Energy Service Companies

At the heart of innovative financing models for efficiency

Energy service companies (ESCOs) deliver energy efficiency projects that are financed based on energy savings. Given the need to rapidly and significantly increase financing for energy efficiency, interest in ESCO business models is growing.


Canada




Insights

Canada has a well developed ESCO market based around non-residential retrofits and renovations. The public sector played a large role in the development of the industry. Organisations such as the government owned Hydro Quebec, Ontario Hydro, Natural Resources Canada, and provincial ministry of energy either created ESCOs or enacted favourable policy and program initiatives that allowed the market to exist.

The Energy Services Association of Canada (CAESCO) provides ESCO accreditation process that reviews credentials, project history and interviews former and existing clients to increase the trust of certified ESCOs. Most ESCOs that are members share information on the costs and mark-ups on project components which encourages larger projects with greater savings.

Only 10% of ESCO projects include renewables, but this percentage may increase due to a current focus on meeting green house gas and energy reduction targets. A limitation to further renewable usage is the requirement that installation of power generating technology must be subcontracted out unless the ESCO is registered as a power supplier. The most popular renewable projects are solar on schools and geothermal for heating which entail a longer pay-back period. However for the market to continue to develop there needs to be increased focus on the long-term maintenance aspect. Lower maintenance costs frees up capital for alternative projects. Bundling projects to obtain economies of scale should also increase.

Average duration of ESCO projects in Canada is 2-4 years. Survey Data

In the majority of ESCO projects, debt is borrowed by the client. If the client decided not to take out debt then the ESCO does the borrowing. Plenty of mutual and investment funds are willing to lend to ESCOs projects.

Project aggregation is already happening in Canada but few banks are not involved. This is a great opportunity for a green bank to enter this sphere.

Canada Infrastructure Bank is a Crown corporation that operates at arm’s length from government with priority areas in transportation and green infrastructure.

Few barriers exist in the ESCO market. Plenty of investors are willing to engage with ESCO industry due to the level of maturity and the ability to witness the successful implementation of previous projects. One barrier is client's capacity to borrow, which is dependent upon the debt classification at the provincial level (on or off balance sheet).

Many clients attempt in-house energy efficiency solutions and fail to achieve full possible savings or GHG reductions and have no recourse for under-performance. Education of the full benefits of the Energy Performance Contracting model including the transfer of risk to the ESCO would help remedy this problem.

Energy Service Association of Canada