The ESCO business model has a particular characteristic. At the risk of one of the contracting parties, benefits for both parties are obtained. Despite this peculiar feature, some barriers in the ESCO business model break a faster development.
In July 2011, the Environmental Defense Fund, EDF for short, published a report titled Show Me The Money, Energy Efficiency Financing Barriers and Opportunitiesort that goes thru barriers in the ESCO business model.
We want to share with you the summary I made for myself.
The financial dimension of barriers in the ESCO Business model.
- Universal Barriers to MUSH , Commercial and Industrial sectors.
- High upfront capital cost.
- Uncertainty of savings and perceptions of risk. A matter of confidence and reliability
- Budgets do not prioritize energy efficiency: Maximizing energy efficiency is not generally part of the core mission statement of an institution.
- Lack of secondary markets.
- Municipalities, Universities, Schools, and Hospitals (MUSH) Barriers
- Policies that fail to incentivize investments.
- Limited capacity and staff resources to pursue energy efficiency.
- Commercial Property and Industrial Facility Barriers
- High development costs. Protection from risk requires higher overall development costs that in MUSH sector.
- Long payback periods vs. corporate focus on short-term profits.
- Mortgage lender limitations on external financing of equipment and systems because are considered part of the assets securing the original mortgage.
- Limited external financing products available.
- Landlord and tenant split incentives problem. The landlord has to pay the buildings´ efficiency upgrading. The tenant is responsible for paying the energy bill.
- Operational interruption.
It makes obvious that the enlargement of the real ESCO market has to do with the development of new contracting models tailor-made around the needs of each customer. New contracts have to offer specific solutions to specific financial and risk perception problems.