World ESCo Outlook: Germany
Germany
Jan W. Bleyl
Friedrich Seefeldt
History of ESCO Market Development
The German ESCO market development started in the early 1990s. On the supply
side, early market development activities were mainly driven by two groups of
stakeholders. On the one hand, a few utilities (all of them still “bundled”) started to
implement least-cost-planning and demand-side management strategies, which
may be considered as ESCO-type activities in some cases. On the other hand, a
variety of manufacturers of building technologies, automation and control
equipment, as well as a number of plant engineering and construction companies
started to extend their value-added chain and scope of services.
On the demand side of the ESCO market, a key driver has been the engagement of
independent intermediaries (also labeled as market or project facilitators) since the
mid-1990s. Mostly, these were energy agencies that spread the word and helped in
particular the (potential) demand side of the ESCO market. The whole consisted in
developing concrete projects, preparing tender documents (including model
contracts) and putting the projects out on the market for ESCO bids. This holds
particularly true for public sector EPC projects.
The
first
large
statewide
EPC
program
“Energy
Saving
Partnership
(Energiesparpartnerschaft)“ was initiated by the State of Berlin, grouping more
than 100 public buildings into two building pools. This idea was successful and
during the subsequent 15 years, more than 20 large EPC tenders were launched.
The most prominent facilitator example is BEA (Berlin Energy Agency) but
likewise,a number of other regional energy agencies (EA-Northrine-Westphalia,
KEA – Klimaschutz – und Energieagentur Baden-Württemberg or Bremer
Energiekonsens as well as others) and since the year 2000, also the German
Energy Agency dena deserve credit for developing the market, guidelines and
innovative models. The State of Hessia, and later dena, developed model contracts,
which laid the basis for EPC contracts in federal, state and municipal buildings in
many regions. Despite these enabling factors, the EPC market is still mostly limited
to large projects in public buildings (pools), hospitals, leisure facilities and the like.
Energy supply contracting (ESC) – performance-based supply of useful energy –
developed faster and succeeded in different end-use sectors, predominantly in the
residential sector but also in industrial premises as well as in public facilities.
Featured technologies range from standard boilers to CHP solutions (sometimes
including distribution networks), but the measures are mostly limited to boiler
rooms. The majority of projects run on natural gas but a variety of renewable
heating systems and solar systems have been installed as well. The minimum
energy cost line is about one order of magnitude below that of EPC projects.
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World ESCo Outlook: Germany
The above overview does not claim to be exhaustive. If important activities have
not been mentioned, please accept the authors apologies and advise for future
country reports 1.
ESCOs and their Associations
The estimated number of ESCOs range from 250 to 500. A total of 250 up to 300
companies are continuously working with energy services (BEI/Prognos/Energetic
Solutions, 2009), of which around 50 have more than one EPC reference (Berliner
Energieagentur, 2009). More than 200 not very active companies may be regarded
as "market observers" or "market entrants" (BEI/Prognos/Energetic Solutions,
2009).
The principal actors in the market are large national and international companies
with a small dedicated ESCO unit as a supplementary business. SMEs with ESC as
their main activity represent a smaller share of the market.
According to a Prognos market survey, service providers can be categorized as
shown below.
others / unspecified:
17,9%
planning &
engineering: 4,8%
power supplier:
16,7%
municipal utility:
25,0%
energy service
company: 35,7%
Quelle: Prognos Market Survey 2008
© Prognos 2009
The German ESCO industry consists of national or super-regional utilities (17%),
municipal utilities (25%), ESCOs which are typically branches of building technology
or control manufacturers as well as building and metering service companies
(36%), planning and engineering companies (5%) as well as others (18%) (Berliner
Energieagentur, 2009/Prognos, 2010b).
The ESCO industry in Germany is represented by two associations:
The “Verband für Wärmelieferung” (VfW) represents mainly SMEs that deliver
energy supply services (ESC). However, VfW also hosts an EPC working group. The
turnover of its 285 members is stated with EUR 1.8 billion, holding some 40,000
contracts.
1
Contact: [email protected] or [email protected]
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World ESCo Outlook: Germany
The “ESCO Forum im ZVEI” currently lists 23 members who mainly serve industrial
and real estate customers. Their accumulated turnover is at above EUR 1 billion.
The “ESCO Forum” resulted from a merger of the former “PECU” and “Contracting
Forum im ZVEI” in 2007.
Types of ESCO Contracts and Markets
The latest German energy efficiency action plan (NEEAP) to the European
Commission has adopted, to a large extent, the following definition of EnergyContracting:
Energy-Contracting - also labeled as ESCO- or energy service - is a
comprehensive energy service concept to execute energy efficiency and
renewable projects in buildings or production facilities according to
minimized project cycle cost.
