carbon limited

As Phil Clark pointed out in a comment on my last post, there’s a very good piece in Building on the disappearance of ESCOs. This is a subject near to my heart as I’m part of  Fontenergy, an independent ESCO.

Before the economic crisis, the majority of our clients were private developers. When they put the brakes on last summer, a significant part of our pipeline stalled.  We’ve still got a number of very good projects on the go (with large RSL components as you’d expect) but progress is significantly slower than it would have been 18 months ago. And the pipeline is leaner and less certain than we’d like.

One nice thing about being an ESCO is that in order to do the job well, you must have excellent breadth of expertise within your team. There are three essential legs to the stool: commercial strategy, energy markets, and building services engineering (something that the big engineering consultancies don’t appear to be able to effectively pull together). So right now we’re doing a lot more consulting and training  in order to maintain our presence and pay the bills, all the time watching the horizon for the return of the market.

Surprisingly, unlike for developers, financing for DE isn’t a problem at the moment. A manager from one bank recently told me they’re sitting on a £400m fund for this sector. The picture for private equity is similar – a reliable modest return is very attractive at the moment and there is private money out there.

The problem is projects. Private development has ground to a halt. There is more movement on social housing projects but the approach among RSLs varies hugely and it’s taking longer for them to pick up the experience that will enable them to successfully procure energy services for low or zero carbon developments.

The downturn comes at a critical time: the industry was just taking the first steps towards meeting requirements for zero carbon. Several large projects intended to trial technical and commercial routes to low carbon (one-off zero carbon homes are lovely but I think they teach you very little about how to reduce carbon at scale).

But the crisis came, pilots halted, deals failed to materialise, and ESCOs disappeared. As Peter Walker from EcoCentroGen points out in the Building article, it’s the small ESCOs that are suffering most.

The big energy companies may offer ESCO services when they see a demand for it. But as demand dwindles, they either cut people loose or simply pull their ESCO resources back into the areas of the business they were taken from.

There are also questions around whether the big energy companies actually want to see a meaningful move towards distributed energy. Certainly the stronger their presence in the sector, the more they’re able to control the way in which DE is delivered. For the cynically minded, there are several examples of large incumbents making all the right noises until it’s time to commit, then digging their heels in.

Paradoxically, there are some real dangers that will accompany the eventual end of this economic crisis. When the market returns, the construction industry will find itself starting from scratch rather than drawing on experience. It will face greater risks as, rather than gradually meeting tighter targets, it’s forced to make giant leaps in order to meet regulatory requirements.

In addition, the crisis may wipe out many of the independent ESCOs. When demand returns, we may find large energy companies moving in to dominate the ESCO market, effectively dictating terms to developers and government. This will stifle innovation and possibly make it even harder to achieve meaningful carbon reductions through DE.

There are a number of steps that we can take now to help the situation. Here are a few:

1. Clarify the terms of the FiT and RHI.
2. Governments, banks, and ESCOs themselves should work to remove costs and barriers to developing DE. Priority number one: standardise contracts and share them with others.
3. The government should strengthen energy market reform to level the playing field for DE. Three examples: make cost reflective distribution charges a reality. Bring supplier services to market by hook or crook to enable non licensed ESCOs to break through the 1000 home barrier. Put gov’t backed loans in place to reduce finance risk for DE schemes.
4. Recognise that large energy companies have a vested interest in maintaining the status quo. Should they be in charge of administering the feed in tariff as DECC has proposed? Should they run the Low Energy Refurbishment programme as proposed in the HESS consultation?
5. Support your independent ESCO.