Barriers in the ESCO business model. Show me the money

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.

Sawley level crossing with the barriers down by David Lally. Used under CC BY-SA 2.0. No changes were made.
  1. 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.
  2. Municipalities, Universities, Schools, and Hospitals (MUSH) Barriers
    • Policies that fail to incentivize investments.
    • Limited capacity and staff resources to pursue energy efficiency.
  3. 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.