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Designing an appropriate ESCOs environment in the Mediterranean

Konstantinos D. Patlitzianas, Haris Doukas and John Psarras
Management and Decision Support Systems Laboratory, Department of Electrical and Computer Engineering, National Technical University of Athens, Athens, Greece
Abstract
Purpose To contribute to the design of the energy service companies (ESCOs) environment in the Mediterranean countries, mainly focusing on the constraints this companys environment face and the actions that can full its needs and aims, taking also into consideration the opportunities and threats emerging from the energy liberalization and climate change. Design/methodology/approach The methodology that was followed (based in a large part on the context of two projects targeted to the Mediterranean region and funded by the European Commission) incorporated four steps, the desk analysis for energy efciency potential in the Mediterranean, the data collection, the assessment of the constraints and the nal assessment of the ESCOs environment. Findings Provides information regarding the current status of ESCOs development, in the dimensions of the ESCOs environment (political/legal, economical/nancial, social/cultural and technological), both in the European Union (EU) (Cyprus, France, Greece, Italy, Malta and Spain) and non-EU (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia and Turkey) Mediterranean countries. Originality/value There are no papers investigating the activation environment of ESCOs in a coherent and integrated way in the Mediterranean. This paper provides to decision makers a supportive framework for policy design and formulation of policy priorities for ESCOs development in the region. Keywords Energy supply systems, Europe Paper type Research paper

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Introduction Energy service companies (ESCOs) have been developed and their role is crucial in the promotion of energy efciency. Nowadays, the increasing penetration of this market is expected to support the implementation of the reform strategy that is becoming more and more common in the energy sector and minimize the impacts of climate change. The usefulness of these companies has been known since the late 1970s and early 1980s. Most ESCOs activities occurred in the late 1980s and 1990s and the creation of the rst ESCO is continuing today (Vine, 2005). The development of this market is related to the existence of an appropriate and dynamic environment that can give the opportunity to companies to be activated properly. This companies environment can
Management of Environmental Quality: An International Journal Vol. 17 No. 5, 2006 pp. 538-554 q Emerald Group Publishing Limited 1477-7835 DOI 10.1108/14777830610684512

The effort allocated for this research has been supported by the European Commissions (EC) MEDA programme, (project number ME8/B7-4100/IB/98/0480), as well as the Synergy programme (project number 4.1041/D/02-003-507.21086). The content of the paper is the sole responsibility of its authors and does not necessarily reect the views of the EC.

be categorized as political/legal, economical/nancial, social/cultural and technological, taking also into consideration the literature that is related to the companys environment and its correlated strategy (Fahey and Narayanan, 2001). The key points of this companys environment for one each of the aforementioned four dimensions are briey described as follows: (1) Political/legal. It refers to the laws as well as the policies that affect ESCOs either directly or indirectly. The inclusion or the removal of a legislative or regulatory constraint can affect the environment of those companies. Moreover, the political decisions regarding the companies can have a signicant effect on them. This inuence is more complicated in multinational corporations, since the fact that they are activated in more than one country induces the necessity of operating under completely different circumstances. (2) Financial. It is related to the consequences and the effects that subsidies exercise on the companies, the possibilities of alternative forms of investments nancing as well as the evolution of correlated macroeconomic factors. (3) Social/cultural. It refers to the possibilities of reinforcing the educational and cultural level, the geographic allocation, the age pattern, the womens position in the society and the consumerism, in order to consolidate the environment in which ESCOs are activated. (4) Technological. It is related to the possibilities of supporting the evolution and the utilization of research and technology, the relative achievements that are applied in the market and may have signicant inuence on the ESCOs environment. Nowadays, this market has developed only in some countries (USA, Germany, Canada, Austria, Japan, etc.) and is still in its infancy in the Mediterranean, due to the absence of an appropriate activation environment for these companies. However, the potential for energy efciency improvement in the region has been estimated to be more than 30 per cent (IEA, 2005). Based on the international literature, there are no papers investigating the activation environment of ESCOs in an integrated way in the Mediterranean. In the above framework, the main aim of this paper is to contribute to the design of the ESCOs environment in Mediterranean countries, mainly focusing on the constraints this environment face and the actions that can full its needs and aims. The analysis elaborated is based on a coherent and integrated methodology for the investigation of the appropriate companies environment in the Mediterranean. The current paper is structured along seven sections. The section that directly follows describes the methodological approach that was adopted in the current analysis. The third section of this paper provides a review of the current status in the Mediterranean, both in terms of the energy efciency potential and the ESCOs activities. The fourth section is devoted to the analysis of the main constraints that inhibit the full development of the ESCOs environment. The fth section presents the opportunities and threats of these companies environment, emerging from the energy liberalization and climate change. The sixth section describes the appropriate actions needed toward the development of the appropriate ESCOs environment. The last

