
Government policy and
legislation including
launch of feed in tariffs
Much of the energy is generated thorough natural gas, but could be eligible for tariffs due
to micro generation techniques. Not eligible for new renewable heat incentive as does
not use solar or biomass. The addition of solar panels to the system increases the
likelihood of feed in tariffs.
Reducing energy poverty
Provides heat as well as electricity which reduces overall bills. No reduction in electricity
Energy security and
resilience
Separate, private electricity network increases resilience. Many sources of energy from
gas, solar and heat pipes increases resilience.
Lack of internal funding
Paid for in the main by Energy Savings Trust (EST) grants and private involvement.
Maximising income
generation and inward
investment and capital
growth
Risk
Extensive inward investment required to create the private electricity and heat transfer
systems. Maintenance required and provided by private firm employing local people.
High initial capital cost, but much of the risk is shared with private contractors
This model means that the ESCO is self sufficient as it sells excess supply to the private electricity
network and exposes the council to less risk defraying it to the private companies involved.
© AP Benson 2011, Investigation of ESCOs
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AP Benson Ltd
Investigation into ESCOs
London Development Agency Projects
The London Development Agency has a stated goal of reducing of reducing CO2 emissions by
60% by 2025. As a result of this it has put in place several ESCo type projects which are aimed at
reducing carbon emissions. One example is the Green 500 project which aims to mentor large
companies through a process which will lead to energy savings and efficiencies.
Drivers
Model
Assessment
Government funded scheme through the LDA
Timing and
opportunity
Introduced by new Conservative government, aims to increase efficiencies within a few weeks
of working with large firms.
Political and local
pressures
Replaced the previous London Climate Change Agency set up by Ken Livingstone. Strongly
backed by Boris Johnson and large firms in the London area
Government policy
and legislation
including launch of
feed in tariffs
Reducing energy
poverty
Energy security and
resilience
Lack of internal
funding
Maximising income
generation and
inward investment
and capital growth
Risk
Aimed mainly at energy savings
Aimed at large firms, to reduce their energy usage.
Has little effect on supply of electricity
Paid for by government funding and large companies who sponsor the scheme
Massive opportunity for investment in new sites, jobs and infrastructure in the London area.
Very low risk, no capital expenditure
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
A summary of the schemes and how they meet our suggested key criteria is presented as a
subjective scored matrix (scored from 1 to 10 with 10 as the criteria that most meets the
objectives as defined by our “drivers”) as follows:
Potential Criteria
Timing & opportunity
Political and local pressures
Government policy and legislation including
launch of feed in tariffs
Reducing energy poverty
Energy security and resilience
Lack of internal funding
Maximising income generation and inward
investment and capital growth
Risk to Council
Total Score
Aberdeen
CHP
8
8
3
Southampton
Geothermal
7
8
3
Woking
Green 500
10
8
7
10
10
1
8
4
7
7
4
8
7
7
6
6
7
7
1
6
9
3
7
52
8
52
7
58
10
50
The above type of assessment indicates that the Woking model could be the most attractive
approach for any future ESCO since it generates high volumes of renewable energy; most of the
risk is shared and the infrastructure investment requirement results in inward investment,
capital growth and sustainable job creation.
Clearly different organisations will have different needs and drivers and this result will not apply
to all potential ESCO projects.
Learning from these projects would lead to the following types of conclusion concerning an ESCO
project:
© AP Benson 2011, Investigation of ESCOs
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AP Benson Ltd
Drivers
Model
Timing and
opportunity
Investigation into ESCOs
Assessment
A model should be chosen which delivers the easiest and most cost effective mechanisms.
There may be strong time limitations on the project. Any scheme would therefore need to be
simple to implement i.e.:
1.
2.
3.
4.
A private sector partner and funding should be easily available
The technology should be easily available on short lead times
Implementation should be quick
The project should be relatively low risk given the rapid “time to market” inherent in the
plan
Political and
local pressures
Government
policy and
legislation
including
launch of feed
in tariffs
Reducing
energy poverty
Public bodies may be looking to cut costs under the government’s austerity budget.
Energy security
and resilience
The project needs to be resilient and therefore points to a model similar to the Woking model
where resilience comes from many sources of energy from gas, solar and heat pipes..
Lack of internal
funding
Maximising
income
generation and
inward
investment
and capital
growth
Risk
Look for outside investment or grants from EST or government/EU.
The research might point to a scheme which is aimed at making use of the new government feed in
tariffs, to reduce costs for the consumer.
A real effort must be made to pass on any savings to the consumer, may result in using less private
involvement so as to obviate the need for the JV company to make a commercial return allowing
profits to be reinvested in the supply of energy.
If possible, create a project which has a significant infrastructure element which would create jobs
to build and maintain.
Use a model which would share risk as much as possible
It will be noted that there will be many tradeoffs in order to secure the optimal model for an
ESCO that meets an organisation’s criteria. For example, reduction of energy poverty might be
better achieved by using public sector funding (e.g. from the EU) as opposed to private sector
funding which requires an investment return and therefore looks to maximise prices charged for
energy. A lack of private sector funding could however impair the ability of the ESCO to attract
inward investment. Some comprises may therefore be required.
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
Any further investigation would identify and suggest a strategy to manage these types of
tradeoffs leading to a model that:




Reduces risk and has low administrative overheads by sharing risk with private firms or
other bodies
Is an inexpensive scheme but creates jobs in the local area and attracts inward
investment
Uses renewable energy sources in order to maximise revenue from the Government feed
in tariffs scheme
Allows energy savings to be passed on to local people
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
4) Feasibility of Investment in Alternative Technologies
One of the options for an ESCO is for it to generate energy from alternative and sustainable
means. There are several technologies which would reduce the carbon footprint of an
organisation. The key technologies that would be assessed are listed below. Clearly this is not an
exhaustive list, but contains around twenty of perhaps more than 100 options. For the purposes
of a wider study we would investigate a wide range including their cost of implementation,
maintenance and support and energy generation efficiency.
For each technology type below we have included a description and the advantages and
disadvantages of each in Appendix I.
Solar Power
The technology is constantly improving and new government feed in tariffs and grants should
decrease the overall cost of using solar power. Solar power would be easy to include as part of
an overall solution, it has been used in previous ESCOs including the Woking project.
Solar Heat
This is a very simple technology which converts solar heat, into heat for use in houses, buildings
or any other structure. Often this heat is used to heat water for general use or as heating in
buildings. Solar heat could be a useful addition to the project, but is restricted by the milder
British winter.
Wind
The use of wind turbines to generate energy is increasing across the UK with capacity running at
5.2 MW in 2010. The UK has the best conditions in Europe for generating wind energy due to our
position in the North Atlantic.10 As we have windier conditions and more inclement weather
compared to the rest of Europe, the UK is ideal for generating energy through wind power. Wind
energy is a tool which could be applied easily to any project by simply having a turbine attached
to an electricity grid. Wind turbines are a well used and well understood technology that would
deliver real carbon savings.
Biomass
By burning biomass such as wood or sustainable crops, an organisation could obtain a relatively
cheap, renewable energy source. Biomass could be a useful source of heat to generate energy in
the long run.
CHP, the use of a heat engine or a power station to generate electricity & heat
Combined heat and Power systems have proved very attractive in previous ESCOs and have been
used in the Aberdeen and Woking schemes described previously. CHP has proved successful in
previous ESCo projects and is an option that should be considered for any future ESCO.
HVAC
HVAC (Heating, Ventilating, and Air Conditioning) refers to technology for indoor or automotive
environmental comfort. This would generally involve installing a system which controls the
10
http://news.mongabay.com/2005/1114-oxford.html
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
energy used in these systems by frequent monitoring of energy use. HVAC could be a good
addition to an overall scheme which aims to reduce the energy usage of public buildings or
private companies.
Automated lighting
This would generally involve placing an infrared sensor, to detect people and movement. Lights
are automatically switched off to reduce energy. This would be an easy way to reduce energy
usage in all buildings.
Renewable Lighting
By attaching solar panels or a wind turbine to a street lamp, the amount of carbon used by the
lamp will decrease. This scheme has already been tried successfully by the Woking District Power
Scheme and has delivered real energy and costs savings.
Lighting Schemes
Turn off street lights during certain hours of the day; turn off lights in public buildings during
certain hours of the day. This scheme has been used in the Woking District Power scheme, and
has delivered real energy and costs savings.
Metering
Attach meters which measure energy usage and present the information to energy users. Energy
users can then use this information to reduce overall energy usage. This would be useful to have
in partnership with other initiatives to reduce overall energy usage in the ESCO area.
Other technologies include tidal, more effective insulation, energy from anaerobic digestion,
energy from waste using incineration techniques, private electricity networks, power cells,
kinetic energy generation and energy harvesting.
Organisation must set out how the technology can be applied within an ESCO by reference to
past projects. Illustrations include:
Woking Power District
This project has used a variety of different types of technology to achieve energy savings such as
CHP, Solar PV, Wind and Private electricity networks. The diagram below illustrates the
arrangement:
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
Picture taken from Woking Borough Council: CLIMATE NEUTRAL DEVELOPMENT A good practice guide
This carbon neutral development delivers savings by using a combination of different energy
technologies. Energy is initially supplied by the gas fired CHP which supplies electricity to the
local private grid and sells energy to the national electricity grid. This CHP then also supplies hot
water, chilled water and heats six buildings, including two hotels, a conference centre, Civic
Offices and other properties within the town centre. The solar power and wind systems are
attached to street lighting in the area to further reduce carbon output. The private electricity
network provides further resilience to the network, should the national grid fail for any reason. It
also provides electricity at a much cheaper rate than if delivered over the national grid.
The advantages of this scheme are:




It is carbon neutral
The structure is self sufficient because of the private wire network, thus enabling both
heat and electricity to be supplied direct to consumers
The scheme encourages energy efficiency
It meets the potential goals of addressing energy poverty, local investment, reducing
carbon, mix of funding, shared risk, government tariff help and energy resilient
The disadvantages are that it is expensive requiring significant capital investment and requiring
complex relationships with private firms. Other case studies would also be assessed from a
technology viewpoint in a similar way to demonstrate other technologies and schemes currently
deployed.
Disability Essex
Disability Essex’s new headquarters has been designed so that it produces 80-85% less carbon
emissions than other buildings of a similar size. This has been achieved by using a sustainable
design according to Passivhaus standards, which include: 11
11
http://www.passivhaus.org.uk/index.jsp?id=668
© AP Benson 2011, Investigation of ESCOs
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AP Benson Ltd




Investigation into ESCOs
Very good levels of insulation with minimal thermal bridges
Well thought out utilisation of solar and internal gains
Excellent level of air tightness
Good indoor air quality, provided by a whole house mechanical ventilation system with
highly efficient heat recovery
In addition the building has under floor heating combined with an exceptional utilisation of
natural light. The project cost £2 million with a contribution of £815,918 from ERDF and the
majority of the balance coming from the East of England Development Agency (EEDA) Building
Communities Fund.
Suffolk Bio Energy Facility
The East of England Development Fund in partnership with Adnams Bio Energy Limited are
putting together a facility which uses Anaerobic Digestion (AD) and waste to generate energy.
The facility will use bacteria to break down organic waste which produces bio gas which can be
used to power vehicles and to create electricity for the national grid.
The whole project cost in the region of £2.7 million and benefits from £1,187,397 in funding from
the ERDF, which is managed by East of England Development Agency (EEDA) which is also
making an additional financial contribution
In addition the facility will cut local landfill costs and create jobs in the area. All waste by
products can be re – used for example liquid waste can be used as a fertiliser and any CO2
emissions are used to grow algae which are processed by the AD facility.
Building the Market for Renewable Energy
Renewables East (RE), funded by the East of England Development Agency is co-ordinating
efforts in the region to create markets for renewable technologies. RE is helping firms based in
with solar energy technologies by providing grants and helping different agencies to co –
ordinate their efforts together to provide better solar solutions in the East of England.
RE is also supporting the off-shore wind industry in the area which already generates 1.3GW of
power at a cost of £1.7billion in expenditure. RE actively supports research and development
into offshore technologies, helping to commercialise ideas. In addition RE is supporting a
business centre at Ness Point, which aims to be a world class centre for the creation of new wind
technologies.
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Investigation into ESCOs
5) Stakeholder Identification and Engagement
There are a variety of organisations that could be stakeholders in any future ESCO project.
Originators of any ESCO will need to engage with these stakeholders and obtain their agreement
for future projects. Potential stakeholders could include:
Local Authorities
Local authorities (“LA”) in the area will be interested in any new energy schemes which could
deliver benefits to the Authority and the people living in the region.
Local authorities could be interested as partners, buyers of service or as interested spectators
who could use the ESCo model in their own areas.
Any list would be created with further research into the relevant geographic area.
Energy Suppliers
These firms could be energy suppliers, a partner in a JV and investors in infrastructure required
to generate energy. Energy suppliers include;





