The energy services company (ESCO) business model had strong potential in South Africa, International Finance Corporation (IFC) regional sustainability and climate business specialist Tibor Kludovácz said on Monday.

Although numerous ESCOs already operated locally, the model had not truly taken off, he said at the inaugural International ESCO Finance Conference, in Sandton.

Kludovácz stated that South Africa could benefit from the structure, which had been implemented widely and had been particularly successful in countries such as China and the US.

An ESCO undertakes complex reconstruction of the end-user’s systems to maximise energy savings, as opposed to selling assets. Kludovácz indicated that the key difference between the ESCO model and other business models in energy efficiency was financing.

“Access to finance is one of the critical barriers to the expansion of energy efficiency markets. The ESCO model has the potential to solve some of the problems associated with financing energy efficiency projects. Technical viability and bankability go hand in hand,” he said.

Kludovácz added that an ESCO took a one-stop-shop approach by offering the benefit of providing a full technical solution, as well as financing the investment, which meant that the company using its services incurred no capital expenditure (capex).

He explained that an ESCO borrowed from local banks to finance the capex, while energy savings also financed the investment.

However, Kludovácz pointed out that ESCOs required sophisticated skills in terms of engineering and project management, as well as advanced financial skills, including financial planning, liquidity management, collections and banking relationship management.

Further, these models also incorporated complex contractual and legal arrangements.

Meanwhile, energy efficiency programme finance advisory firm Econoler owner Pierre Baillargeon said that the lack of knowledge about energy performance contracting in the finance community as well as credit worthiness remained a barrier to ESCOs in most countries.

He stated that for ESCOs to be successfully implemented in countries such as South Africa, the use of a dedicated mechanism and supportive policies would be required.

“Based on past experience, countries with support policies for ESCOs succeeded in developing their national industry,” Baillargeon indicated, adding that policies would assist in creating awareness and, information dissemination, as well as offer technical assistance, registry and financing instruments to support industrial growth in countries where ESCOs had not taken off yet.

He said governments would have to learn about the concept behind ESCOs and the specific barriers it must overcome to successfully implement such a model.

Baillargeon also emphasised that training and certification would be required to ensure a robust and stable ESCO market, while documentation standardisation and longer-term contracts would add to its advancement.

Further, Chicago Bridge & Iron Company client programme manager Joel Freehling suggested that countries rather prioritise the adjustment of their existing policy framework to boost energy efficiency and the demand thereof, than creating new policies.

SRC Globa business support services company president and CEO Dilip Limaye said governments of countries where the ESCO model had not been implemented widely would have to create market incentives for these structures.

“But we have to establish a collaborative approach between government, the financial sector and the private sector to make this happen,” he urged.