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section is the conclusions, which summarizes the main points that have arisen in this paper. The methodology The analysis that follows is based in a large part on the context of two projects targeted to the Mediterranean region and funded by the European Commission that took place the period from 1998 to 2005 and were coordinated by the authors team (EC MEDA programme, 2003; EC Synergy programme, 2005). In particular, a rigid methodology was followed, which incorporated four steps as shown in the following sections. Desk analysis of energy efciency potential The rst step reviewed an in-depth analysis of the energy efciency in the Mediterranean based on all the available sources and implemented activities. In general terms, their energy structure and the kind of services they provide to their prospective customers were analysed. An overview of the effective retrotting scenarios for energy efciency and comfort for a number of countries such as Denmark, England, France, Germany, Greece, Italy, Norway, Sweden, and Switzerland is presented (Hestnes and Kofoed, 2002). Moreover, ve agreement schemes in the eld of industrial energy efciency have been examined (Krarup and Ramesohl, 2002) in The Netherlands, Denmark, Germany, France and Sweden. A survey on the structure of residential energy demand in Greece was conducted (Rapanos and Polemis, 2006). The interest on energy efciency in Italy was described (Lazzarin and Noro, 2006), while an evaluation of some energy efciency measures implemented in Jordan was provided (Jaber et al., 2005). For Lebanon, the building sectors energy efciency options were assessed (Chedid et al., 2002). The Syrian energy sector has also attracted the interest of researchers (Hainoun et al., 2006), who described in detail the energy efciency potential of the country. Finally, for Tunisia and Turkey, some researchers (Khemiri and Hassairi, 2005), (Hepbasli and Ozalp, 2003) have correspondingly described the achieved progress in energy efciency in the tertiary and industrial sector. As regards Algeria, specic emphasis has been given in the development of renewables concerning mainly wind (Kasbadji Merzouk, 2000; Abdeladim et al., 1996) and solar energy (Hadj Arab et al., 1995; Maa, 2000), while the oil exporting business has also been addressed (Birol et al., 1995). For Cyprus, focus is given on energy management and renewables in the residential sector (Florides et al., 2000; Kalogirou, 1997). Renewables (Mayhoub and Azzam, 1997; Kamel, 1995; Tadros, 2000; Ahmed and Abouzeid, 2001; Ahmad and Schmid, 2002), as well as the environmental effects in energy planning (Khella, 1997), are also addressed in depth for Egypt. In addition, estimates for oil and natural gas reserves in Egypt were presented (Ibrahim, 1998). In Israel, emphasis is given by the researchers in the electricity sector in aspects such as pricing (Beenstock and Goldin, 1997), reform (Tishler et al., 2002), generation costs (Porat et al., 1997) and electricity demand (Beenstock et al., 1999). As far as Jordan is concerned, a signicant number of papers are present in the literature covering a wide eld of energy-related aspects, including energy-environmental analysis (Jaber et al., 1997; Jaber and Probert, 2001, Jaber, 2002; Jaber et al., 2005), renewables (Mohsen and

