POLITECNICO DI MILANO
Scuola di Ingegneria Industriale e dell’Informazione
Corso di Laurea Magistrale in
Ingegneria Gestionale
“Analysis and evolution of the Energy Service
Companies' Italian market
”
Relatore: Prof. Davide CHIARONI
Autore: Michele Bassi
Matr. 837629
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SUMMARY
1. Figures index ... 4 2. Tables index ... 6 3. Acronyms index ... 7 4. Abstract ... 85. Abstract (Italian version) ... 9
6. General introduction ... 10
7. Introduction and contextualization of the market ... 11
7.1 The energy efficiency target and the role of the ESCos ... 11
7.2 What is an ESCo ... 14
7.2.1 Definitions ... 14
7.2.2 Classifications and business models ... 19
7.3 The contracts ... 24
7.3.1 Contracts typologies and financing modes ... 24
7.3.2 The contracts related risks ... 29
7.3.3 SPINs and EPC+ contracts ... 32
8. Practical example of an energy efficiency project ... 36
9. The state-of-the-art of the Italian Energy Efficiency market ... 42
10. Methodology of the analysis ... 58
11. The ESCo-market analysis by industry and by technology ... 64
11.1 Results and comments by industry ... 64
11.1.1 The “revenues-proportional” approach ... 64
11.1.2 The “absolute percentage” approach ... 70
11.2 Results and comments by technology ... 73
11.2.1 The “revenues-proportional” approach ... 73
11.2.2 The “absolute percentage” approach ... 77
11.3 Results and comments per specific sectors and tecnologies ... 81
12. ESCos’ market analysis by contract ... 83
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SUMMARY
13. Insights and trends ... 88
13.1 Energy Service Companies and Small-Medium Enterprises ... 88
13.2 Energy Service Companies and Logistics ... 94
14. Conclusions and future perspectives ... 99
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1. FIGURES INDEX
Fig.1 The 20-20-20 targets... 11
Fig.2 The specialized operators’ market composition ... 21
Fig.3 The integrated operators’ market composition ... 21
Fig.4 The Energy Efficiency Service Providers’ market ... 22
Fig.5 The target markets ... 23
Fig.6Third parties financing with ESCo borrowing. ... 28
Fig.7Third parties financing with energy user/customer borrowing ... 29
Fig.8 The phases of an energy efficiency project ... 36
Fig.9 The phases of an energy efficiency project ... 36
Fig.10 The growth of the Italian market for energy efficiency ... 44
Fig.11 The partitioning of the investments per sector ... 45
Fig.12 The partitioning of the investments per technology ... 46
Fig.13 The investments in GDO and Hotels ... 50
Fig.14 Detailed investments of Food Industry ... 51
Fig.15 Detailed investments of Paper Industry... 51
Fig.16 Detailed Investments of Chemical Industry ... 51
Fig.17 Detailed investments of Mechanical Industry ... 52
Fig.18 Detailed investments of Products for Metallurgy Industry ... 52
Fig.19 Detailed investments of Products for Building Industry ... 52
Fig.20 Detailed investments of Glass Industry ... 53
Fig.21 Detailed investments of the GDO industry ... 53
Fig.22 Detailed investments of the Hotel Industry ... 53
Fig.23 The ESCos incidence on core and non-core activities ... 54
Fig.24 The incidence of the TEE on the investments ... 56
Fig.25 The revenues of the sample per industry ... 64
Fig.26 The revenues of the market per industry (1st approach) ... 68
Fig.27 The revenues of the market per industry (2nd approach) ... 72
Fig.28 The revenues of the sample per technology ... 73
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1. FIGURES INDEX
Fig.30 The revenues of the market per technology (2nd approach) ... 79
Fig.31 The partitioning of the contracts typologies ... 84
Fig.32 The revenues of the market per contract typology ... 85
Fig.33 Relations between barriers and drivers for energy efficiency ... 91
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2. TABLES INDEX
Tab.1 Activities and phases of typical intervention ... 16
Tab.2 Activities and phases of a typical intervention ... 16
Tab.3 The specialized operators’ activities ... 19
Tab.4 The integrated operators’ activities ... 20
Tab.5 The contracts’ typologies ... 32
Tab.6 SPIN’s strength and weaknesses ... 34
Tab.7 SPIN’s opportunities and threats ... 35
Tab.8 Economic evaluation of an energy efficiency project ... 39
Tab.9 Total energy consumption per industry ... 42
Tab.10 The partitioning of the Italian market for energy efficiency ... 44
Tab.11 The inclination index towards energy efficiency ... 48
Tab.12 The inclination index for GDO and Hotels ... 50
Tab.13 The revenues of the sample ... 63
Tab.14 The revenues of the sample ... 63
Tab 15-16 Investments and revenues rankings ... 69
Tab 17 The revenues rankings ... 70
Tab 18 The shares of revenues per sector ... 71
Tab 19 The shares of revenues per technology ... 78
Tab 20 The revenues of the market ... 81
Tab 21 The revenues of the market ... 81
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3. ACRONYMS INDEX
EESP Energy Efficiency Service Providers
ESCO Energy Service Company
P&P Pulp and Paper industry
F&B Food and Beverage industry
ROI Return on equity
NPV Net Present Value
UNI Ente Nazionale Italiano di Unificazione
OEM Original Equipment Manufacturer TPF Third Party Financing
O&M Operation & Management
SPIN SME Partnerships for Innovative Energy Services EPC Energy Performance Contract
EPC+ Energy Performance Contract Plus
GDO Grande Distribuzione Organizzata
PBT Payback Time
IRR Internal Rate of Return
TEE Titoli di Efficienza Energetica
EER Energy Efficiency Report
SME Small and Medium Enterprises
LE Large enterprises
PPM Parts per million
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4. ABSTRACT
The concept of energy efficiency must not be confused with the “energy conservation” one; with this one indeed, it is meant a decrease in consumption which, not necessarily, coincide with the subsistence of the expected level of performance. To switch-off lights at home it’s energy conservation; to substitute an hold lamp with a LED one, and keep it switched-on for the same time, it’ energy efficiency.
The actions of Energy Service Companies are based on this fundamental but simple concept: to grant an equal (or even better) level of performance to the customer, compared to a decrease in consumptions, and, consequently, in the energy costs. The appropriation of a quote of the savings is the key to success of this business model and it allows to offer to the customer “cash-free” installations.
