ESCOs should be regulated in order to scale up

It is imperative that Energy Service Companies (ESCOs) are well regulated, writes Sougata Nandi, founder of 3e Advisory

Sougata Nandi.
Sougata Nandi.

The concept of ESCO (Energy Service Company) services is picking up pace in the UAE.

While this was earlier spearheaded by the ESCOs themselves, over the past five years, the leadership role has shifted to entities like Etihad ESCO of DEWA and the Kafaati initiative of the Tarsheed program of Abu Dhabi Water and Electricity Authority (ADWEA). SEWA is putting together their concept of the ESCO as well.

These initiatives are streamlining and standardising the ESCO business model, by managing such programs on behalf of end customers, using unified contracts, best suited to the unique needs of the ESCO business. Historically, ESCO contracts have often been fractious, with no legal expertise existing in the region; sometimes ending in arbitration.

Typically, the ESCO would present a draft ESCO contract to the client, whose legal team would inappropriately review it from the purview of a regular construction contract, resulting in delays in contract signing, terms and conditions of which would leave either or both parties dissatisfied. Thus, standardising this business model and associated legalities, by authorities like Regulation & Supervision Bureau (RSB), is a welcome move for the industry.

Energy management is a highly specialised service/activity, requiring thorough knowledge on a vast range of skillsets, and as such, should be carried out by a subject matter expert. This function cannot be a part time responsibility of a resident engineer, or the facility manager. The energy manager not only needs to know a building’s unique energy requirement characteristics, but also how to match the energy supply to energy demand in a dynamic manner, on a 24x7 basis, in order to achieve the greatest energy savings.

This is referred to as continuous commissioning in energy efficiency parlance, which can be only successful on the basis of accurate data, like: hourly, daily, weekly and seasonal occupancies of the building, functional use of different zones within the building, hourly ambient weather conditions, capability of building automation systems and condition of HVAC equipment and maintenance schedules, amongst others.

Depending on the age and condition of the building’s MEP equipment, large-scale retrofitting may also be warranted in some instances.

These expertise help the energy manager achieve energy savings. However, an energy manager has to also provide objective evidence of energy savings generated. This is the last mile where part-time energy specialists fail miserably. The quantification of energy savings can only be done by applying the IPMVP (International Performance Measurement and Verification Protocol) criterion.

A meter-to-meter savings calculation may suffice for the finance departments (ultimately this is what is reflected in their P&Ls), but contractually, actual savings calculations need to factor in variables like changes in weather patterns, occupancy changes, changes in operating methodologies of energy consuming equipment etc.

A regression based energy baseline needs to be established that has to meet a minimum criteria, to which fixed and variable adjustments are to be applied, in order to calculate exact energy savings achieved. This step is fundamental for the ESCO business model, in the absence of which ESCO contracts could run into disputes. These requirements are regulated by RSB in Dubai.

While ESCO model is maturing in Dubai and other Emirates, it is important to understand that an ESCO project works well in relatively big energy management projects. In addition to the investment in energy saving equipment and associated energy engineering costs, project financing and ongoing management costs constitute significant portions of the overall cost of ESCO projects.

Thus, for relatively small, or simple projects like retrofitting existing lighting with LED lights, should preferably be executed using in-house financing. IPMVP allows straightforward calculations of energy savings in such cases.

Financing ESCO projects in this region still remains a big challenge, as finance is neither easily available, nor is it attractive. ESCO projects are best served by financiers who have a passion for sustainability, with a reasonable expectation of financial returns. With the growing ESCO market, financiers will find good opportunity for growth through a secure business model, where risks of not achieving predicted returns are relatively less or non-existent.

For ESCO projects that do not originate through bodies like Etihad ESCO, a major hurdle is the fact that significant number of facilities that qualify for energy savings, are freehold and thus have an owner’s association, instead of a single owner, managing such decisions. In such instances, although the project itself might be very attractive, with multiple owners involved in the decision making process, the contract negotiation process can be well stretched.

Reviewing monthly reports and securing acceptance of the same by the OA Board can be an added challenge. Finally, the fact that a board that may not be a registered entity usually signs the contract, can present its associated risk to the ESCO service provider and its financiers.

For ESCO model to scale up, it is imperative that it is well regulated, the service providers are reputable and clients have an appreciation for the intricacies of such engineering-cum-business model and ESCO contracts. 

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