Energy services companies and financing energy efficiency initiatives

Here is another one for the NERD magazine.

An Energy services company (ESCO) is “a company that provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business”.

The revenues of these ESCOs are tied to the amount of energy they help their client to save. Most of the ESCO projects have a payback period of two years and typically they help reduce the energy costs by about 20 to 25%.

As an estimate, India's potential energy savings are in the tune of 180 Billion kWh annually. That is about 36% of our total consumption now.

ESCOs have a big role to play in the BRIC countries by increasing the economic viability of accelerated growth. In 2007-2008, Indian ESCOs had an annual revenue of US $ 18 million while during the same time, Brazil had an annual revenue of US $ 280 million - about 15 times larger.

ESCOs take up energy efficiency projects where they take up the charge of a plant, invest in the required infrastructure and charge the client according to the energy savings achieved. They act as a energy efficiency consultants as in they find ways to streamline the operations to reduce energy costs.

One problem that EE projects face is their financing. The fact that these projects are auxillary to the strategic plans of the institutions. In contrast Industrial restructuring projects are more planned and tend to have a higher thrust from the managers as they are directed towards the company's long term goals.

These energy efficiency projects are distinguished from industrial restructuring projects because most of the IR projects are aimed at improving the units' overall market competitiveness by process changes and product modifications. These often need larger investments and have longer payback periods. These projects need a strategic thinking by the managers about the the units' competitiveness in the changing market conditions. Improving energy efficiency is not the major reason for this activity and neither is it the most desired outcome.

EE projects on the other hand, don't change the process, neither do they change the product. It only concentrates on increasing the energy cash savings and not about the impact on future market growth of the product.


Of late, IFC has taken up some initiatives to fund purely EE projects. As banks have started understanding the short payback time that these projects tend to have, a lot of tailor-made funding options are coming up.