Financing mechanisms to facilitate and promote ESCO operations

One of the most important barriers to the growth of ESCO operations is the limited access to affordable, adapted or dedicated, sustainable and low-risk financing. The availability of financing for ESCO projects is often hampered by commercial banks’ and financial institutions’ limited knowledge and experience with typical ESCO business models. Their perception of high risks in ESCO projects and reluctance to accept the project cash flows as collateral result in high-interest costs and short debt repayment periods, relatively large equity requirements, and, in the case of public sector projects, budgetary or other limitations on the ability of the client to pay for the ESCO services from energy cost savings. However, there is ample experience with financing mechanisms that overcome the financing barriers. Some of the approaches that have been successfully deployed are summarized below.

While financing mechanisms are not policies per se, the Global ESCO Network recommends that all stakeholders including governments and financing institutions together explore the feasibility and benefits of the various financing mechanisms that can facilitate the availability of affordable and sustainable financing, including government policies or initiatives that can underpin it, and implement the most suitable mechanism in their countries to help the scaling up of ESCO projects (Global ESCO Network, 2023). These include:

  • Energy efficiency revolving funds (EERF)
  • Dedicated credit lines
  • Credit or risk guarantees to commercial financing institutions
  • Super ESCOs
  • Forfaiting through a fund for the securitization and purchase of ESCO cash flows

EERF established by national, state or local governments, in cooperation with financial institutions, can provide long-term, affordable financing for ESCO projects under favourable interest rates and repayment periods relative to commercial financing. This approach is particularly useful in the public sector, where the EERF provides loans to public agencies to cover the initial investment costs of energy efficiency projects, while the resulting energy savings are used to repay the EERF’s original investment, plus interest (World Bank, 2014). Examples include the Bulgarian Energy Efficiency and Renewable Sources Fund, the Armenia R2E2 Fund, and Salix Finance in the U.K.

An energy efficiency credit line established by governments, multilateral or bilateral financial institutions or international donor agencies can make funds available to FIs to provide debt financing of energy efficiency projects. An energy efficiency credit line increases the funding available from financing institutions for debt financing of energy efficiency project investments. Examples include EBRDs sustainable Energy Financing Facilities or AFD Sunref mechanism in many countries with emerging economies.

The provision of credit or risk guarantees to FIs is a mechanism that addresses the FIs’ common ‘high risk’ perception of ESCO projects. Such risk-sharing programs are designed to leverage commercial financing for energy efficiency projects including performance contracting projects by ESCOs (Global ESCO Network, 2023). They may also allow ESCOs to provide services to marginally creditworthy clients by partial coverage of the risk involved in extending loans. Examples include the World Bank’s Partial Risk Sharing Facility in India and the IFC Commercializing Energy Efficiency Finance facility in central and eastern Europe.

Super ESCO, capitalized by the government and/or IFIs, can help provide financing for ESCO projects in both public and private sectors. Such an entity contracts for energy efficiency projects with energy end uses, reduce transaction costs associated with complex procurements, finance the projects on an aggregated scheme, and engage ESCOs as subcontractors for the implementation process, without requiring financing from either the project’s beneficiary nor the ESCO. Successful examples include Etihad ESCO in the UAE, the SOFIAC in Canada and Tarshid in Saudi Arabia.

Finally, forfaiting through a dedicated Fund for the securitization and purchase of the cash flows from an ESCO project can be very useful in situations where an ESCO is investing substantial equity for its project financing. The Fund can purchase the future cash flow stream from the ESCO, thereby releasing the ESCO equity funds to finance additional projects. It transfers future receivables from the ESCO to the Fund. An example of forfaiting is the Bulgarian ESCO Fund established by the company Enemona, based on loan financing from EBRD, to buy receivables under the energy saving contracts signed by Enemona.