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By Melani Skenderi
For the last decades in Europe, energy services and ESCOs have been considered cost-effective, market-based solutions to enhance the sustainable energy use agenda through the promotion of energy efficiency (EE) and renewable energy sources (RES). According to (European Commission. Joint Research Centre., 2019), national ESCO markets in the EU could be categorized into four groups based on their level of development: Mature markets, Well-developed markets, Developing markets and Embryonic markets.
Both Germany and Italy, countries that will be studied in this paper are classified as mature markets, due to a wide understanding of the ESCO model, demand-driven growth, different types of contracts and financings at low transaction costs, as well as the existence of a policy framework and established monitoring and verification tools (Ibid.). Remaining barriers however, persist and are keeping these markets’ size below their potential. This analysis will thus provide an overview of the ESCO market in Italy and Germany, the key drivers to their development, as well as the most relevant remaining barriers. The latter considerations are included in efforts to inform policy at MS and EU level. Some considerations are included on framework agreements such as Horizon 2020 and Horizon Europe, as alternative policy levers at EU level.
Italy
Overview
The Italian ESCO market is considered one of the biggest and most developed ones in Europe (Boza-Kiss et al., 2017). It was worth €3.7 billion in 2018, with 35% of its revenues coming from energy performance contract (EPC) services, 42% from EE and consulting projects, and 23% from sales of white certificates (AmBIENCe, 2020). The penetration of EPCs in EE investments is considerable in the commercial and offices sector, while it remains low in the residential sector. In the public administration, only c. 35% of the sector’s EE investments were carried out through EPCs (Ibid.).
While there are around 1,500 companies registered as ESCOs, only 340 enterprises can be considered ESCOs (QualitEE, 2018). On the supply side, the majority are SMEs and typically energy supply companies, utilities, facility management and operation companies, energy auditors, etc. Their implemented technologies include: building as a whole (ex. active and passive systems, EE and RES), heating/cooling systems and air conditioning, street lighting, co-generation, automation and control systems (European Commission. Joint Research Centre., 2019). In terms of representation, Italy has many ESCO associations aiming to promote EE, amongst which AssoEsco, Federesco, FIRE, etc.
Key drivers
The principal drivers for the implementation of EE measures in Italy have been regulatory support schemes, the white certificates scheme in particular (QualitEE, 2018). The latter, introduced in 2001, became applicable to ESCOs in 2004 when final users and/or ESCOs were allowed to obtain white certificates depending on the level of EE they achieved (Ibid.). Additional support schemes that have driven this markets’ growth in the recent years have been: the “Conto Termico” scheme, dedicated to the promotion of EE investments and thermal energy production from renewable sources in the public administration and private individuals; tax deductions for EE investments in buildings; as well as the introduction of D.Lgs 102/2014 (Directive 2012/27/EU) obligating large companies to have mandatory audits performed by ESCOs (European Commission. Joint Research Centre., 2019).
Remaining barriers / Areas of improvement
According to JRC’s 2018 survey, the main remaining barriers to ESCO market development in Italy were lack of appropriate forms of finance and lack of trust from potential clients. Other barriers to ESCOs included:
- ambiguities in the legislative framework,
- small projects’ size and high transaction costs,
- long and complex procedures, especially in the public sector, due to the EPC type of contract,
- Shortage of resources and skills at local authority level (European Commission. Joint Research Centre., 2019).
Germany
Overview
The German energy services market was worth €[10-13] billion in 2020, making it the largest market in Europe (Bundesstelle für Energieeffizienz (BfEE), 2022). The national association of ESCOs for Germany is EDL Hub, representing all three segments of energy services in Germany: Energy Contracting (c. 95% of turnover), as well as Energy Consulting (c. 5% of revenues) and Energy Management (marginal contribution to revenues).
The supply side of energy contracting is not concentrated (c. 440 providers). Providers are 48% power companies (municipal utilities and other energy suppliers), 28% self-declared “contractors”, 12% engineering/architecture companies, and the remaining amount, smaller providers (Ibid.). There is a considerable difference of market concentration however, in terms of the specific service offered. For energy supply contracting, providers averaged 168 ongoing contracts and the biggest 15 energy supply providers held almost ¾ of the market in 2021. On the other hand, for energy performance with guaranteed savings, i.e. a “proper” ESCO service as per EED definition (Directive 2006/32/EC, 2006), providers averaged 15 ongoing contracts. Such contracts are hence less frequent, their providers are mainly SMEs and the public sector was found to use them more often than the private sector (36%) (BfEE, 2021). On the demand side, according to BfEE’s survey, contracting’s strongest market penetration was found in the health sector, energy-intensive industries, and hotel, hospitality & leisure companies (Ibid.). The ESCOs’ implemented technologies are co-generation and renewable supply followed by building level heating, district heating, building as a whole, industrial processes, motor systems and horizontal technologies (European Commission. Joint Research Centre., 2019).
