Categoría: ESCO Business Model

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ESCO negotiations: Four issues to focus on.

From «ESCOs, Myth and Reality» Ribes&Casado

As we have said, the ESCO´s is a multivariable business that works jointly with technological, legal, and economic aspects; the dealing process requires transversal experts to combine the ruling vectors of both disciplines. It is a barrier to overcome.

Multiple Variables are involved in Esco´s business model. Cover of book "ESCOs, Myth and Reality: Negotiation misunderstandings when outsourcing energy efficiency".
Multiple Variables are involved in Esco´s business model. Cover of the book «ESCOs, Myth, and Reality: Negotiation misunderstandings when outsourcing energy efficiency».

It is also commonly known the use of indicators as the Internal Rate of Return (IRR) and the Net Present Value (NPV) to evaluate the acceptability of an investment. These indicators are highly efficient when the analyzed business basics are absolutely understood.

Nevertheless, there are insufficiently explored areas in the popularized ESCO business manuals. This analysis lack has as a consequence negotiation with close-to-mistake dealing rules; the lesser experienced part is the one that suffers the most negative effects.

In ESCO´s business there are four issues to focus on with a higher intensity:

Four issues to focus on ESCO negotiations

  • Which is the best time to buy a brand new technology? Technology prices evolution.
  • It is necessary an accurate description of each device´s requirements. “Useful life” and “essential performance”.
  • The devices substitution investment (DI) and some controversial variables when the capital supplier is the ESCO.
  • Former energy bill is not a solid reference when we forecast future gains.
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La materia prima del negocio ESCO.

La materia prima del negocio ESCO es la eficiencia. En este caso la eficiencia energética. Hacemos aquí un simil entre esta materia prima y la materia prima que necesita la sociedad para avanzar.

“Mejorar el bienestar exige aumentar lo que producimos con los mismos recursos” es el subtítulo de un artículo de Luis Garicano sobre el futuro de la innovación publicado en El País. Esto es la materia prima del negocio ESCO es pura eficiencia energética.

EscoRawMaterial

Garicano es un economista paseado por Brujas y Chicago que en la actualidad es catedrático en la London School of Economics LSE. Vive a caballo entre Londres y Holanda y fue quien en 2009, con motivo de la inauguración de la nueva sede de la LSE, contestó a la pregunta de Isabel II “¿Cómo nadie advirtió esta caída?”.

Es un personaje multidimensional, preocupado por la educación: «España necesita educar a la gente para buscarse la vida» , también por la causa histórica de los problemas que nos atenazan: «¿Cuándo se torcieron las cosas? Tres hipótesis«.

En el artículo citado al inicio, afirma: “Las economías no pueden crecer sostenidamente empleando más recursos (más trabajo, más energía, más capital)”. Esto, que es lógica pura, pone de relieve la estupidez de reformas económicas basadas fundamentalmente en bajadas salariales, pero también la de sectores alérgicos a la eficiencia y la productividad. No es fácil que Garicano haga amigos en los extremos del arco social y político.

Sin la materia prima del negocio ESCO

El no apostar por la eficiencia energética bloquea el mercado ESCO. Es como intentar desarrollar un negocio con escasez de materia prima. Si falta la materia prima del negocio ESCO también afecta a la competitividad internacional de nuestras empresas. ¿Cómo competir con países con más recursos energéticos y/o decididas políticas en eficiencia? Hay que elegir modelo: ¿Escandinavia o el Caribe? ¿EEUU o China?

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Negotiation of an ESCO deal.

Negotiation is the whole process of reaching an agreement between the Customer and ESCO parties by means of the exchange of documents and/or peer-to-peer meetings. In actual terms, this process starts when any party issues the first document proposing, to counterparties, the execution of an EE-ESCO project establishing initial negotiation positions; it ends, in positive case, with the contract signature.

Gerd Altmann From Freiburg, Deutschland CC0 Public Domain
Negotiation by Gerd Altmann CC0 Public Domain

The essence of an EE-ESCO business model is a long-term partnership with the aim of sharing common benefits which are conditioned to a successful energy-saving strategy. So, each other´s gains addition is equal to the whole common benefits; a party´s over-gain supposes an over-loss to the counterparty. This business nature means a pair of apparent contradictions in the looking for arrangements process:

  • Self-interest is logically both parties´ main negotiation vector. In this case, the discussing field is focused on the collection of multiple variables that determine the gains´ split; this is, obviously, more complex than a simple sharing proportions agreement about the efficiency savings. There are uncertainties – energy future price-, partial knowledge –operating and maintenance real costs-, complex key rules –measurement and verification plan- future post-contract hidden costs –devices useful life, obsolescence-,…; these are risks that, in the dealing process, have to be compensated with equivalent guarantees.
  • But this is a win-win business where all depend on: the cooperation for achieving efficiency savings, the none existence of winners and losers –except the case of an unfair negotiation- and long lasting partnership ties. So, a smart negotiation is necessarily based on mutual understanding and trust compatible with the self-interest defense.

Negotiation phases

The sequenced phases that drive negotiation to the final agreement follow a scheme like this

From   «ESCOs, Myth and Reality»  Ribes&Casado