E.ON Energy
EDF Energy
Scottish & Southern Electric
NPower
Virgin Energy
These firms could also help to supply initial funding for the project.
Local Specialist Technology Suppliers
In the local area there will be several small start up firms that offer renewable technology
services. These firms could provide local technical expertise to the project.
Any list would be created with further research into the relevant geographic area.
Technology firms
Technology firms looking to diversify from their core business or looking to add their expertise to
specific energy projects could be interested in being a part of the ESCO. Technology firms based
in the UK include;





Amstrad Ltd
EADS Astrium
Logica
SELEX Galileo
Motorola
These firms could be looking to expand capabilities or generate revenue from a new stream of
business. Some of the project may require metering or sensing technology e.g. automatic lights
on/off or a metering system. This technology would not be provided by an energy supply firm.
These firms could also help to supply initial funding for the project.
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Local Community Groups
The Council has a stated goal of increasing the role of local groups in the area. These groups
would be particularly interested if a model was chosen which was drawn from local community
based organisations. Examples of this type of group include;



Local Community Foundations
Local Association of Local Councils
Local Community Cohesion Strategic Groups
Local community groups could help to organise people in an energy reduction or efficiency plan
in the local area.
Government Departments
The Department for Energy & Climate Change (DECC) may be a stakeholder and could provide
funding, advice, networking or government backing to support a project.
Not for Profit Organisations
Organisations such as the Carbon trust or the Energy Savings Trust can provide funding, advice
and contacts to help with the project. Local Development Agencies can also provide funding and
expertise in the area of technology and business development in the local area.
Methods of engagement and outcomes
Interested organisations would engage with these stakeholders by way of one to one meetings,
group meetings and presentations. The views of local stakeholders on potential schemes need
to be understood and reported.
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6) Contracting Models and Financing
There are several models for creating and running an ESCO, an overview is included below:
Energy Performance Contracting Models
Energy Performance Contracting (EPC) can be defined as ‘a form of ‘creative financing’ for capital
improvement which allows the funding of energy efficiency upgrades from cost reductions’.12
Guarantees are agreed upon for the ESCO in terms of costs and energy savings by all parties in
the ESCO. This model targets specific energy or cost savings which are then shared by the
members of the ESCO. Any saving can be used to re invest in the ESCO. The aim is not to create
commercial revenues from the project.
There are two main variations of this model; Shared Savings and Guaranteed Savings:
Shared savings
In this model, the ESCO or customer finances the project either through its own funds or by
borrowing from a third party. The ESCO then takes on most of the risk including project risk and
any risks associated with the customer’s credit rating. All cost savings are then shared between
the members of the ESCO and the customer at a prearranged percentage for an agreed length of
time. The amount shared between the parties is dependent upon;



Project costs
Project length
Risk accountability
Shared saving contracts are beneficial when the customer does not have borrowing capacity.
Guaranteed savings
An organisation would finance the creation of the project by borrowing funds from a third party
such as bank or a leasing company. The ESCO then takes on all the risk of the project and
benefits from the energy savings made.
If the savings do not reach agreed minimums the ESCO covers the difference; if they are
exceeded then the organisation agrees to share the savings with the ESCO. Therefore, the ESCO
is providing a guarantee of performance to the organisation that financed the project.
The organisation takes on the debt, or lease payments because it knows that savings will exceed
debt payments. Third party financers assess and take on the risk and the greater the savings
achieved, the more rapid the payback. Revenues from savings are less risky than guaranteed
savings and approximately the same risk as a shared savings contract. This form of ESCO is
particularly popular with the public sector as it results in increased investment in energy saving
measures and technologies.
12
http://manchesterismyplanet.com/about-and-history/esco-feasibility-study
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The Build-Own-Operate-Transfer (BOOT) contract
This contract model is increasingly popular for financing CHP projects in Europe. The equipment
is owned and operated by the ESCO. After the end of a long term supply contract with the
organisation the infrastructure is transferred to the ESCO at a rate that allows the ESCO to
recover its investment. The benefit is that the ESCO takes the risk and also raises the initial
investment managing the creation and implementation of the entire infrastructure and
operation.
Energy supply contracting
This method has many of the same advantages of the performance contracting model but gives
less incentive for the contractor to continually improve the energy performance experienced by
the client. This is a low risk method with small margins. The suppliers’ business models will often
focus on developing long term operation and maintenance contracts.
The Chauffage Contract
This contract is popular in the UK, especially in CHP projects. The end users are sold energy by
the ESCO at an agreed rate. The ESCO has the freedom to change the way the energy is supplied,
e.g. the ESCO could add more efficient methods to reduce operating costs. The ESCO will provide
all maintenance and support throughout the project, which can last for 20 or 30 years.
Financing an Energy Service Company
The options available for financing capital projects include:



