April 12, 2023

Although energy service companies have carried out a wide range of energy efficiency and renewable energy (ERNC) projects, more bank financing and other conditions are still needed for greater penetration of this business model.

Their name consists of just four letters, but over the past decade, they have left a mark that could be even deeper. The reference is to the so-called ESCOs (short for Energy Service Companies), whose business model allows them to “support energy efficiency (EE) investments for public or private clients, paying for their services mainly through the savings generated in the buildings or facilities they improve,” as specified by the Ministry of Energy.

This financial arrangement, which is highly developed in Europe and the United States, has been recognized as a fundamental tool for advancing Chile’s Nationally Determined Contribution (NDC) commitments, which involve reducing greenhouse gas (GHG) emissions across various sectors, particularly through energy efficiency.

The book Energy Efficiency Law in Chile, published in 2022 by the National Association of Energy Efficiency Companies (Anesco Chile), states that the country has “a small ESCO industry that has carried out a variety of EE and non-conventional renewable energy (ERNC) projects in both the public and private sectors. And while they initially worked with their own resources, they have gradually formed partnerships with banks and some distributors to expand their number of implementations.”

Positive Evaluation

According to Claudio Pérez, head of the Renewable Energy Department at the Energy Sustainability Agency (AgenciaSE), the ESCO business model has been and continues to be attractive for the public sector and other market players “due to the complexities that some institutions face in making significant energy investments. For us, there is high potential for implementing the model in distributed generation for public buildings. However, although AgenciaSE has conducted various energy diagnostics for these facilities under the ESCO model, implementing these projects requires approval for long-term budgets, ranging from 8 to 15 years,” he explains.

“Banks should be able to recognize ESCOs’ energy sales contracts as assets to secure funding for more projects.”
—Carlos Silva, researcher at the Energy Transition Center, Universidad Adolfo Ibáñez.

In this regard, Pérez highlights a success story: an 80 kW photovoltaic project at the Ministry of Social Development, which achieved a 14.1% discount on the electricity price compared to the local utility, secured through a 15-year contract.

Carlos Silva, a researcher at the Energy Transition Center (CENTRA) at Universidad Adolfo Ibáñez (UAI), points out that this model “has facilitated the implementation of solar generation systems for large and medium-sized customers, both in industry and commerce.”

Eight Key Areas

As noted by Anesco, the ESCO model is applied across eight energy efficiency areas: efficient lighting, climate control and thermal retrofitting, replacement of efficient boilers, steam generation and distribution, sanitary hot water generation through solar collectors, renewable energy integration for electricity supply, cogeneration, and district energy.

Specifically, Mónica Gazmuri, executive director of Anesco, highlights that district energy “is part of the solution to an energy system that is currently overwhelmed, facing territorial conflicts and challenges in gaining public acceptance for large-scale projects. However, it requires greater collaboration and commitment from all stakeholders. It represents a missing piece in Chile’s energy efficiency efforts and demands a different investment approach for energy projects and local development.”

According to Silva, two major barriers hinder the implementation of these ERNC projects:

  1. Informational Barrier: For potential clients, “it is not immediately evident that these systems will perform as advertised, and they fear losing their investment due to unexpected failures or malfunctions.” Additionally, “since they lack expertise in this area, they are skeptical of energy generation forecasts.”
  2. Financial Barrier: “While the industry and commercial sectors have access to financing, it is limited, and they generally prefer to allocate funds to their core business activities,” explains the researcher.

In this scenario, Silva emphasizes that ESCOs help mitigate both barriers by “acting as intermediaries between technology providers and end clients. These companies typically finance, build, operate, and maintain the projects, ensuring efficient system performance throughout their lifespan and relieving the client of the technological complexities.”

ESCOs in Action

Two ESCOs that have successfully leveraged this model are Punto Solar and Energy Tracking. Hermes Silva, general manager of Energy Tracking, highlights the company’s active participation in public and private sector projects, particularly in real estate and hospitality. The company has also played a key role in district energy projects, from prefeasibility studies to implementation.

Meanwhile, Juan Pablo Oyanedel, general manager of Punto Solar, shares a milestone achievement: in 2013, his company signed the first ESCO contract in Chile with Universidad Andrés Bello, with support from Corfo. “Punto Solar is a company with a youthful spirit, representing a generation that is changing how things are done, offering comprehensive solutions based on photovoltaic solar energy systems, energy storage projects, and electromobility across various sectors,” he states.

Challenges and Barriers

What challenges must the ESCO model address, and what obstacles must be overcome for it to have an even greater impact on distributed generation in Chile? The book Energy Efficiency Law in Chile refers to the “virtuous relationship that can be established between these projects and bank financing, considering the regulatory framework provided by the law.” It also suggests the possibility of “a state guarantee for ESCO financing or the recognition of ESCO contracts by banks as loan collateral.”

From AgenciaSE’s perspective, Claudio Pérez notes that the agency’s technical team has been working on diagnostic studies and tendering guidelines. He hopes that by 2024, if budget approvals for public buildings are secured, this type of project can be scaled up significantly.

“This market is in full development and has tremendous potential, although some factors work against it, such as rising energy and fuel costs, higher solar technology prices, and logistical challenges.”
—Juan Pablo Oyanedel, general manager of Punto Solar.

Pérez also underscores that “these initiatives will contribute to the government’s goal of achieving 500 MW of installed distributed generation capacity by the end of this administration. In this regard, the public sector’s role is crucial in adjusting regulations, removing entry barriers, and providing incentives to drive this segment forward.”

According to experts, the main difficulties in launching such projects are related to the initial investment and return on investment, which can make them unfeasible for some ESCOs. Additionally, for projects funded under this model in the public sector, “long-term contracts between institutions and ESCOs are required. However, this issue is already being addressed directly by the Ministry of Energy and the Budget Directorate, which are in advanced discussions on the matter.”

“ESCO models offer an excellent opportunity to execute more projects in public buildings through independent financing from the state, contributing to the government’s distributed generation goals.”
—Claudio Pérez, Head of Renewable Energy, Agencia de Sostenibilidad Energética.

Pérez adds that the Renewable Energy Department has the technical capacity and experience to promote the implementation of such projects, noting that “we have successfully launched similar programs, such as Public Solar Roofs and Solar Home.”

For his part, Hermes Silva points to “the lack of market and industry awareness as a key challenge. With few projects and incentives, the business model is not developing at the necessary pace to make a real impact, leading to a lack of training and knowledge.”

Juan Pablo Oyanedel agrees, stating that while the market has enormous potential, “factors such as rising energy and fuel costs, higher solar technology prices, and logistical challenges create obstacles. Additionally, there is a need for low-cost financing lines that allow these models to be financially viable over time, given that they essentially function as financial business models.”

“With few projects and incentives, the business model is not growing fast enough to have a real impact, which results in a lack of training and industry knowledge.”
—Hermes Silva, general manager of Energy Tracking.

Similarly, Carlos Silva concludes that “the biggest barrier for ESCOs tends to be access to financing. Many of them are small or medium-sized enterprises, and once they start financing projects under this model, they quickly exhaust their credit capacity with banks. In this context, banks should recognize ESCOs’ energy sales contracts as assets to facilitate more projects. Alternatively, some companies have turned to investment funds to raise financing.”

Courtesy of: Revista EI