carbon limited

Most people who work in the built environment agree that ESCO stands for Energy Services Company. But that seems to be the only thing about ESCOs that everyone agrees on – the term can mean vastly different things to different people.

So what is an ESCO?

The short answer is: there’s no one answer. Here’s a rough list of the services that an ESCO might offer. Keep in mind that a company might provide all, some, or only one of these services and still call themselves an ESCO:

Retail services are all those required at the interface between the customer and the ESCO. These include things like billing and meter reading, calculating and sending out bills, and chasing late payments. It may also include taking on debt risk.

Energy market services relate to management of the energy itself. This is generally a high-cost high-competency area and can require special attention. It includes buying in fuel and electricity from the grid, holding contracts for exported energy (e.g. power purchase agreements), managing sale of instruments such as ROCs, responsibility for market regulations such as Balance and Settlement Code, allowing third party access on private wire networks, and holding Supply Licenses when not license exempt.

Finally, plant services relate to the equipment itself. This might include designing, funding, and running plant. This often seems to be what people have in mind when they use the word ESCO. Companies that specialise in this area are frequently the equipment manufacturer/supplier as well (e.g. gas CHP).

Going back to the point that an ESCO might only offer a subset of the list of services in the figure above – this isn’t necessarily a bad thing. From experience, you might want to be wary of going with a one-stop-shop. This is for several reasons:

1. If service is poor in one area, the client’s comeback options can be very limited. For example, if one company owns the plant and handles customer interface, what do you do if their billing services are rubbish?
2. It’s often not clear what margins are being made in which parts of the business and so difficult for the client to know if they’re getting a good deal.
3. There’s a very broad range of skills required to provide all of the above. It’s *hard* to find one company who’s competent at all of them.

So piecing together all the above services from more than one supplier might require more time and thought, but can result in a more transparent and flexible solution.

Sometimes the term ESCO refers to a commercial arrangement where a company sells services rather than units of energy. For example, they might charge for “lighting” or “thermal comfort” rather than electricity or heat.

The idea is that by offering services in this way, the ESCO can afford to fund energy efficiency improvements on the customer’s site. For example, by improving the efficiency of light fittings, the ESCO increases its own margins as it continues to charge for “light”, not electricity.

While it’s often talked about, in reality this model has yet to emerge in the market in any meaningful way. At the domestic scale it’s difficult to see quite how this arrangement would work in practice.

A perfectly reasonable question when someone uses the word ESCO is: what do you mean by ESCO? But I think most of us either think we know what the word means or that we should know already and so keep quiet to avoid looking foolish.

But try asking that question the next time you’re in a meeting where ESCOs come up. You might even find that the person can’t tell you what they mean – in which case, well done! But at least you’ll establish what their understanding of the term is, which is essential if you’re going to have a meaningful conversation.