An ESCO will finance the company through its own equity. This is often funded through debt,
which allows the ESCO to run a number of projects at any time.
Energy user/customer financing, where again the finance comes from internal resources of
the client with the risk managed through the energy service guarantees. This may make
sense if organisations have ‘ring fenced’ funds that could be invested in guaranteed energy
projects.
Third party financing from a bank or leasing company is the most commonly employed
option in the UK
Debt financing
Normally a customer will take on debt as it lowers the financing costs as the average customer’s
cost of capital is lower than the average leasing company’s or ESCO’s. Most ESCO projects are
financed by debt which the customer has borrowed from a bank or other lending institution. This
debt will appear on the customer's balance sheet, which could reduce the customer’s ability to
borrow for activities directly related to its business.
Leases
ESCOs can take out a capital lease, at the end of this lease following regular payments; the
customer will have the option to buy the equipment. The capital will also appear on the balance
sheet as an asset or liability. An operating lease will generally cost more for the customer as the
leasing company still owns the equipment and thus takes on the risk. The equipment does not
appear on the balance sheets and at the end of the lease; the customer would have to pay the
market value for any of the equipment.
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Municipal leases are often used in school, hospital and other local government projects. They
can be taken on as operating or capital leases, but are generally low cost due to local
government involvement.
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
7) Barriers to Implementation
ESCOs have been established in the UK for over 25 years, and initially flourished in the private
sector. However, it has taken more time for them to be accepted in the public sector during that
time because13 the initial structure of ESCOs which were known by the term Contract Energy
Management (CEM), were initially seen with scepticism. CEM schemes focus less on energy
efficiency but look to deliver cost savings.
Some points to note include:




ESCOs can have very long payback times, e.g. 10 years or more
Many energy companies over the years have not been interested in improving energy
efficiency
Models which rely on savings also rely on ESCOs to measure savings, so a great deal of trust
is involved
There is a general lack of understanding of ESCOs:
o Potential clients are unsure of what an ESCO involves
o They can have complicated organisational structures
o There is a lack of understanding of models and of delivery methods
o ESCos can sometimes not deliver the commercial incentives required by clients

There has been a lack of new ideas for new types of ESCO

There is a lack of best practice guidelines in the set up of new ESCOs, stringent guidelines
must be followed to allow stakeholders to be fully informed of risks etc

Groups have tended to aim for larger projects that offer better economies of scale, less
sensitive business models and, critically, offer better returns on investment. New models
could help to create smaller ESCOs or clusters of smaller projects

There is a lack of experienced managers available to operate the ESCO; organisations are
already running at full capacity.

There could be high start up costs due to the capital investment requirement.
Despite these barriers, ESCOs have proved popular and have offered real energy or cost savings
in recent times. An interested organisation may therefore need to look to create innovative
solutions to build on the earlier work done in this area.
13
ttp://books.google.co.uk/books?id=ODKyADHHhlEC&pg=PA127&lpg=PA127&dq=barriers+to+ESCo&source=bl&ots=EBo7jTEmZD&si
g=8plWLrz0t5TRcV2J4Jp67EFBeH8&hl=en&ei=nldvTYuVKYnQhAeYvdEw&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGIQ6A
EwCQ#v=onepage&q=barriers%20to%20ESCo&f=false
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
8) Legislative Matters
Below is a brief review of legislative and regulatory matters which could affect any potential
ESCO.
The current Conservative led coalition has made little comment on the role of ESCOs in the UK
energy economy. However, the Government has recently published the “Green Deal,” which will
give loans to small businesses in the energy market, which then pay the loan back as they make
savings through energy efficiency and reduced energy costs.14 This model is remarkably similar to
previously discussed ESCO models.
Deputy Prime Minister Nick Clegg has also pledged to make this, “The greenest government
ever,” and has set out plans for government bodies to reduce their waste and carbon emissions.
Mr Clegg also stated, "In order to achieve this, we must lead by example. I am pleased to see this
document sets out exactly how we can do that and take our place among the greenest
governments in the world."15
Other key national government factors include the publishing of the Green Energy (Definition
and Promotion) Act 2009, which sets out some key impact indicators including;



