Santiago Barcón
President
Mexican Association of ESCO Companies (AMESCO)
/
Insight

The Relentless Risa of the ESCO Scheme

Wed, 02/24/2016 - 15:11

Sustainability is gaining momentum across many Mexican cities given the unstoppable pace of urbanization. In its wake, we can see the rise of the ESCO scheme, which is comprised of companies devoted to energy savings. This is a vision upheld by Santiago Barcón, President of the Mexican Association of ESCO Companies (AMESCO). While the ESCO scheme has been used for decades in countries like the US and Germany, it has been a somewhat overlooked concept in Mexico. “Among the OECD countries, Mexico comes last in energy efficiency. Rather than building more generation stations, even if they come from renewable sources, we must improve the efficiency of the existing ones first,” Barcón explains.

A flicker of understanding is beginning to spread through the public sector, and Barcón is a witness to it. “There has certainly been a change in the government’s mentality and CONUEE has been extremely helpful.” At the end of 2008 there were only seven major formal ESCO identified in Mexico, and since then the number has grown exponentially, which is reflected in the amount of members in the association. “AMESCO has 28 members and approximately ten of them are of a significant enough size that they are able to commit to large projects. As the figure shows, we have taken considerable steps, but we are only half way there,” Barcón describes. As the numbers grow, AMESCO is tasked with weeding out the weak links and choosing carefully which companies it accepts into its fold. “One of the premises is that an ESCO must always install brand new equipment. If a company installs used machinery, they will be able to save energy for a significantly shorter time.” For the customer, this represents high maintenance costs and a slower ROI. “When a company says that its clients will save energy just by installing a piece of equipment but does not explain how, this is a red flag that indicates a lack of viability,” he adds.

As AMESCO helps drive the ESCO rhetoric across Mexico, for the past couple of years there has been a tug of war regarding the true savings this scheme can offer. On one side, CONUEE maintains that the potential energy savings of 11.6 million kW translates to US$1.2 billion and a market opportunity for ESCO of US$121 million. While Barcón does not contest this figure, he believes this is only the tip of the iceberg, since the CONUEE figures are measured in terms of kilowatt-hours and they do not take thermal energy into consideration. Barcón sheds light on this issue, “By taking the US market and dividing its installed capacity by that of Mexico, it is evident that the US has 30 times greater capacity. The US market for ESCOs represents US$7-8 million, and multiplied by 30, this means that there is an approximately US$250 million market for ESCOs in Mexico. Additionally, if Mexico’s lack of efficiency is taken into consideration, another 30-40% can be added, which increases the market size to US$400 million.”

Strikingly, the ESCO model possesses unique attributes in the market. The distinguishing feature of an ESCO is its approach, with an extensive energy audit for potential customers in order to identify required improvements for generating energy savings. In conjunction with the client, the ESCO then designs and constructs a project that meets the client’s needs and arranges the necessary financing. “If a company wishes to develop a 20MW cogeneration plant because it consumes 20MW of electricity, the ESCO in this case will first propose a reduction in energy consumption. In these cases the client may have been consuming 20MW, although operations only require 16MW. When it starts its own generation, it can sell its energy to other companies,” Barcón clarifies. In the meantime, the ESCO must guarantee the improvements through Energy Savings Performance Contracts (ESPCs). These contracts have fiscal advantages, since they resemble leasing processes. The company pays for the equipment for three years, while normally it can take ten years to depreciate. “The most important aspect of the contract between ESCO and client is that if it does not work, the client does not pay for it,” Barcón adds. While this might seem risky, Barcón is assured that it poses no problem as long as the ESCO is certified and has enough experience in the market. Additionally, the financing comes from ESCO capital, meaning that it must be careful with the clients it picks.

In spite of such evident benefits, ESCO remains an unexplored option. Barcón identifies financing as the biggest barrier. “The banking system is not geared toward providing support for energy saving schemes and the government has strict rules regarding multiyear contracts,” he laments. With the latter, use of performance contractors becomes unfeasible since there is no way these players can recover the total investment in less than one year. Barcón has spotted a few clouds on the horizon, and according to him, the Energy Reform does not concentrate enough on improvement of energy efficiency; all attention has been centered on higher and faster production. Yet, this has not deterred AMESCO from its mission. “If the government begins to pay attention and encourage the development of ESCO projects, then the opportunities will be endless.”