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Akash, 1998; Habali et al., 2001), energy management and analysis in the residential sector (Shariah et al., 1997; Kablan, 1997; Akash et al., 1999), and energy analysis and planning concerning electricity supply and demand (Tamimi, 1995). In addition, alternative decentralised electricity generation options available to rural areas in Jordan were presented (Kablan et al., 1999). The energy sector of Lebanon has also attracted considerable interest of researchers in aspects like energy planning and modelling (Yehia et al., 1995; Mezher et al., 1998; Nasr et al., 2000; Saab et al., 2001; Karaki et al., 2002), greenhouse gas emissions (Ghaddar and Mezher, 1999; Chedid and Ghajar, 2004), electric power sector restructuring (Badelt and Yehia, 2000), energy savings (Chaaban and Rahman, 1998), and policy considerations for solar water heaters (Chedid, 2002). Malta (Iskander and Scerri, 1998), Morocco (Nfaoui et al., 1998), Syria (Al-Mohamad, 2001) and Tunisias (Bouazzi et al., 1997) potential of energy saving has been less addressed by researchers during the last few years. Finally, several papers are present in the literature that focus on the energy policy of energy efciency in Turkey, including energy-environment considerations (Tiris et al., 1996; Kaygusuz, 2002; Demirbas, 2002), renewables (Hanagasioglu, 1999; Ediger and Kentel, 1999; Oztopal et al., 2000; Durak and Sen, 2002), energy resources and investments (Demirbas, 2001; Akdeniz et al., 2002) and energy demand forecasting (Aybar et al., 1986; Ediger and Kentel, 1999). Data collection The second step included information collection for the ESCOs environment in the region. In particular, an appropriate questionnaire was developed and its questions were divided in six different sections with a list of possible answers for the interviewers for each section. The sections of the questionnaire were as follows: political/legal, nancial (national and international sources), social/cultural, technological (expenditures R&D data), impact of energy liberalization, climate change and related activities/services. In addition, this step included the evaluation of the questionnaire that was lled in successfully based on the information and data that were collected by a relevant number of experts during the events of the EC programmes (January 2002-May 2005). Assessment of the constraints Furthermore, the study focused on the problems and the constraints that these companies face in terms of specic legal/political, nancial, social/cultural and technological dimensions of their environment. A number of constraints were identied in order to assess the development of the appropriate ESCOs environment. Assessment of the environment of ESCOs The last step is related to the actions that can full the needs and aims of the above companies in order to promote the development of an appropriate companies environment in the Mediterranean. The main requirements that can stimulate ESCOs market and promote the sustainable development are proposed, taking also into consideration the impact of the energy liberalization and climate change in the region.

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Review of the current status Energy efciency potential The Mediterranean Sea is embayed by the European Union (EU) countries (Cyprus-CY, France-FR, Greece-GR, Italy-IT, Malta-MT and Spain-ES) and the non-EU countries (Algeria-DZ, Egypt-EG, Israel-IL, Jordan-JO, Lebanon-LB, Morocco-MA, Syria-SY, Tunisia-TN and Turkey-TR). The increase of energy consumption as well as the CO2 emissions in the Mediterranean is, to a certain extent, an inevitable outcome of social and economic development. The southern and eastern Mediterranean countries have a rapidly growing consumption, particularly for electricity, with 9 per cent per annual rates in some countries (e.g. the Algeria, Tunisia, and Morocco). Especially, as concerns the tertiary sector, it is considered as one of the most consumable sectors, since the average energy use per area in many domestic buildings is very high and most buildings show less sustainable measures in terms of energy and environmental features, energy performance and privacy. Energy efciency can signicantly contribute to buildings energy conservation in the region. As concerns the current energy status, the indicators of total primary energy supply (TPES) per GDP are higher in the non-EU countries, while the indicators of electricity consumption per population are higher in the EU countries of the Mediterranean, as they are shown in the Figure 1 (IEA, 2005). As concerns the perspectives that are related to the TPES and CO2 emissions evolution, they are expected to be increased in the forthcoming future both in the EU and non-EU Mediterranean countries, as they are shown in Figures 2 and 3. Considering all the above, it is clear that energy efciency could be improved in the region and especially in the non-EU countries. ESCOs activities The current status of the ESCOs environment in the Mediterranean shows some differences from country to country ranging from the small range countries (Spain, Italy and France), to the rest countries whose ESCO market does not exist. In the rst countries, companies targeted the commercial, industrial and municipal sectors. In addition, the type of sectors targeted by company varies by country. The most common projects have been in co-generation, public lighting, heating, ventilation, air-conditioning and energy management systems. The recent energy industry restructuring has stimulated projects in combined heat and power for large commercial centres, hospitals and industrial facilities. More details regarding the status of the ESCOs market in Mediterranean is presented as follows: . Spain. A few private companies have been operating in Spain. ESCOs are especially active in nancing wind farms and try to foster new markets such as cogeneration with biomass, solar thermal and photovoltaic applications. The customers range across all industrial sectors as well as the residential and transport sectors (Bertoldi et al., 2005). . Italy. A number of companies already exist in Italy. ESCOs are expected to supply customers with a number of possible services, including energy audit and technical/economic analyses, design and implementation of the project, nancing, supply of fuel, heat, electricity and lighting, operation and maintenance of equipment and a guarantee of the energy savings. The key