Total number of energy efficient solutions
Number of households in fuel poverty
Percentage of energy that has been generated from renewable source
The previous Labour administration also supported ESCO formation with then energy secretary
David Miliband stating, “Over the next year, I want to work closely with each of the eight 8 core
cities, and the RDAs, to explore the potential to set up ESCOs.”16
Other Legislative Changes





The requirement for a 28 day notice period for changing energy supplier has been
relaxed
The Utilities Act 2000 allows electricity to be generated, distributed and supplied by
those that are licensed to do so or are exempted. Small suppliers, i.e. most site specific
ESCOs, are authorised to generate, distribute and supply electricity under The Electricity
(Class Exemptions from the Requirement for a Licence) Order 2001
The Local government white paper states ESCOs can be used as mechanisms to allow
local authorities to work more closely together. The paper states, “we particularly
encourage partners in our major cities to take up the challenge locally”17
Relaxation of government attitude towards CEM mechanism, which delivers on cost
savings
Government Feed In Tariffs to promote generation of energy through renewable energy
14
http://www.greenwisebusiness.co.uk/news/green-deal-must-not-penalise-small-businesses-says-fsb--1801.aspx
http://www.greenwisebusiness.co.uk/news/government-pledges-to-lead-by-example-on-resource-efficiency-carbon-emissions2150.aspx
16
http://manchesterismyplanet.com/about-and-history/esco-feasibility-study
17
http://manchesterismyplanet.com/about-and-history/esco-feasibility-study
15
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Investigation into ESCOs
9) Risks
The risks associated with ESCOs which are dependent to a large extent on:


The models used for the ESCO
The technology used
Some of risks that will need to be addressed in any ESCO project include:
Model Used for ESCOs
The risks will vary according to the level of private involvement in the project, what the aims of
the project are and the size of the project. Some of the key over arching risks include;








Investment risk
Failure to achieve agreed energy/cost savings
Project taking too long to deliver savings
Project exceeding initial capital cost estimates
Lack of local community enthusiasm for the project
Energy project could be seen as diverting funds from other key services e.g. home helps
for the elderly
Maintaining public interest in schemes
Maintaining staff interest in schemes
Technology Risks
Different technologies bring with them their own risks, such as wind energy relying on the
weather or solar energy working better when there is less cloud cover. Some of the key risks
associated with the technology include;




Maintenance costs/ breakdown of the system
Inappropriate weather
Security issues
Vandalism of infrastructure
Risks should be identified and approaches to mitigating the risk by way of insurance,
management, investment etc will be established. Risks should also be costed into a financial
model so that their impacts on a worst case basis can be assessed.
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
10) Conclusions
The choice of ESCO model, technology and financing options will depend heavily on the type of
organisation that is setting up the project. Each project must be considered on its own drivers
and goals.
It is crucial that organisations set out a strategy for the success of the ESCO at the outset of the
project. Each project should;









Set out exactly what it is trying to achieve, e.g. energy savings, cost reductions, energy
resilience
Examine previous projects in depth to learn from their success and problems
Engage local stakeholders to ensure support for the scheme
Engage appropriate partners who can help to deliver strategic goals
Choose appropriate structure and technology for the ESCO
Understand costs
Understand legislative issues and engage with relevant public bodies e.g. local
authorities
Understand and set out key risks
Set out a sustainable financing model
It is recommended that interested parties should initially commission a feasibility study which
would cover the issues described above. Should the interested party wish to proceed to
development of the ESCO following the completion of the feasibility study then it is
recommended that interested parties should develop an investment ready business plan.
This business plan would aim to develop and cost the proposed strategy and develop a financial
model to project the expected revenues, profits and cash flows from the propose investment
and also provide a more detailed and accurate assessment of the return on investment.
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
Appendix I
Description, Advantages and Disadvantages of Technologies
Solar Power
Solar Photo Voltaic (PV)
Description - Converts the light from the sun into electricity
Advantages

