Energy service company and financial market development: experiences of the Global Environment Facility

Abstract

Energy Service Companies (ESCOs) and the energy market for ESCO financing have been developing since 1976 when oil prices increased dramatically. ESCOs’ services cover projects in many energy areas, including energy extraction, power generation, energy conversion, transportation, power transmission, energy consumption, project financing, energy project audits, monitoring, and energy savings verification. In developing countries, there are many barriers in the energy market that are preventing ESCOs from developing. These barriers include lack of appropriate policy, financial mechanisms, and local capacities for ESCO development and management. Over the past 20 years, the Global Environment Facility (GEF) financed 39 ESCO projects in 25 countries and regions to remove these barriers. The results of these projects show that some countries, such as China, are very successful in ESCO development, but others are not. Different models of ESCOs in different financial markets in various countries are analyzed; and case studies are undertaken for China, India, Ukraine, and Brazil. This article concludes that, while developing financial markets for ESCOs, countries need to consider (1) initiating national government policy to stop energy subsidies and to reform energy pricing, (2) establishing a real, market based financial mechanism for ESCOs, (3) involving the private sector in project co-financing, (4) creating incentives to ESCOs in the market by investing part of government revenue from energy tax, and (5) incentivizing ESCOs by government corporate tax exemption.