This thesis work, basing on previous industries classification studies, wants to deepen the way ESCos interface with customers in the real world and how they face the intrinsic complexity of the energy efficiency market. As shown in the literature indeed, in this field there are many possible business models, as well as many specific know-hows, portfolio of offered services and levels of integration. About that, the ultimate goal of this thesis won’t be the one of purposing further categorizations, but instead the one of analyzing the contact mechanisms with the client, the barriers, the trends of the single industries and the possible future developments for a market which was born more than 10 years ago.
The nature of this work will be twofold: quantitative and qualitative. It is quantitative for what concerns the definition of the weights of the industries and technologies, in terms of turnover. It is qualitative, once the dimensions of the market have been understood, in terms of investigating the relationships with customers before, during and AFTER an energy efficiency intervention. The ESCos are a facilitator and an implementer, recognized by law, of the achievement of the environmental goals: their mission is not just to “make the business” but to create and to stimulate demand too.
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5. ABSTRACT (ITALIAN VERSION)
Il concetto di efficienza energetica non va confuso con quello di “conservazione dell’energia”; con quest’ultimo infatti, si intende una diminuzione dei consumi, che non per forza coincide con il mantenimento del livello atteso di performance. Spegnere la luce di casa è conservare energia; sostituire la vecchia lampada con una a LED, utilizzandola per lo stesso tempo, è fare efficienza energetica.
Su questo concetto basilare si fonda l’operato di una Energy Service Company: garantire al cliente un livello di performance equivalente (o migliorato), a fronte di una riduzione dei consumi e, conseguentemente, dei costi energetici. L’appropriamento di una quota del risparmio è la chiave di successo di questo modello di business e consente di offrire al cliente un’installazione “cash-free”.
Questo lavoro di tesi, basandosi su precedenti studi di inquadramento del settore, intende approfondire il modo in cui le ESCo si interfacciano con i clienti nel mondo reale e come esse affrontino la complessità intrinseca del mercato dell’efficienza energetica. Come si evince dalla letteratura infatti, i modelli di business in questo campo sono molteplici, così come i know-how specifici, i portafogli di servizi offerti ed i possibili livelli di integrazione. A tal proposito, il fine ultimo della tesi non sarà quello di proporre ulteriori categorizzazioni, ma bensì di analizzare i meccanismi di contatto col cliente, le barriere, le tendenze dei singoli segmenti e i possibili sviluppi futuri di un mercato che esiste ormai da più di un decennio.
La natura del lavoro sarà dunque duplice: quantitativa e qualitativa. Quantitativa nella definizione dei pesi dei segmenti e delle tecnologie sul piano dei fatturati. Qualitativa, una volta comprese le dimensioni del mercato, nell’indagare i rapporti con i clienti prima, dopo e durante un intervento di efficientamento energetico.
Le ESCo sono un facilitatore ed un attuatore, riconosciuto a norma di legge, del raggiungimento degli obiettivi ambientali: la loro mission non è soltanto “fare il business” ma è anche creare e stimolare la domanda.
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6. GENERAL INTRODUCTION
The thesis work has been organized through eight main chapters, which will guide the reader through a dissertation about the dynamics of the Energy Service Companies’ market.
The chapters, from seven to fourteen, can be grouped into three phases:
1) The first phase will provide definitions and frameworks to give a precise contextualization of the operators in terms of structures, level of integration, portfolios of services and contracts. Chapter seven will focus on the relationships between European Regulations and the role of the ESCos and, in a second moment, on the theoretical classification of the different actors and contracts. Chapter nine will provide the results of previous market-analyses (mainly from the Energy Efficiency Report
2016 by the Energy & Strategy Group), which will be used as a basis and
a benchmark for the correct quantification of the results (chapters 10 and 11). Chapter eight describes instead the phases of a “typical” energy efficiency project.
2) The second phase consists in the presentation of the results, coming
from the surveys and the interviews. The numerical data from the surveys will be organized with a similar structure with respect to the Energy Efficiency Report, so as to be able to make considerations about their accuracy and affordability. The operative and “real-business” issues will be discussed with reference to the interviews, to favor a better framing of the dynamics and mechanisms which lay “behind the numbers”. Chapter ten explains the methodologies used for the analysis of industries and technologies (chapter eleven) and of the contracts (chapter twelve). 3) The third and last phase of the work consists in the evaluation of the
evolutionary dynamics in the short-medium and long term. Some topics (which have been the objects of personal and direct experiences) will be deeply analyzed and final conclusions will be presented together with future perspectives (chapters thirteen and fourteen).
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7. INTRODUCTION AND CONTEXTUALIZATION OF THE
MARKET.
7.1 The energy efficiency target and the role of the ESCOs.
In 2010 the European Union established the 20-20-20 goals for energy efficiency, Co2 Emissions and renewable sources. The 2020 threshold was a fundamental step for World’s sustainability and the whole green economy, being the first pragmatic set of objectives, which derived from the well-known conferences undertaken at the end of the century and during the 2000’s. Today these targets are continuously monitored and are going to be updated, new protocols are going to become effective and new conferences like the Paris one are setting long terms strategies and new goals for the near future. The institutional attention towards the sustainability cause is increasing year after year; the time needed for protocols’ ratification overtime is a proof of this global trend: Kyoto protocols took years to be confirmed while the Paris COP21 just took some months, thanks to the stronger will of European leaders and to the earlier participation of new countries and institutions.In the graph below the three objectives are reported together with the timeline of the real progresses.
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Some observations about this representation are then needed to clearly understand what is the real distance from the benchmarks and to realize if the current trends have the right intensity to meet them within the deadlines. The
Renewables and Greenhouse Gases objectives have been defined compared
with 1990, with the result that, when they were set in 2010, a part of them had already been satisfied. Today these 2 goals have very good projection for the future and they can be supposed to reach or even exceed final targets by 2020.