Easy to place Solar tiles on roofs etc

Uses less land

Can be low scale or large scale

Renewable source, so eligible for government feed in tariffs

Light source available each day

Used on previous Woking ESCo
18

Current PV capabilities doubling in capability every 18 months

Eligible for government feed in tariffs

Secure energy supply
Disadvantages

Currently electricity from this source is more expensive than fossil fuels

Does not work at night
19

Still currently inefficient ~ 40% at best
Solar Heat
Solar Heat
Description - Converts the light from the sun into heat
Advantages

Easy to place Solar tiles on roofs etc

Renewable source, so eligible for government feed in tariffs

Light source available each day

Easy to scale up or down depending on the project

Secure energy supply
Disadvantages

Does not work at night

Mild weather in Britain
18
19
http://www.livescience.com/4824-solar-power-rule-20-years-futurists.html
http://www.reuk.co.uk/40-Percent-Efficiency-PV-Solar-Panels.htm
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Wind
Wind
Description – Using wind turbines to generate electricity
Advantages

Has worked successfully in previous Woking ESCo

Well tested technology

Very scalable

Approved by UK government

Renewable source eligible for feed in tariffs

Secure energy supply
Disadvantages

Can be unsightly

Only works when the wind is blowing

Large infrastructure required

Expensive
Biomass
Biomass
Description – Burning of wood or sustainable crops to generate energy
Advantages

Less carbon emitted

Secure energy source

Easy to attach to other schemes such as Combined Heat and Power

Does not affect fuel poverty
Disadvantages

Fumes from burning

Availability of high quality wood and crops

Less scalable

Difficult to generate at community level
CHP, the use of a heat engine or a power station to generate electricity & heat
CHP
Description – Creation of heat and electricity simultaneously
Advantages

Can use renewable sources such as biomass

Has worked successfully in previous ESCos – Aberdeen, Southampton and & Woking

Works 24 hours a day

Opportunity to generate excess energy for resale

Lots of UK experience

Opportunity to reduce energy costs to householders
Disadvantages

Less scalable

More expensive to install

Often uses gas to power heaters
© AP Benson 2011, Investigation of ESCOs
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HVAC
HVAC
Description – Monitoring and reduction of energy usage in Heating, Ventilating, and Air
Conditioning systems
Advantages

Generally an automated system that requires little management

Deliver energy savings

Should be easy to insert into existing NCC HVAC systems

Very scalable between small and large systems
Disadvantages

Can be expensive

Mainly for public buildings or private companies

Delivers little benefit to local community

Little affect on fuel poverty
Automated lighting
HVAC
Description – Automatically turning off lights that are not needed.
Advantages

An automated system that requires little management

Deliver energy savings

Easy to install in all buildings

Easily scalable

Inexpensive
Disadvantages

Mainly for public buildings or private companies

Delivers little benefit to local community

Little affect on fuel poverty
Renewable Lighting
Renewable Lighting
Description – Using local micro generation for lighting networks
Advantages

Reduce carbon footprint

Reduce energy costs to council

Little effect on fuel poverty
Disadvantages

Multiple solar panels/wind turbines required

Expensive to install all equipment

Only good on large lighting projects, low scalability
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Lighting Schemes
Lighting Schemes
Description – Innovative measures to reduce the amount of energy used in lighting
Advantages

Low cost

Easy to implement

Reduces carbon

Low complexity

Scalable

Reduces energy usage
Disadvantages

Does not reduce fuel poverty

Small energy savings
Metering
Metering
Description – Use meters to provide information to energy users, to encourage them to
reduce overall consumption
Advantages

Encourages all people to take responsibility

Easy to implement

Government policy to introduce smart meters

Easy to have as part of a larger scheme

Good scalability
Disadvantages


Does not reduce fuel poverty
Small savings in energy
© AP Benson 2011, Investigation of ESCOs
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Investigation into ESCOs
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