Energy Service Companies (ESCOs)
The Shanghai Economic Commission established its Office of Energy performance contract in 2002 to promote private sector participation in investing energy efficiency in industries and buildings. They sought LBNL advice on developing enabling policies and frameworks to nurture the growth of the industries. The emphasis of the program is on market-based mechanisms, and there was no direct government financing, only initial funding for energy audits and pre-feasibility studies targeting 10 industrial sectors.
The World Bank started to promote ESCO and energy performance contract as a model for investment in energy efficiency projects in China. They set up three Energy Management Companies with GEF grants and loans loans from the World Bank and the Chinese Government, with investment totalling US $55 million over 300 projects from 1997-2002. Most projects have a payback period of under 2 years, however, significant barriers exist, limiting the growth of the industry in China.
LBNL conducted interviews with key stakeholders in Shanghai in Summer, 2004. Findings included:
- Lack of local project financing is the most challenging barrier to ESCO industry development
- Lending is primarily based on assets and collaterals
- Lack of credit history of emerging EMCs
- Small capitalization of emerging EMCs
Proposed solutions:
- Explore several enabling options simultaneously (DSM, government buildings)
- Adopt IPMVP as a standard protocol to document and certify savings
- Identify non-bank companies with familiarity of EE technology to finance projects for ESCOs
- Leverage other sources of financing to provide loans and loan guarantee programs for EE projects
- Use ESCO as one of the delivery mechanism for Energy Efficiency Power Plants
SHEC is negotiating with ADB on a US$100 million DSM loan
September 2003 International ESCO Workshop held in Shanghai
SHEC and LBNL jointly sponsored an international workshop in September 2003. Ten international experts from the ESCO industries in the US and Japan were brought in to address a targeted audience of 100 senior policy-makers and executives in Shanghai. Issues that were highlighted in the workshop include:
- DSM and other enabling policies supported the early development of the ESCO industry
- Institutional buildings are the dominant market segment, in contrast to China's focus on industries
- Guaranteed saving model is key to the success of ESCOs, in contrast to the Shared saving model promoted by the World Bank
- Local long-term commercial financing is critical to the ESCO industry growth