A fit for purpose definition of ESCOs

Energy Service Company (ESCO) is not a protected term. Neither is it well-defined. In principle, therefore, any company providing components or services related to energy generation and consumption could, and oftentimes do, call themselves an ‘ESCO’ (Global ESCO Network, 2023). Setting a standard for what can be expected from an ESCO as the current market understand it is necessary to underpin the credibility of the sector. It may also help educating the client on what to expect as a minimum when considering the involvement of ESCOs for the delivery of energy efficiency and potentially demand side renewable energy services.

The following generic definition of ESCOs is endorsed by the Global ESCO Network:

An Energy Service Company (ESCO) is a legal entity that delivers energy services, energy efficiency improvement measures and/or demand side renewable services in a user’s facility, premises and operations and accepts some degree of financial risk directly linked to the project performance in so doing. The implemented services and improvement measures are based upon a holistic analysis of the users’ energy and resource demand, against financially and technically viable alternative energy source and/or resource efficient low-carbon technologies, and/or energy management systems. The remuneration scheme of the ESCO for the services delivered is based (either wholly or in part) on the measured and verified achievement of energy efficiency improvements and of any other agreed performance criteria. (Global ESCO Network, 2023)

It is the view of the Global ESCO Network that companies that do not operate in accordance with this definition should not be referred to as ESCOs.

What fundamentally differentiates an ESCO from another service provider is related to the way that its remuneration is link to the sharing of the performance risk. Any service provider might install a new heat pump and be paid for this service (including the cost of the equipment, but the client bears the risk that it achieves a reasonable reduction in energy consumption. An ESCO, on the other hand, bears the risk that it performs as calculated, as it is remunerated based in part or in whole on that basis (Global ESCO Network, 2023). While there are many ways in which the performance risks can be distributed, the Global ESCO Network recommends that in principle the performance risk of an installation should fall in part or in whole on the ESCO. The ESCO definition is based on this principle.

In order to assume this risk, the ESCO typically takes the responsibility of the designs and installs the systems as a main contractor or indirectly through a subcontractor. It may or may not engage in maintenance or operational optimization and it may or may not engage in the direct or indirect financing of the installation. But ESCOs should be able to assist clients in identifying financially viable options leading to the targeted technical and/or financial savings related to energy and resources demand, considering the whole spectrum of the user’s facility, premises and/or operations. (Global ESCO Network, 2023)

ESCOs are professionals in their field, more likely to apply systems approaches and less prone to ‘cherry-picking’. Energy systems, either demand side or supply side or a combination of the two, are complex and consist of a multitude of components. Optimization commonly require several interventions and components, each of which have different financial returns. The Global ESCO Network encourages ESCOs to apply systems approaches to the greatest possible extent.