As for the Energy Efficiency Goal instead, the evaluation of the progresses with respect to the final target must be particularly careful, given that it must be compared to 2005 consumptions (which was the first year in which consumptions started to decrease, and so the first useful year to set the target), so that it is practically a more recent target. Looking at future projections, it is understandable that it will not be easy to reach the decrease of 20% of consumptions by 2020, even if some nations like Italy have already reached it. During the next decade the Energy Efficiency target together with the Renewable Sources one will be fundamental as a driver for the Emissions
Reduction target, which is actually set on the 450 ppm (Parts per million);
indeed, even if this target is going to be reached, it seems that it will not be consistent enough to keep world temperature under the “2 degrees maximum increase”. The Paris COP21 wants to move right on this direction, enforcing measures and placing stricter standards, even if at the moment, the global scientific community is skeptical about the containment of temperatures increases within the 2 degrees. Given all these very generic considerations, it is easy to understand that there are almost two main reasons why enforcing the energy efficiency market is fundamental for the entire world: the energy efficiency target is currently the most challenging one and it is a strong driver to furtherly reduce CO2 emissions.
By relying on this strategic vision and on these macro trends, the European Union issued the first Energy Efficiency Plan in 2011, which aims to put into practice measures and guidelines to reach objectives, with a more
“operational” vocation. It is basically articulated over three main priorities:
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2. Promoting the exemplary role of the public sector (3% restructuring per year)
3. Promoting the development of the business model of the ESCOs In 2012 with the directive 2012/27/EU each member state had to set its own national energy efficiency targets in a non-binding way. For Italy, for example, the quote was 126 Mtoe (Million tons of oil equivalent) and each state had to bring into force these directives by 5th June 2014. During 2011 the three
aforementioned priorities were a little modified and redefined (the fact of updating guidelines and priorities at a European level is crucial to keep contact with the single countries in the medium term, putting “steps” for markets and “references” for institutions and laws-adjournments) as following:
1. Promotion of long term strategies for renewal of building stocks
2. Promote the exemplary role of the public sector (3% restructuring per year)
3. Reduction of the energy sales by 1.5% each year (importance of TEE market)
4. Promotion of specific measures for energy audits and energy management systems involving large enterprises.
These two lists of priorities constitute the “pillars” of the Energy Efficiency market definition for what concerns operational procedures aimed to demand stimulation and market development; furthermore it is possible to notice that the individuation of the Energy Service Companies as enabling-actors of the market is clear and well-defined. This is the evidence of the fact that the ESCo ,as an “entity”, is strongly incentivized by the European regulation, which also certifies them uniformly (UNI-CEI11352): the ESCo is described as an actor which works as a “trait d’ union” between EU guidelines and their application into the real market, guaranteeing standardization, reliability and legality. Anyway, as it will be explained afterwards in the next sections, the ESCos are uniformly defined only for what concerns their final purpose (Energy Efficiency) and European certifications: the structure, the size, the role in the market, the contracting and the core activities instead, can slightly vary from one company to another.
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Now that the “macro” institutional role of the ESCOs is clarified, the aim of the introduction will be the one to explain what they are, how they work, what are the main contract forms and what is the state of the Italian energy efficiency market.
7.2 What is an ESCO.
7.2.1 Definitions.The energy efficiency objectives can bring very different types of advantages: the decrease in the degree of energetic dependence from other countries and from fossil fuels, the possibility to pursue costs reductions and the GHG reduction are just some of them. It is evident that energy efficiency takes with it a large series of benefits but it is also true that there are a lot of barriers to it: some of them are the lack of information and knowledge, the presence of not qualified entities carrying out projects, the high initial costs and sometimes a sort of “general apathy” of the specific sectors. In this contest the Energy
Service Companies acts exactly as an “Access door to energy efficiency”,
offering consultancy, knowledge, experience, historical data, dedicated solutions, assuming technological and financial risks.
It is very difficult to give a precise definition of an Energy Service Company, because they sell very different services, have different internal structures, work at different stages of the supply chain and have very different ranges of integration and specialization, by the way a first definition was given in Italy in the Decreto Legislativo 115/2008 :
“A person or a company selling energy services and efficiency actions
in the user’ s property assuming a well-defined financial risk. The remuneration depends totally or partially on the value of the amount of energy saved thanks to the efficiency intervention”.
The ESCos are different from the ESPCos (Energy Service Provider Companies) which have not the same focus on energy efficiency that we find in the previous definition, they are indeed a sort of more “generic actors” which operate in the market for energy efficiency, but which have not the same
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institutional value and do not mandatorily assumes technological or financial risks. These are two central concepts for the definition of an Energy Service Company which:
“assumes the technological risk of the intervention” And moreover:
“assumes the financial risk of the intervention”
In the reality, none of these two last sentences is strictly necessary to define an ESCO, but they are two key points for the framing of the entire business model of an Energy Service Company which, as a consequence, will always have to be technologically upgraded and able to make investments by itself or through third parties. Some other general characteristics describing the ESCOs, found out in the decrees and in literature, are the model of remuneration (which is directly dependent on the customer savings), the guarantee of the savings given by the ESCO itself and the general focus towards energy efficiency topics.
At this point, it is almost clear that an ESCo, as it is defined, must use financial and technological resources in the most effective way during the phases of a project, so that this can be identified as an always-present characteristic for every kind of company working in this sector. There is then another crucial perspective which is useful to give definitions and generic figures of Energy Service Companies: looking at its behavior and portfolio of offered services over the different phases of a project. During the design & engineering, construction, running and maintenance phases the ESCos are normally the only responsible of the actions taken, so that the next step will be the one of understanding the width and depth levels referred to the sets of actions provided during an Energy Efficiency Project. These actions can be grouped for every step of a “typical intervention” like it is proposed in the following tab:
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Tab 1-Activities and phases of a typical intervention.
Tab 2-Activities and phases of a typical intervention. The first step coincides with the energy audit phase; even if it can have very different levels of analysis, (basically depending on the needed accuracy degree, on the available financial resources, on the possibility to stop the lines, on the endurance degree compared with invasive investigations, on the availability of time and on other factors) it is usually composed of some of the following typical actions: taking physical measurement, making surveys (dedicated to personnel and to the different levels of management), drawing up an initial “as is” situation of the site and of the employed machines, gathering all the technical characteristics and coming up with final consumptions over time. During these stages ERP data as SAP databases are usually asked to the company’ s management and are used to select and extract only pertaining categories.