Key drivers
As illustrated in the technologies implemented by ESCOs in Germany, the market has been mainly driven by the supply of energy and energy services. Due to the earlier and wide-spead development of renewable energy in Germany, co-generation and renewable energy supply have been at the core of ESCOs activities and their main sources of revenues. The market has been additionally helped to grow by the increasingly mandatory audits, grants, as well as, especially for Germany, the high-quality financing options (European Commission. Joint Research Centre., 2019). Products such as guarantee systems, revolving funds, tax rebates, subsidies, as well as the low interest rate environment, have driven market growth and investments in EE (Laurenz Hermann & Anna-Constanze Plüschke, 2019).
On the other side, prior to the 2021 energy crisis, low energy prices in Germany, coupled with low interest rates, have been reported as a reason for many potential clients, public entities especially, to implement modernisations on their own, i.e. without ESCOs (Ibid.).
Remaining barriers / Areas of improvement
As per the same survey, the key remaining barriers to ESCO market development in Germany were lack of trust from potential clients and small size projects with high transaction costs. Other barriers to ESCOs included:
- in-house technical expertise of industrials (reducing ESCO activity),
- ambiguities in the legislative framework,
- lack of collaboration, commitment and cultural issues,
- And complexity of energy conversion: Requirements for the energy supply of buildings and communities can hardly be handled by building owners and users anymore (European Commission. Joint Research Centre., 2019).
EU Levers for the development of the ESCO market
The most important lever of action at EU level is policy making. With initiatives dating back to 1988, European institutions have supported the development of the ESCO market at large scale through legislation and directives, the EED (2018) in particular, the publication of ESCO-type contracts (1996), as well as lists of active ESCOs (2002)(European Commission. Joint Research Centre., 2019). Additionally, framework programmes, such as Horizon 2020 (2014-2020, with a budget of €77bn) and Horizon Europe (2020-2027, with a budget of €95.5bn) have been encouraged, not only to carry out research and innovation, but alsoto address specific remaining market barriers and/or clients’ limitations for ESCOs development at a smaller scale. Few programmes carried out in Italy, Germany or both countries are reported below for illustrative purposes:
- Prospect+ (2021-2025) promotes capacity building for cities and regions. With the objective of establishing an easy peer-to-peer learning programme for local authorities (CORDIS, 2023a), it specifically tackles the issue of shortage of resources and skills at this government level, an issue that was identified in Italy.
- EPC+ (2015-2018) and LEAPS4SME (2020-2023) both aim to support European SMEs in their EE investments. The former does so on a small scale, by reducing transaction costs for their small projects (CORDIS, 2023e) (a relevant barrier in both mature countries studied); the latter aims at a larger scale mapping of existing support measures to SMEs to inform policy making (CORDIS, 2023b).
- Trust EPC South (2015-2018) and STUNNING (2017-2019) both aim to increase trust in EE, another relevant barrier in almost all EU ESCO markets. The former does so by targeting the large tertiary sector in Southern Europe through standardization and benchmarking involving different stakeholders (CORDIS, 2023d); the latter promotes the adoption and replication of new successful renovation business models (CORDIS, 2023c).
Conclusion
A thorough understanding of the status of the local ESCO markets, including the mechanics, drivers and barriers determining them, is necessary for appropriate policy making. For mature markets, like Italy and Germany, where the main remaining barriers are linked to market perception (lack of trust) and clients’ type (small projects), the EU should consider alternative levers of action, beyond legislation and support schemes, to help the market grow.
Framework programmes, such as H2020 and Horizon Europe, can have a targeted impact, tested on a smaller scale and in an evidence-based manner that can inform action, provide outputs and mitigate current market barriers. While the evaluation of the H2020 programme is still ongoing, results from closed projects are positive, pointing to the opportunity for the EU to leverage such initiatives as an additional policy lever to further develop the ESCO market and reach the EE targets of the EED.