ESCO - A Route for DSM

Delivery of energy efficiency services by ESCOs has been identified as one of the thrust areas under the Energy Conservation Act, 2001. An ESCO could implement and finance energy efficiency measures at the user's premises. The use of ESCOs is attractive for utilities as well as the users as it entails extremely little initial investment through them. The ESCO is commonly paid only if energy savings are realized. Primarily, the ESCO's services are paid for by the savings produced through the reduction in energy costs over a period of time.

In an ESCO arrangement, an audit is conducted to formed baseline data of the current energy consumption. The energy saving potential is assessed through the ESCO based on the audit. A performance contract is developed. The ESCO commonly provides a guarantee on energy saving for a stipulated time period (classically four to five years). There is an O&M agreement with the ESCO that involves retrofits in order to ensure sustained savings. Such energy saving projects could be financed either through the ESCO, banks or other financial institutions.

The Bureau of Energy Efficiency (BEE) has also been entrusted along with the task of building capacity for the growth of ESCOs. It is working along with stakeholders and the government to arrive at a viable payment mechanism for ESCOs. This practice is associative new and there are only a handful of companies acting as ESCOs. In most cases, it is the equipment manufacturers who undertake energy saving projects, more as an additional service to their clients. In addition, most of the Indian companies have taken up such energy saving projects as joint ventures with foreign companies.

ESCOs have so far had mixed success in the global market. They have been limited through a number of factors. These are given below.

• Lack of appropriate financial mechanisms to fund their projects. The payment agreement commonly is such that the ESCO is paid only if savings are realized. Thus, even lenders are skeptical about investing in such projects.

• Most ESCOs offer specialized services pertaining only to a particular procedure. Therefore, an ESCO specializing in, say, lighting or HVAC or control systems might not be able to offer more comprehensive services. This would output in lower savings for the user. In addition, some energy saving services is more attractive than others. It has been seen which lighting offers the most attractive savings, as it includes low investments. Instead, enhancing the efficiency of HVAC systems is costlier and has a longer gestation period. It would, thus, be desirable for ESCOs to offer a complete package, along with specialist companies creating consortia to offer comprehensive services.

The concept of ESCOs is still new. There are extremely few stand-alone ESCOs and some companies had to shut down operations because of the limited demand for their services. There is, therefore, a requirement to increase awareness between utilities about the advantages of using ESCOs. Along with this, it is necessary to find a appropriate financial mechanism to pay for these services.

The description so far throws up various issues in the implementation of DSM. We should end with a brief discussion of these issues.