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Figure 1. Energy indicators in the Mediterranean (2003)

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Figure 2. TPES evolution

Figure 3. CO2 emissions evolution

markets are the residential, public building and industrial sectors (Bertoldi et al., 2005; Goldman et al., 2005). France. While the term ESCO has appeared relatively recently in France, the concept of performance contracting has been in existence since the early 1980s.

. .

Initially, it was oriented towards nancing projects aimed at replacing fossil fuels with renewable energy and was later evolved into nancing energy savings. In late 2000, Frances Minister of Environment announced a new energy conservation program, which among other elements, would create a fund for energy conservation and environmental projects targeted at small and medium-sized rms (Bertoldi et al., 2005; Jamet and Adnot, 2003). Greece. The pure ESCO activity in Greece is still in a pilot phase for some renewable energy projects and does not affect yet the local energy market. The main reason is the lack of a properly adopted procurement, contractual and administrative procedure for the selection, control and repayment of the integrated energy service provided by an ESCO (Bertoldi et al., 2005; Lytras, 2004). Malta/Cyprus. There are no ESCOs in these countries. Non-EU Mediterranean countries. There is no activation of the ESCOs in the rest countries except of Egypt in which the US Agency for International Development is in the process of initiating a credit guarantee mechanism to encourage energy-efciency nancing. This product is based on the Development Credit Authority model of providing a guarantee of up to 50 per cent to a nancial intermediary to provide preferential nancing to energy-efciency projects. The guarantee mechanism was in place with a joint venture bank in 2003 (Vine, 2005).

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Assessment of the constraints Some constraints inhibit many cost effective energy efciency projects and prevent the full development of the ESCO market internationally. Most of the time efforts to transfer efcient technologies are constrained by legal/political obstacles and social/cultural rather than by nancial or technological reasons (Table I). Based on the above table, the constrains vary from one country to the other depending on the stage of development, the role of markets and competition in the economy, institutional and regulatory practices and so on. However, the main constraints that can be distinguished from the legal political dimension are the weaknesses in the provision of effective political support and the absence of verication protocols for the certication of the contracts guarantees. In addition, important constraints from the social cultural dimension are the shortage of specialized personnel, the reduced interest for ESCOs and the insufciency of educational policy on energy savings. Identication of opportunities/threats Energy liberalization The energy markets deregulation provides opportunities in order to promote the dialogue and the cooperation between the users and the ESCOs. The decentralization decisions that deregulation introduces, amplies the posting up and the realization of the consumers needs. However, the reinforcement of ESCOs needs to take also into consideration the risks involved. More specically, it is very probable that a tendency for mergers and unications of ESCOs will appear, so as to survive in the continually increasing

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Legal political dimension Weaknesses in the provision of effective political support Absence of the verication protocols for the certication of the contracts guarantees Weaknesses in the existence of model contracts for projects on energy services provision Financial dimension Insufciency of nancial support of ESCOs Weaknesses in the nancing of energy efciency activities Lack of funds for awareness Social cultural dimension Shortage of specialized personnel Reduced interest for ESCOs Insufciency of educational policy on energy savings Technological dimension Weaknesses in supporting R&D of ESCOs activities Weaknesses in the commercial utilization of research results C C C C C C C C C C C C C C C B C C C C C C C B C B C B C C B B C B B B B B C B B B C B B C B C B C C C B B B C C B C C B B C B C C C C C C C C C B C C C C C C C C C B B B C C B B C B B B B C B C C

