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Wednesday, 14 September 2022

“ESCOs” aren’t just a big opportunity for entrepreneurs — they could help countries get a handle on the energy efficiency question, too

How developing energy efficiency regs and an ESCO market could help Lebanon’s economy and reduce its emissions: Lebanon’s widespread electricity shortages and surging energy prices are both the result of and factors in its economic woes, making more energy efficiency a really big issue for folks in Beirut and beyond. One way forward is for the country to invest in creating energy efficiency standards, practices and policies, according to a white paper (pdf) out last week by the Clean Energy Business Council MENA (CEBC MENA), the American University of Beirut (AUB) and the Issam Fares Institute for Public Policy and International Affairs (IFI).

The report’s key recommendation? Officials should help develop a market for energy service companies (ESCOs).

Uh, Enterprise … what’s an ESCO? ESCOs increase the energy efficiency of their clients’ facilities by developing, designing, building, and arranging financing for energy-saving projects that translate into cost savings on the energy, operations and maintenance fronts. Advocates think ESCOs will become more important as more and more companies adopt ESG targets and emissions standards.

How are they different from your run-of-the-mill energy service companies, like Halliburton? Their incentives structure: What differentiates ESCOs from standard energy companies is their use of performance contracting — meaning they are paid from the energy-related savings resulting from the solutions that they design and implement — the report notes. This could be through a guaranteed savings model — where the client pays retrofitting expenses, but the ESCO has a legal obligation to generate energy savings. It could also be done through a shared savings contract — where the ESCO covers all retrofitting expenses and is then paid by receiving a share of the client’s savings from reduced energy consumption rates.

And with one of the region’s worst economies and emissions profile, Lebanon can use all the help it can get: The World Bank expects that Lebanon’s ongoing economic and financial crisis — which in part is due to rising energy costs and energy inefficiencies — will see real GDP contract 6.5% in 2022, after falling 10.5% in 2021. Lebanon’s CO2 emissions, which stand at some 4.1 metric tonnes per capita, according to 2019 World Bank data, is higher than many regional peers, including Egypt (2.5), Jordan (2.4), Morocco (2.0) and Tunisia (2.6).

So, how can Lebanon get ESCOs up and running? A regulatory framework for energy efficiency would be a start: Ratifying its draft energy conservation act would promote energy efficiency, the report notes. It recommends setting “ambitious but achievable” energy efficiency targets. It also advocates setting up a regulatory body to introduce energy audit guidelines, certification, and ESCO accreditation, providing training and capacity building, and setting clear transparency measures in ESCO contracts.

Electricity subsidies also need an overhaul: Reforming electricity subsidies would, among other things, create demand for ESCO projects, the report argues.

On the financing side, Lebanon’s ESCO market needs more private-sector buy-in. The authors say the best way forward is to get private capital engaged, either on a stand-alone basis or through public-private partnerships.

And setting up Super ESCOs is also key. Super ESCOs usually function as intermediaries between ESCOs, the government, and facility owners. They grow the overall ESCO market, help existing ESCOs operate more efficiently and “can assist ESCOs in less economically developed countries to overcome financial and technical barriers,” the report says.

There’s precedent for a successful rollout in MENA: MENA’s ESCO market is still early-stage compared to the US, China and Europe, the paper says. The UAE has the most developed market in MENA, while Saudi Arabia, Oman, Morocco and Egypt have taken steps in the field. In 2014, Dubai’s Etihad ESCO generated AED 4.5 mn in cumulative investments and saved 4.4 mn kWh of energy and 2.2 mn imperial gallons (MIG) of water, the report notes. Tarshid, Saudi Arabia’s first Super ESCO, is expected to save an estimated 3.7k tonnes of CO2 emissions through a project it began in 2020 retrofitting ministry buildings in Riyadh, the report adds.

OUR TAKE- It’s a stretch to think that Lebanon, with all of its current challenges, has the capacity to create an ESCO market, but they’re clearly part of a long-term solution when it manages to get through the current bottleneck. And the concept absolutely has legs in other regional countries — smart entrepreneurs should take note.

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