An ESCO can decide to implement very different types of energy audits: the ones which are currently (after 2015) mandatory for law belongs to the “very low detail level” type. Depending on the detail degree required by the customer and by the kind of process, different types of procedures are used; with the increasing of the detail level, practices like simulations become fundamental. The right setting of the level of detail is a very challenging issue for an ESCO because it is a key-point to satisfy the customer need in the right way: to give an example the typical Small-Medium Italian Enterprise does not
Energy Audit Contracting Design
Site inspection and data collection
Contract Definition Definition of technical specifications Data Analysis Funding Definition Technical Design
Energy Consulting Terms Executive planning
Verification of safety standards
Execution Monitoring Operation &
Maintentance
Facilities supply Results verification Management
Installation Measurement Maintenance
Starting Eventual corrective-actions
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need high level of details and does not want to stop processes during inspection phases, so the ESCOs are moving towards light solutions, quick methodologies and software to make energy audits in the less invasive possible way (it is important to remember that the basic concept to be respected in this case, is that the final benefit brought by the energy audit actions must exceed the total cost the energy audit itself). Another key-issue, besides quickness and low invasiveness of procedures, is to provide forecasted economic results (with the best approximation possible), in order to give the customer an early idea of the savings, before going into deeper investigations; this is a generic and fundamental principle for the “sales-area”, and it is particularly effective when the customer is not completely aware of the benefits given by the product/service: trying to sell the basic product/service first, providing certain results, then going deeper into further investigations and interventions opportunities. Another important issue at this stage of an energy efficiency project is setting the right priorities both from an economical-advantage point of view and from a “customer-preference” point of view, so that the final solutions will be recommended in order of priority for easier selection.
Once the type of intervention, together with very general parameters, has been defined, the ESCO is in charge to offer a contract for each new plant or retrofit-solution (i.e. the installation of new LED lamps into old fixtures previously mounting neon lamps). The parameters of a contract are various and this topic will be deepened in a dedicated chapter (depending on the kind of contract the parameters can change in typology and value too), anyway the most frequent elements inside this type of contracts are: the share of savings dedicated to the ESCO, the share of saving dedicated to the customer, the guaranteed saving performance, the duration of the contract, the condition given by the ESCO for operating and managing the plant in the first years, the presence or not of the possibility for the customer to redeem the plant and the guaranteed payback-time. In this phase also the funding methodology is defined, the investment indeed, can be carried out by the customer, by the ESCO, by a bank institute or again by mixed quotes of different actors (this final solution can get high degrees of complexity as returns must be divided
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by taking into account different weights of the invested quotes and different degrees of financial risk and cost of capital).
The third phase of an energy efficiency project is the design of the new solution or of the retrofit solution; in the first case the design is simpler and requires less collaboration between the ESCO and the customer. The definition of the technical specification must coincide with the technical translation of the economical parameters defined in the contracting phase: the plant must be dimensioned to give the best possible economical result, under the constraints of space, time required for installation, minimum performance, health & safety, productivity and so on. At this point an executive planning can be defined and, at the end of this procedure, all the safety standards must be checked and valued as compliant both with law regulations and with company’ s safety policies.
As it will be better explained in the next chapter, an ESCO does not always undertake all the previous and the next phases but its business model can be focused just on some of them. An example of this fact is the frequent outsourcing of the installation procedures (in particular for integrated operators) or interventions (typical plants whose installation is outsourced by the ESCOs are PV plant).
The installation follows the gathering of all the necessary components which are rarely produced by the ESCO, (there are just some examples of big and very specialized ESCO which produce some components for their own plants) indeed in the current market the components are supplied by specialized operators mainly for higher specialization and cost efficiency reasons.
After the plant has been installed and tested, and after that fixed parameters have been confirmed by the real functioning of the plant, it can start working under continuous monitoring. In this phase the role of the ESCO is fundamental for the optimization of the plant, indeed even though the plant have been properly designed and it is in line with the customer needs, some changings in settings and parameters are always needed after the installation (let’s think about the effects of the increase of external temperatures over the setting of heating systems, or increasing the “lumen/m2” in a given area of a
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site, due to changes in regulations), in order to get the best possible efficiency from the plant. An ESCo is indeed much more qualified in monitoring plants with respect to the customer; the data coming the monitoring activities anyway, are usually available also for customer’s consultations. As for operations & maintenance practices, the ESCos often support the customers during the period in which it runs the plant so that the company will be able to do it better when the period of competence for the ESCo will come to an end.
7.2.2 Classifications and Business models.
An ESCO can provide all or just a part of the six aforementioned actions, so each ESCO can have a different degree of coverage over Energy Efficiency Projects; for this reason, a first categorization is needed, dividing the ESCOs in specialized and integrated, depending on the number of carried out activities. The criteria and the data reported in the following lines have been taken from the energy efficiency report 2015, in which all the Energy Efficiency Operators (not only certified ESCOs) have been classified. The specialized operators work on no more than 2/3 phases and are more likely to focus on the upstream part of the projects (almost 30% of the sample makes the Energy Audit phase). Energy Audits Solution design Installation Maintenan ce & Monitoring Incentives Manageme nt Frequence X 11% X X 9% X X X 8% X X 8%
Tab.3-The specialized operators’ activities. The most diffused configuration is the first one, followed by the second, these operators are usually consultancy studies which specialize over energy efficiency topics; they normally have a network of installers’ companies they use to collaborate with, in order to link the energy audits and the design solutions with the final installation. The Operators which use to effectuate also
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the installation stages have more complex structures and need more personnel and more heterogeneous competences. In the end a minority of the operators focuses on monitoring and maintenance issues, these operators rarely identify with ESCos because they don’ t carry out the first three phases which are fundamental for being considered an ESCo (they do not assume technological or financial risks and they do not stimulate demand in any way). The second category is identified by the integrated operators, which instead work on almost all the phases of an energy efficiency project; in particular, 28% of the sample of the integrated operators work on all the six phases. These actors are obviously more likely to be larger companies than the ones belonging to the category of the specialized operators. The two stages which are more frequently outsourced are the installation and the maintenance and monitoring phase: the first one is usually outsourced to specialized installers (to give an example, PV installers can have a much more specialized and dedicated company structure than an ESCO which offers various types of installations and services); this choice is mainly due to the different operative nature competing to this kind of activity. The second one instead, is frequently outsourced to societies which are specialized in quality-control and in the monitoring of the processes.