Notes: A Low; B medium; C high

Table I. Constraints of the ESCOs environment DZ EG IL JO Non-EU LB MA SY TN TR CY ES FR EU GR IT MT B B B B A B B B B A B B A A B A B A B B A A A A A A A A A B B A A C B B B B A B B B B B B A A B A B A B B A A B B B B A B B B B A B

competition. The impacts for each one of the dimensions of the ESCOs activation environment are described in the following sections. Political/legal. The monopolies are gradually reduced on the production and distribution side and the consumer is given the opportunity to choose its retailer. As a result, the opening of the market is broadened in a direction that supports the use of ESCOs against the conventional energy forms. However, besides these opportunities, there are threats emerging from the competitive market, such as: . the danger of a negative impact on the prices; and . the increased difculties of new companies to enter the electricity market in case the electricity distribution grids are controlled by monopolies. Financial. The competitive market promotes more and more the support of interferences that are correlated with the nancing of energy savings projects, since now there is more condence in the anticipated result. The threats of a fully deregulated energy market include the danger of subsidizing energy savings activities more than each member states economy requires (especially in cases where the domestic reserves of conventional fuels cover a large degree of the energy needs). Another threat is the confusion caused by the excessive information on ESCOs, since there is the risk that consumers who are restricted by given policies will not nally know their abilities, and will have difculties in choosing the ESCO that is truly in their interest. Social/cultural. The competitive market imposes the largest reinforcement of projects undertaken by ESCOs in the district, compared with the monopolist energy market. On the other hand, the competitive energy market can support the companies businesses and training, while also increasing unemployment and ignorance in other vital energy sectors. Technological. The technology maturation and support is connected straightly with the energy markets deregulation. However, the main threat that the deregulated market introduces in the design of the technological dimension, is the continually increasing support provided in the small scale research activities regarding energy savings. Climate change Climate change provides the opportunity to the ESCOs to evolve into companies providing services on climate change issues, since the second period of the National Allocation Plan will pressure even more the large energy consumers. Consequently, a fertile ground for the provision of services by the energy companies will be developed. In addition, the implementation potential of projects based on clean development mechanisms (CDM)/joint implementation (JI) in developing countries abroad can subsidize energy companies with emission reduction units (ERU) and/or certied emission reduction, which the ESCOs will be able to trade through the emission trading system and in this way contribute indirectly in the reduction of the particular emissions worldwide. On the other hand, climate change may probably bring the tendency for mergers and unications of the small and medium scale energy companies. Political/legal. Recently, more and more the belief that the reduction of greenhouse gases emissions presupposes the gradual removal of subsidies on the conventional

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fuels prevails, something that would automatically promote the operation of energy services. Moreover, climate change results in taking measures like tax exemptions and subsidies for the domestic and large industrial electricity consumers, and in some cases these measures are highly signicant. This can gradually lead in minimization of the interest in energy savings and consequently in a decreased interest for investments through the ESCOs. Financial. The implementation potential of projects based on CDM/JI in developing countries abroad, can subsidize energy companies with ERU. On the other hand, it should be taken into consideration that given the shortage of investment funds, the emerging market gives to the ESCOs the opportunity of additional project funding through new nancing organizations and mechanisms. Social/cultural. The efforts towards a sustainable energy development, based on the activities to reduce climate change, provides the opportunity of developing close business relations between ESCOs and the developing world, while simultaneously leads into the establishment of similar energy companies in these countries. However, distortion of the energy market has to be avoided since supporting the social dimension of the ESCOs activation environment may increase the unemployment in other vital energy sectors or spending money on efforts with low success potential. Technological. Climate change broadens research and development, aiming at the promotion of relevant technologies and in this way the promotion of energy companies business activities. However, efforts to minimize climate change may lead in the support of the technological dimension of the companies activation environment, but may also decrease research regarding other vital energy sectors like natural gas. Proposed actions Several types of perspectives and appropriate actions are needed for fostering the development of this companys environment. In particular, actions which tend to increase the demand for energy efciency and renewable energy and, therefore, the wide-spreads ESCOs development are as follows. Political/legal First, of all, government-owned property is a major energy user and can represent a signicant proportion of the potential ESCO market in the region. ESCOs can provide government organizations with valuable expertise and private sector investment capital. However, energy performance contracting is very often regarded as unconventional nance by government authorities and, therefore, has to be simplied. In addition, obscurity in the ESCOs operational framework leads into the necessity of developing an accreditation certication system of the services provided by the ESCOs, through the creation and maintenance of measurement protocols and the possibility of their verication. Furthermore, the absence of a common structure in the contracts for the provision of energy services by ESCOs results in differentiations in their effectiveness, with consequences on the image and trustworthiness of all ESCOs. The legislated existence of a common type of contract that would determine in detail the scope of the services provided by the companies, the conditions for their maintenance and the way for their verication, would harmonize the companies into a direction of adopting common and standard contracts. In this way, the provision of energy services is clearly phrased, without misinterpretations and with the possibility

