Why Energy Service Companies are not so Successful in Europe?

Why Energy Service Companies are not so Successful in Europe?

Eric Morel 01/11/2019 2

The title of this article is already ambiguous considering that energy service companies (ESCOs) have only one growth or business model. This is not the case. In their diversity of actions, these companies have been successful in the US where their market could be today about 8 billion dollars.

ESCOs have some difficulties to reach the same success in Europe where some business models, such as the energy performance contracts, face off hurdles to impose themselves, despite their spontaneous attractiveness.

What are the reasons for this situation? Are they political, economic, regulatory or social? And how can we improve this situation?

Firstly, the ESCOs have responded, in the US, to the need to find ways to refurbish public buildings, in often bad shape, as they are the property of administrations running out of budget to maintain them properly. ESCOs, notably through energy performance contracts, have been public building renovation companies, addressing from financing to commissioning and operation of improvements. They have not been at the service of energy savings but it is the energy savings that have been at the service of the ESCOs.

To date, it has always been easier to find actors looking to maintain their property rather than actors who are interested in investing to save energy.

Energy performance contracts are more easily sold when they meet the customer’s operational objectives: to improve the productivity for an industry or to improve the comfort of the users of a building. Energy, like blood in the human body, carries values and information to improve comfort or productivity.

In Europe, ESCOs have suffered from regulatory environments. Most business models of ESCOs disrupt the chains of actors and change the power relationships, especially with maintenance companies or facility managers. A rather liberal regulation will favor a progressive and “natural” adaptation and repositioning of the actors. More stringent regulation, as we sometimes see in Europe, reinforces defensive strategies and prevents ESCOs from finding their place.

In Europe, and even more in Southern Europe, we have difficulties to understand that the remuneration of ESCOs must cover the risks taken: technological, financial and energy risks. Because one of the great values of ESCOs is the delegation of risks. And if the ESCOs wish to optimize their price, it makes them limit the risks, by contract, for example, by framing more precisely the conditions of their remuneration. A contract of this type can generate suspicion and the temptation to make a standard contract is great to give the feeling to control the situation. In reality, such a contract does not take into account the risks, always related to each particular case, and kills the business model of the ESCOs

Many European ESCOs, in difficulty with the public sector, have turned to the private sector, in which priority is given to “productive” investments, that is to say, linked to the use values of the building. There are few ESCOs contracts whose return on investment then falls within customer standards.

The desire to lead via regulation, the difficulty to remunerate the risk, the will to target the ESCOs on energy savings, the search for always lower prices, here are four reasons why the ESCOs model is struggling to take off when it would have, in the current context , so many benefits!

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  • Martin Pritchett

    We are still far behind America

  • Chris Austin

    Good explanation

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Eric Morel

Energy Expert

Eric Morel is a worldwide recognised expert of energy transition and digitalisation. In the past, he has served as VP Corporate Business Strategy and VP Global Smart Grids and Energy Efficiency at Schneider Electric as well as CEO of Ilevo, a telecommunication start-up. He is a founding member and a former Board member of the Gridwise Alliance, the main professional private/public association dedicated to Smart Energy.

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