Tab.4-The integrated operators’ activities.
Energy Efficiency Report
The specialized operators are 56% of the total number of the operators and are divided into Energy Efficiency Service Provider (the category in which ESCOs are included) and Original Energy Efficiency Equipment Manufacturers. The majority of the specialized operators is represented by
Energy Audits Solution design Installation Maintenance & Monitoring Incentives Management Frequence X X X X X 28% X X X X 9% X X X X 7%
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EESPs which are indeed dedicated operators for this kind of activities, while the OEEEM’ s focus is the manufacturing of energy efficiency solutions.
Fig.2-The specialized operators’ market composition.
Energy Efficiency Report
The integrated operators are 44% of the total number of the operators and are divided into Energy Efficiency Service Providers and Original Energy Efficiency Equipment Manufacturers. The majority of the integrated operators are again EESPs (for the same motivations of the previous case).
Fig.3-The integrated operators’ market composition.
Energy Efficiency Report
96% 4%
Market composition
EESP OEEEM 85% 15%Market composition
EESPs OEEEM22
As mentioned before, ESCOs are included into EESPs, which is a much more generic and less restrictive group of companies in terms of distinctive characteristics: in the following graph we can notice that Energy Service Companies are 58% of this wider categorization.
Fig.4-The Energy Efficiency Service Providers’ market.
Energy Efficiency Report
By analyzing these graphs, it is finally possible to conclude that ESCOs are almost equally distributed between specialized and integrated operators (with a prevalence of specialized operators).
Another, and probably more significant categorization, from a merely “market perspective”, is related to the ESCos’ target market. This kind of perspective indeed, gives the opportunity to group ESCos’ activities and competences with a horizontal logic (basically concerning the width of the services and products offered on the different target markets), while the previous categorization was more likely to distinguish different portions of a sort of “extended supply-chain” for energy efficiency. In the specific case of the Energy Efficiency market, it is important to specify that the most fitting definition of supply chain (which is a very wide, and sometimes undefined concept) is the one given by Mentzer in 2001 (“The Supply Chain is a series of three or more entities, organizations or
individuals, which are directly involved in upstream or downstream fluxes of products, services, money or information from primary sources to the final
27% 4% 11% 58%
The Energy Efficiency Service Providers
Facility and plant management Utility
Advisory Energy Efficiency
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customer”), considering the “efficiency project” as the “object” of the supply
chain and treating it as a unique product/service which is sold to the customer. By going back to the subject, an ESCO has today three possibilities to set its target market: focusing on the industrial sector, focusing on the tertiary, residential and building sector or focus on both these two categories. In this case the ESCO obviously needs a much more complex and developed structure together with a spread knowledge, enabling to invest over different realities which have completely different capability to invest, needs to be satisfied, risks perceptions and type of competences. The diffusion of the ESCOs in the residential sector is anyway very low in the current market, which is constituted for the moment by just some pilot projects (mainly in the field of energetic-class qualifications of residential complexes), while it is more frequent to find collaborations between building companies and ESCOs for what concerns the construction of big residential complexes respecting new requirements in terms of energy consumptions, to obtain the higher possible classification.
Fig.5-The target markets.
Energy Efficiency Report Industrial ESCOs use to offer both custom and standard interventions, in
particular they use to carry out the design phases like the ones concerning energy recovery and cogeneration systems. To do that, with the right level of personalization and to accomplish all the different parameters of such a system, they need to have very specific technical competences. Building
ESCos are focused on the tertiary and residential sector while full scope
Full Scope ESCOs
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ESCos act on both the target markets. Industrial ESCos are larger in terms of
revenues and generally offer specialized and technically advanced solutions which need high personalization degrees and high durability. The other two categories have a slightly different approach towards the final market: they often try to enter partnerships with OEMs (Original Equipment Manufacturers), they try to perceive standardization, ease of installation and sometimes cost leadership.
As a conclusion of this chapter, it is important to give a unique view of all these categories (both horizontal and vertical), by providing a general idea of the nature of an ESCO. The first observation regards the huge variety in terms of carried out activities and levels of integration (vertical perspective) in the Energy Efficiency Supply Chain (see previous definition). The second one instead, highlights the presence of different strategies in terms of approaching the final customer and, as a consequence, the need of developing different marketing skills and strategies (aimed at fixing quality or cost leaderships) depending on the target market (horizontal perspective). The combination of the two categorizations gives the big picture of the market, which results to be very heterogeneous. This big variety perfectly reflects into the real market, in which an ESCo division controlled by a big energy player, an Original Equipment Manufacturer and a Consulting ESCO are acting together and, maybe, offering similar services to the same target market. Furthermore consider that also non-certified operators can compete in the market too, for what concerns portfolios of services which do not mandatory need a UNI-certified operator). At this point, the different degrees of operational structure, technical knowledge and competences have been highlighted, but there are other two very big elements of heterogeneity: the typology of the offered contracts and the financing modes, which consequently affect the financial structure of each company; these two aspects are going to be analyzed in the following chapter.
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7.3 The contracts.
7.3.1 Contracts typologies and financing modes.
Different contracts typologies are used in the nowadays market for energy efficiency; their parameters usually differentiate depending on customer needs and on the characteristics of the intervention so that, as consequence, the ESCo must be able to find out the best-fitting contractual form for the specific situation. In the following chapter the most spread contractual forms will be analyzed, pointing out pros and cons of each typology.
The first type of contracts is called “Standard contracts”; they are usually referred to the pure outsourcing of energy management and have been used since the ‘80s, for turnkey services mainly related to plants dedicated to heat production. The guaranteed performance in terms of volumetric units and day degrees are both explicitly expressed parameters. The nature of the contract is firstly related to the outsourcing of energy management issues and, as a consequence, it is not mandatory that the specific project has to provide the construction of a plant. In some cases indeed, some of these contracts directly act on already existing plants, dealing with operational and maintenance activities. During the whole duration of the contract the ESCo results in being the effective owner of the plant and the customer lose every right to take operational decisions over the plant. This type of contract does not usually provide a direct dependence between the ESCo’s profits and the effective savings for the customer, but some clauses can put upper and lower limits to ESCO revenues on the basis of the procured savings. Another option of the standard contracts is the possibility to protect the customer, by guaranteeing a fixed price for fuels or electric energy supply, so that the variability of performances decreases and the degree of guarantee over final results increases (This fact can be an advantage not only for the customer but for the ESCo too, which can better control and forecast the performance trends of the plant). In Italy the evolution of these contracts over time went through two subsequent stages: from the “contratto calore”, which provided the management and maintenance of a boiler, trying to improve its overall utilization-efficiency, to the “servizio energia”, which provided the insertion into the contract of new parameters, the most important one is the explicit forecast
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of the customer’s saving during the years. This element was someway “preparing the ground” for the issuing of the Energy Performance Contracts, which appeared on the market some years later.