of supervision of the projects and their results by apposite authorities. The existence of standard contracts between companies will lead into the increase of competition and stimulation of the energy services market, since those not following this evolution will become obsolete and non competitive. Financial For the recording and elimination of intensive energy losses, it is suggested to nance specic energy management procedures (e.g. energy audits) wherever high gures of the energy intensity coefcient are observed, or when the annual energy consumption per person exceeds some standard limits. Moreover, the rational use of energy and the energy management of the industrial, tertiary and commercial sector, as well as the electricity consumption, require the immediate nancing of energy savings projects in each one of these sectors. There is a need to search out for modern nancing mechanisms that could respond to the requirements for capital, requirements that the national budget cannot full. The necessary funds ow can take place through organizations like the European Investments Bank, while modern nancing techniques should be utilized and developed, techniques such as third party nancing. The promotion and support of third party nancing sources on energy savings projects will add to the ESCOs environment new dynamics. Other possible nancing sources should be investigated too, like private banks and lending institutions, venture capital rms, equity funds, strategic partnerships, leasing companies and equipment manufacturers. Social/cultural The interference for the employments reinforcement aims at the energy companies stafng with specialized and trained personnel, able to correspond directly and effectively to the processing of services and activities they undertake. Moreover, the provision of support for training regarding energy savings needs to initiate from research activities through an increase of the universities funds, aiming at the provision of better and more efcient scientic and technological background to the future staff of the energy sector. Besides, the low interest observed in the district regarding the services that companies provide requires the design of an intervention in order to develop new energy companies in non civil and rural areas. In addition, one of the most important steps a country can take to promote the ESCO market in their country is to establish an association of ESCOs. Technological The related R&D actions can bring their experience in managing an ESCO environment, their knowledge of current energy efciency equipment and practices and the key technological factors necessary for success and the actions to avoid. Furthermore, the support of research results commercial utilization for activities of the energy sector can be achieved through the continuous promotion of advantages of the energy saving techniques and through encouragement of the business interest in their protable utilization. Conclusions Based on the results of the current paper, Mediterranean countries (especially the non-EU countries) face several constraints, since the energy efciency and especially

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the ESCOs environment is still in a nascent state. In addition, EU and non-EU countries around the Mediterranean have strong disparities of consumption levels (and, therefore, of pollution). As a result, both sides have unequal possibilities towards nancial, technical and human resources allowing them to implement energy efciency. However, energy efciency is necessary to be increased because it consists of choosing orientations and actions in various and complementary sectors (economical, industrial and energy) so as to provide a more efcient energy consumption system, which will allow an optimal service to the user for limited energy expenses and minimum economical and environmental incidences in the region. Furthermore, the most important constraints are focalized in the legal/political and the social/cultural dimension. These can be constraints due to weaknesses in the provision of effective political support and the absence of the verication protocols for the certication of the contracts guarantees, the reduced interest for ESCOs and the insufciency of educational policy on energy savings. Other important barriers of the nancial dimension are the lack of funds for awareness and the insufciency of nancial support of ESCOs. However, the overall region takes steps by removing subsidies, privatizing the energy industry and promoting environmental friendly technologies. Especially, as concerns the development of an appropriate environment for ESCOs market, based on the current study the future activities should be primarily focused on the political/legal and the social/cultural dimensions. In particular, an important rst step that most Mediterranean countries have to implement is to review regulations and remove institutional impediments to provide a more hospitable and trustworthy energy efciency market. In this context, the procedures for the energy performance contracting have to be simplied and a common type of contract that would determine in detail the scope of the services provided by the companies, the conditions for their maintenance and the way for their verication has to be created. Moreover, the provision of support for training regarding energy savings as well as the increase of funds for building awareness to end-users, energy managers and nancial institutions are actions of signicant importance. In this context, the power sector in the Mediterranean region can be among the leaders in developing the ESCOs environment.

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