If you’ve been following the NOVICE project, you’ll know that we aim to develop and demonstrate a new business model for ESCO’s that makes EPCs more attractive by consolidating energy efficiency and demand response services and combining their revenue streams. One of the first steps we took to inform our research was to learn more about the current state of the ESCO and EPC market across Europe. Crucially, we wanted to know, how do ESCOs currently finance their projects? What barriers do they face in accessing finance? And what do they think of the idea of a dual services model that incorporates demand-side response into their service offering? To find out, we carried out a survey of ESCOs across Europe. The results are in, and they clearly show that the market is ready to embrace a new way of doing business.
For around three quarters of respondents, ESCO activities were not the primary activity of the company and made up less than 50% of their business operations. More than half confirmed that they typically undertake fewer than three EPC contracts each year. So whilst there is clearly a market for EPCs, it’s not the main source of income for most ESCOs.
When asked about project finance, 80% of respondents stated that they use third-party finance to fund projects and of these, almost two thirds stated that a typical project requires an investment of less than €500,000. Whilst building owners may consider this to be a large project, most fund managers and investors would disagree as they commonly deal with projects worth €10 million or more. This limits ESCOs to relying on traditional sources like banks for project finance, and we see this reflected in our survey results as specialist energy efficiency bank loans were ranked as the most popular source of finance for EPCs. The problem is that every time the ESCO goes to the bank to ask for a loan for a new project, the bank performs a credit check, and if the ESCO has already borrowed to finance other projects the bank is likely to refuse a further loan. From the bank’s point of view it’s just too risky to allow the ESCO to take on more debt. This is one of the reasons why many ESCOs are limited to less than 3 EPCs per year. Almost half of our survey respondents admitted that project finance is a barrier to engaging clients in new EPCs and went on to explain that banks and other financial institutions often lack a clear understanding of EPC’s, take too long to approve loans, and are inconsistent in applying their criteria for loan eligibility.
So how will NOVICE help to overcome this problem? Well, by combining revenue streams from both energy efficiency and demand response, we hope to prove that the typical payback period for EPCs can be significantly reduced. This will allow ESCOs to repay their loans more quickly, and allow them to take on more projects, which should give a much needed boost to the EPC market.
When asked about their willingness to collaborate with demand response aggregators, over 40% of ESCO surveyed responded that they are currently exploring ways to implement demand response in their project portfolio and a further 30% are considering expanding their services but are unsure how to do so. If you’re currently developing EPC projects and are looking for support to enhance your service offering through demand side response, please do get in touch. NOVICE is still accepting pilot projects and can quickly review your project for eligibility. We will work with you, sharing what we have learnt through our research and assist with project development and access to finance where possible.
If you are an ESCO who hasn’t yet taken part in our survey, there is still time! Click here to participate and let us know what you think.
If you’re interested in a more detailed market analysis of the market for NOVICE in Europe, click here to download our full report.