The second macro-type of contracts is called “Energy Performance Contracts”. This typology has been changing during years, and is continuously evolving, innovating and adapting to different needs of the customers and to the increasing different nature of projects and technologies. The very essential characteristic is in this case the direct dependence of the ESCo’s revenues on the effective savings for the customer, this fact highlights a distinctive feature of the ESCo compared with a normal energy consultancy company: in the first case the customer buys (through its savings) certain results, while in the second one he pays for knowledge (and not for a final result). While standard contracts are particularly focused on management, operative control and maintenance, the EPCs are mainly aimed at the renewal of buildings and plants and at the installation of new technological solutions for energy efficiency, pursuing innovation and, as a result, the maximum possible Negawatts (the unit of measurement representing the saved Megawatts); by respecting at the same time all the constraints of the specific case, from the financial ones, to the technical ones. The ESCo’s attempt to obtain the maximum possible savings is just due to the fact that maximum savings translates into maximum revenues when using the EPCs: this is a fundamental driver for the development of new technologies (in particular when they guarantee higher savings with respect to older ones but their market is still developing and their prices are still higher), for the stimulation of their demand and for their effective spread into the market. Energy Performance Contracts are to all intents the perfect contractual means for the diffusion of new energy efficiency solutions, they are able to valorize economic feasibility and technological goodness of the solution at the same time, making the first one strictly depending on the second one. The most common EPC forms show at least three general variants which differ for the risks allocation among the involved actors, debt-capital remuneration and ESCO-capital remuneration. The “Shared Saving” is the most classical form: the ESCO provides the capital with its own equity or with third parties financing, then the
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parties agree on the subdivision of the final savings. These contracts usually last longer than the case in which the savings are completely assumed by the ESCO, because only one part of the savings is contributing to the recovery of the investment. They can last from 5 to 10 years, even if the real payback time of the investment (by considering the total returns/savings as the sum of the returns for the customers and the returns for the Energy Service Company), would be much lower. Also in this typology of contract the property of the plant stays in the hand of the ESCOs and only at the end of the contract it comes back to the customer. The operation & management is usually made by the ESCO, with predefined comfort, operative and functioning parameters.
Another well-known typology is represented by the “first out” contracts, in which the savings are used to repay the interests and the depreciation of the contracted loans, for this reason they last less than the “shared savings” and the return of the investment results to be faster (usually 3-5 years). At the conclusion of the competence period of the contract, the savings completely pass to the customer.
The “Guaranteed saving” instead, is the wording used to describe a sort of leasing provided with a guaranteed energy saving for the customer. In the US this form is typically accompanied with a third party financing: the customer underwrites the loan with the third party, while the ESCo have to guarantee a certain level of returns (the ESCo in this case is the guarantor of the technical feasibility and provides the third party with technical parameters useful to set the financial ones with the final customer). The financial risk is in the end in charge of the client and of the third party, so the Energy Service Company is only bearing one of the two typical risks which were mentioned in the definition’s chapter: the financial risk. For this type of contracts the duration is usually 4-8 years. Sometimes in the contracts there are some clauses which can guarantee fixed energy savings, fixed energy prices or again the use of the most convenient source of energy.
In short, the financing modes can be structured so that the entire invested capital is provided by the customer or by the Energy Service Company. The second alternative is represented by the intervention of the aforementioned “third party” which was previously mentioned during the description of the
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“guaranteed savings” contract: the third party is usually a bank institute (sometimes it can also be represented by a big energy distributors) which can participate to the investment by providing the whole amount of the investment or just a part of it (in this case the other part can be provided by the ESCo or by the customer itself). In the latter situation the definition of the contract becomes more difficult, given that different actors have to remunerate different portion of the capital invested. Besides the amount of capital with which the bank institute is going to participate to the investment, there is another important variable, which is the definition of the entity the third party is interacting with. The bank instead, can find a financing agreement both with the customer and with the ESCo, this passage basically defines who is the final responsible for the financial risk. In Italy the very common situation is that the bank interacts with the ESCo, which can assume the function of “technical guarantor” which was previously described while defining the “guaranteed savings” concept. Nowadays bank institutes are “adapting” to this financing scheme, by providing dedicated offices and services with specific skills and competences which can better interact with the ESCo. This could be a key-issue for pushing investments in the Italian energy efficiency market: if bank institutes succeed in defining standardized parameters and conditions which can be met by ESCo competences and guarantees, it could be much easier to finance energy efficiency investments.
To better clarify the two “third party financing modes” described before, two schemes showing fluxes of money and services between the entity are provided:
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Fig.6-Third parties financing with ESCo borrowing.
Fig.7-Third parties financing with energy user/customer borrowing.
7.3.2 The contracts related risks.
When different actors participate to an Energy Service Contract they all incur in different sources of risk; they can perceive risks in different ways and each
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risk typology can have different effective impacts on the specific entity, depending on the Energy Service which is going to be contracted.
First of all the operative risk refers to the responsibility on the design and installation of the technologic solutions concerning its good functioning at the starting of the plant. This risk can be undertaken both by an Energy Service Company or by an installers’ company: whoever takes this risk anyway, should guarantee that the solution is going to effectively work and that it is compatible and well-integrated with the other parts of the plant. When the Energy Efficiency Service Provider which is facing the operating risk is a specialized operator in the installation, design or operation of a particular technology or plant, the operating risk can be lower. This happens because specific experience in the fields of installation and plants’ “running-skills” is fundamental when dealing with strictly practical and operational issues: the cumulated knowledge can be decisive when installers have to face particular physical constraints or problems of any type in the conduction of the plant. The energetic performance risk refers to the responsibility upon energetic consumptions of the customer which follows the energy efficiency intervention. The entity bearing this kind of risk is linking its remunerations to the cash flow coming from the energy savings obtained in a certain time. This fact results in the need of good legal competences given that the energy performance needs to be guaranteed. Legal competences play a central role in this field: a good energetic performance could depend on the activities of two different agents (let’s consider a customer and an ESCo in this case) and, if the initially fixed performance is not going to be reached, it would be difficult to determine the specific responsibilities. The solution to completely leave to the ESCo the operations of a given plant can be found, in part, right in this fact: the goal is to centralize the responsibilities in the hand of the ESCos, so that the customer can be better legally guarded in the case that fixed results are not attained at all.
