Hey Reader, You already know “What is energy efficiency?”. Today, we have brief on “Energy Efficiency as a Business”. For the more information on Energy Efficiency development, please refer: https://www.iea.org/reports/energy-efficiency-2023
History
The rise of energy efficiency as a Business started in late 1970 due to the energy crisis. Entrepreneurs developed a way to reduce the rise of energy costs and unnecessary use of energy consumption. The first ESCO was created in the Republic of Korea in 1992 and subsequently created in China in 1995.
Business Model “To Make Energy Efficiency as a Business”
ESCOs have the potential to create a more creative business model for customer acquisition. ESCO offers a comprehensive package of services that leads to more energy savings for customers without much capital investment. Some of the well-established business models are briefed below:-
An Energy Performance Contract (EPC) is one of the popular contracting methods that is used by the various ESCOs. In EPC, It is a financial mechanism used to pay for today’s facility upgrades with tomorrow’s energy savings –without tapping your organization’s capital budget. An EPC constitutes a partnership between a facility owner and an energy service company (ESCO) and is considered a time and cost-effective method for completing comprehensive energy upgrades.
Shared Savings Model
The ESCO assumes both the performance and the credit risk throughout the EPC project. The ESCO and its client share the energy savings resulting from the project according to a previously agreed proportion. The ownership of the energy-efficient equipment is transferred to the ESCO’s client at the end of the project; thereafter, the obtained energy savings entirely accrue to the ESCO’s client.
Guaranteed Savings Model
The ESCO assumes the performance risk but not the credit risk. The ESCO’s client takes the responsibility to finance the EPC project through banks, other investors, or using its own resources. The ESCO guarantees a certain level of energy savings. If the actual savings are lower than the guaranteed threshold, the ESCO will pay the difference to its client. On the other hand, if the actual savings are higher than the agreed threshold of guaranteed savings, the excess of energy savings will be shared between the ESCO and its client according to a previously agreed proportion.
Energy Cost Trust Model or Chaffee Model
This model is a type of energy supply contracting where the ESCO takes over the energy supply of its client. The client pays a fee to the ESCO which may be discounted from the energy bill. If the bill exceeds a certain threshold the ESCO will compensate its client for the excess part of the payment. At the end of the EPC contract period, the ESCO’s client earns all the energy savings.
Finance Lease Model
The ESCO requests financing from a finance lease company offering the future energy savings of the EPC project as a guarantee. The finance lease company provides the energy efficiency equipment to the ESCO for the EPC project. The finance company owns the equipment throughout the EPC duration. The ESCO’s client pays for the equipment using energy cost savings following a previously agreed timetable. At the end of the EPC project, the client will own the equipment.
The above are some of the innovative business models developed to make energy efficiency a feasible business model.
Benefits of Working with an ESCO
- Energy Cost Savings: Clients benefit from reduced energy consumption and lower utility bills.
- Environmental Impact: Energy efficiency improvements contribute to reducing greenhouse gas emissions and environmental impact.
- Expertise: ESCOs bring specialized knowledge and experience in energy efficiency, which can be difficult for clients to replicate in-house.
- Improved Infrastructure: Retrofitting and upgrading buildings or industrial processes can improve operational efficiency, comfort, and productivity
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