A further source of risk is related to energy supply; it is basically caused by the dependence of the Energy Service Provider’s profits upon the energy supply competitiveness, reliability and the stability of prices. When incentives, electricity prices, fuel prices are particularly variable it is indeed more difficult
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to precisely determine contractual parameters and to guarantee the initially fixed results. Two practices anyway can help to reduce this source of risk: the energy trading and the risk management on energy prices (making forecasts about the trend and the volatility of the future energy prices). Buying electricity through futures can be a good instrument to get constant electricity prices and, in general, all the so called “administrative energy efficiency” practices can play an important role too.
The financial risk, by considering the most general definition possible, refers to the uncertainty linked to the future value of any investment and its volatility. The entity that bears this risk finances the investment through equity capital, if the risk is considered too high, it will be necessary to try to resort to third party financing. This risk is reduced thanks to the capability of evaluating investments and to make affordable costs/benefit analysis. Furthermore, as a definition, the financial risk is “linked” to the balance of incoming and outcoming flows (given that it is the risk impacts on the company liquidity), and when the volatility of these flows in linked to weather conditions, energy prices and a lot of other variables, it becomes a fundamental source of risk to be considered.
In the end the functioning risk is a sort of “all-in-one” risk which relieves the customer from every kind of responsibility: in this case the entity bearing the risk is not just carrying out an energy efficiency intervention but it is completely guaranteeing and managing the entire service offered by the plant, ensuring a continuous and efficient delivery of the service. A good perception and capability of analysis of the company processes is a driver for the reduction of this source of risk.
When an energy efficiency project has to be carried out, it is very important to have a clear view of the risks set before the realization; that is a key point, the complete evaluation of the risks must be clear before starting every kind of activity because it represents an important threshold for outsourcing/in-house decisions. An energy efficiency project is indeed composed of phases completely different the one from the other, and one of these differences is right the impact upon different risks categories: each phase of the project can be more, or less adaptable to the ESCo’s structure and business plan in terms
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of the set of risks (and related intensities) which it bears with itself. As a conclusion (particularly for big players working on big energy efficiency projects) the risks’ effects evaluation and combination is crucial in this sector.
Thanks to the basic considerations coming from the previous chapters, a specific framework categorizing the contracts typologies can be issued, with reference to the Energy Efficiency Report 2016. This framework will be used afterwards to qualitatively describe the results of the surveys which has been applied to the ESCOs. The framework reports the contract typologies and, for each one, the associated risks, so that different typologies of operators (which identifies in operators issuing a specific contractual form) are distinguished with the criteria of evaluating their exposure to one or more risks’ typologies. Obviously a single operator can decide to offer different types of contracts (bearing different risks), depending on the customer it is dealing with and, in particular, depending on what are the specific market and technologies involved. There are indeed some cases in which the same operators cannot bear the energy performance risk relative to a given technology and customer, but it can bear the same risk when installing another kind of technology for another type of customer (in terms of dimensions or needed guarantees in terms of results).
Tab.5-The contracts’ typologies.
CONTRACT TYPOLOGY ASSOCIATED RISK
Turnkey Contract Operative risk
Energy Performance Contract Operative risk
Energy performance risk
Finance Contract Operative risk
Energy performance risk Financing risk
All risk Contract Operative risk
Energy performance risk Financing risk
Energy supply risk Functioning risk
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At this point a clear general overview of the most used contractual forms has been provided and it will be discussed again during the analysis phase.
7.3.3 SPINs and EPC+ contracts
There is anyway another innovative contract form which is further and further being developed: the EPC+ contract. This particular contract allows different Energy Efficiency Service Providers to issue a single EPC collaborative contract regulating a unique intervention indeed, as it was previously shown, EESPs are very different one from the other, especially for what concerns competences and core activities. This practice has been experimented in some contexts as a collaboration between partners acting at different levels of the Energy Efficiency Projects (Specialized installers, auditors, designers and so on) or partners focused on different technologies; the collaboration among these small partners has taken the acronym of SPIN (Small-Medium-Enterprise Partnership for Innovative Energy services). Let’s consider, for instance, that an ESCo has very good performances for what concerns the installation of HVACs systems, this ESCo has technical competences and the right experts and contacts for this kind of intervention. An optimized HVAC system anyway often requires a good combination with building envelope measures (i.e. roof insulation, windows replacement, etc.) to obtain the best performances. The aforementioned ESCo cannot be able to provide technical skills for this kind of installations and, furthermore, the two specific financial analysis could be completely different: while the HVACs investments are typically judged from a pay-off point of view, the building envelope measures are evaluated by a depreciation point of view. These very different perspectives, together with the need for of the customer to be served in a dedicated way (which allows an integrated installation of the two solution) is the source of the need for the SPINs’ contract. A SPIN between the two actors indeed, could be fundamental in a case like this one, and could afford to offer a very highly specialized and integrated intervention, increasing the quality and the satisfaction of the customer. It is easy to understand that a contract which aims to regulate such a kind of collaborative intervention and to involve in it the customer too, could be very complex. It must basically consider a very
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wide range of variables from the technical point of view (parameters) and also from the financial point one. If furthermore we conjecture that the contract provides a remuneration through the sharing of the savings, the complexity from the legal point of view will be consistent too, being the savings shared between two entities (or three considering the customer). It will not be easy to quantify the exact “competence-quotes” of the shares for each actor involved (from an economical point of view) and defining different responsibilities upon final results will be difficult too.
The EPC+ contracts have been progressively standardized in the last years and some business model canvas have been redacted, a lot of pilot projects have been started through Europe, creating clusters of SMEs offering integrated energy efficiency services. The potential of this solution is enormous, the knowledge can be shared between the ESCo, which can enter new markets through partnerships. Another factor that must be considered is the need of integration which would perfectly fit some interventions. Let’ s think about the “home” environment: the PV, the heat pumps together with automation and HVACs system: just a few big and very integrated players can offer the entire package of interventions.
The “EPC platform” is today active for the European states, allowing to exchange not only information and know-how relative to the standard EPC but also to better develop the SPIN perspective; in Italy a list of ESCOs participating to a SPIN is present and specified into the Federesco site. It is for this moment anyway, a field in continuous evolution which has been deepened more by pilot projects than by the natural market demand. To conclude, a brief SWOT analysis of SPINs is reported below.
STRENGHTS WEAKNESSES
Services can be offered in higher quality compared to services offered by a single ESCO
Insufficient definition of an appropriate SPIN-management structure
Services can be provided at lower cost to the customer
Different approaches from experts lead to higher development costs
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Tab.6-SPIN’s strengths and weaknesses.
Tab.7-SPINs’ opportunities and threats. Allow a quick and efficient response
upon consumer needs and marked demand
Absence of a spin-framework leads to:
-Less transfer of sales opportunities -Limited know-how sharing
Allows transfer of know-how among SPINs to persist in fast changing environment
OPPORTUNITIES THREATS
There is growing demand for specialized, innovative and high quality energy efficiency solutions
Retention of know how of SPIN experts due to mistrust
Small scale services providers seem to be less anonymous
Interest of the own company is seen as more important than the success of the SPIN
Local SMEs are likely to be preferred by some clients
Know-how sharing may leads to a growing number of competitors SPINs can be also capable to cover
bigger areas
Unfavourable market conditions may hinder the supply of services of SPINs
Various backgrounds of SPIN members help to be more resilient
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8. PRACTICAL EXAMPLE OF AN ENERGY EFFICIENCY
PROJECT.
In this chapter a simulation of an installation of a LED lighting systems will be proposed, from the acquisition of the data to the measurement and monitoring final phase, passing from the definition of the contractual terms. The illustration below reports the passages through which the project will be described.
Fig.8-The phases of an energy efficiency project.
Fig.9-The phases of an energy efficiency project.
As it was explained in the introduction, the Energy Service Companies do not always follow all the phases of the project and can be, instead, specialized only on the upstream or downstream phases. In this simulation, anyway, the ESCO is going to be supposed to act on all the phases of the energy efficiency project and to be the only Energy Efficiency Provider involved in the project. Another hypothesis is given by the fact that the ESCO is going to finance the whole amount of the investment without borrowing capital from any bank institute, and that the customer is going to get the intervention implemented completely cash-free. The parameters used for this simulation come from a university project-internship carried out during the current year, anyway for confidentiality reasons, even if no interventions have been effectively realized,
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the name of the company will not be shown and indicators, numbers and parameters have to be intended as “proportional” to real values, and not as “equal in absolute terms”.
In the energy audit phase the ESCO analyzes general consumptions of the site to understand what are the main sources of consumption, this operation consisted in on-site measuring, by using technical instruments and by letting the personnel compile some surveys about machines utilization. The results of this analysis underline an incidence of 53% on total consumptions of the lighting system which will be the subject of the energy efficiency project from this point. At this point the ESCO has gathered all the possible data about the lighting system to understand what is the AS-IS situation, what are the currently used technologies and determine what are the energy efficiency opportunities to get lower consumption values. The lighting system consumes more than 1 GWh per year: this value is computed by multiplying the number of lamps of each sector of the site by the nominal power of the lamps (taking into account the transitory effect in the start-lighting phase) by the number of hours in which the lighting system is working in the given sector. Other considerations were necessary for a precise evaluation of the intervention, but they have been considered out-of-scope for the intents of this analysis. The next step is the individuation of all the possible energy efficiency measures for the site, they are a lot and with very different natures the one from the others: changing in the layout disposition, painting the walls white, using partitioning of the systems, installing sensors and finally changing the old lamps with new generation LED lamps (much more energy efficiency measures are possible, just some were reported here). All the energy efficiency measures are then grouped in different “offer-packages” which differentiate themselves in terms of investments, savings opportunities and payback-time. The selection of the packages and the right combination of the energy efficiency measures is the most important part in order to be as effective as possible with the customer: the packages must be the best combination of energy efficiency measures and give at the same time a wide set of alternatives to the customer. In our case anyway, the ESCO entirely finance the project, and so we can suppose that the purpose of the ESCO can get an higher weight in the final decision
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which is supposed to be the one of installing the best configuration possible: the chosen configuration is an innovative smart-lighting system in which all the selected energy efficiency measures are integrated to work all together in an optimized way. It is basically a smart lighting system in which each lighting fixture is equipped with different sensors such as motion, temperature and daylight detectors. Each luminaire is then connected to a central server through a Wi-Fi network, which serves as a controller for the performance of the fixtures. The site’s personnel could control, wirelessly from the software, the light utilization based on set parameters. Moreover, they could automatically set up the system’s luminous output for the day, as well as checking the status of each luminaire in all circumstances.
The definition of the financial parameters has been carried out by interviewing some suppliers and so it refers to absolutely valid and real numbers. The following step is the determination of the forecasted savings, which will be the base for the definition of the contract parameters with the customer. The smart-lighting solutions offers incredibly good results in terms of savings, so that, despite of the very high initial investment needed, the offered paybacks is inferior to 3 years, which is usually the limit imposed by the majority of the Italian companies for what concerns investments in energy efficiency measures. The estimated savings in terms of consumptions are indeed the 90%, this value must obviously be referred to the actual installed technology of the site (in other cases the same intervention could lead to higher or lower savings in terms of consumptions) and to the very high degree of innovativeness of the new one. Considering the price of the energy at 0,158 €/kwh the savings per year have been estimated in 170.000 € as regards the sole avoided energy consumption. In a second moment also TEE certificates incomes and incentives have been evaluated and included in the returns. Instead, as for the cost of the investment all the possible variables have been taken into consideration: system layout modification costs, cost of the lamps, costs of installation, insurance costs, disruption costs and VAT at 10% has been considered too. At this point it is possible to define the investment with the usual parameters NPV, IRR, ROI and payback-time, as it is reported in the following tab.