Typically an Energy Service Company (ESCO) acts as general contractor
and implements a customized efficiency service package (consisting of
e.g. design, building, (co-)financing, operation & maintenance, optimization,
fuel purchase, user motivation).
As key features, the ESCO’s remuneration is performance based, it
guarantees for the outcome and all inclusive cost of the services and takes
over commercial as well as technical implementation and operation risks.
Over the whole project term of typically 5 to 15 years (after Bleyl 2008)
In Germany, ESCO models are mostly labeled as “Energy-Contracting” and in
legislative texts also as “gewerbliche Wärmelieferung” (commercial heat supply).
Two basic business models can be distinguished: ESC, referring to a performancebased supply of useful energy and EPC, referring to a performance-based energy
savings business model.
Even though public attention on EPC indicates otherwise, ESC is by far the
predominant business model in the German market with a share of more than
80 percent, according to the market data of the two leading ESCO associations (see
figure below).
There is no institution for official market data; consequently, reliable market data
are scarce or not publically available.
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World ESCo Outlook: Germany
Results of Member Questionaire 2008
Outer ring: ESCO-Forum
Inner ring: VfW e.V.
12 %
0%
7%
2%
5%
8%
85 %
81 %
Energy Supply Contracting (ESC)
Energy Performance Contracting (EPC)
Finance-Contracting
Technical Management
With a total revenue of around EUR 3 billion (Prognos estimate for 2011 for EPC
and ESC), Germany is the leading market for Energy-Contracting in Europe. Market
figures show a solid growth of 10 percent per annum compared with a total revenue
of around EUR 2 billion in 2008 (BEI/Prognos/Energetic Solutions, 2009). The
market volume might be even higher if technical services for operation of the
building equipment were taken into account.
The most important market segment is the residential sector, showing a share of
more than 60 percent of the market in addition to a variety of small scale ESC
projects and an increasing number of large housing companies sourcing out their
technical facility services.
The public sector (comprised of schools, administration buildings and the health
sector), with a total market share of 15 percent, is the most important market
segment for EPC projects. A growing share of the market also goes to industrial and
commercial projects, which may have a volume of 20 percent of the total market,
showing considerable growth in the last few years.
Even though the market is experiencing considerable growth, transaction costs are
hindering the market to move to smaller projects and explore larger potentials,
especially the large segment of single-family houses. Indeed, the latter represents
more than 60 percent of the surface area in residential buildings in Germany.
Due to the heterogeneity of small and large market participants coming from
utilities, engineering companies and manufacturers of technical equipment, there is
still high uncertainty regarding market figures. The new founded Federal Office for
Energy Efficiency and Energy Services (Bundesstelle für Energieeffizienz und
Energiedienstleistungen – BfEE) has recently launched a market study to get a
comprehensive and more systematic overview of the market.
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World ESCo Outlook: Germany
Key Obstacles and Government Actions
Even though the German ESCO market has experienced a continuous growth over
the last 20 years and can be regarded as having matured, there are still obstacles.
Generally speaking, more and better substantiated information is required,
especially on the demand side. Energy efficiency services still appear as lowinterest-products, lacking clear guidance as well as incentives to make the external
professional and typically more efficient outsourcing solution to an ESCO more
desirable than the home-made version (or the status quo).
More concretely, barriers vary across end-use market segments.In the residential
sector, the cost allocation between landlords and tenants (split incentive) needs to
be resolved in Germany's tenancy laws. Furthermore, transaction cost logics are
against smaller projects and hinder the development of a higher market potential,
especially in single- and small multi-family houses.
A renewed and currently circulated ministry of justice draft2 aims to resolve the
cost allocation problem in the residential sector by an amendment to the tenancy
law. The implications of the Renewable Feed-in Act (EEG), however, imposing a
clear disadvantage for ESCOs with CHP plants compared to the in-house operation
of the CHP plant, are still pending further treatment. Moreover, the transaction cost
logic against smaller projects remains unsolved.
In the commercial sector, the need for flexibility and, hence, the need for a short
payback period are the main barriers to deciding for high capex and life-cycle
optimized energy infrastructures. In addition, both SME clients and ESCOs often
lack a sufficient credit rating with a view to long-term investments3. While price
development is basically more and more in favor of CHP-based contracts, pricing
and tariffs of the German Renewables Feed-in Act impose a clear disadvantage on
ESCOs. The market is still moving forward against these barriers but the outlook
could be much more positive without them.
In the public sector, public budget restrictions (treatment of ESCO contracts as debt
and missing long-term commitment authorizations “Verpflichtungsermächtigung”)
along with the complexity of public procurement legislation are some of the major
barriers in place. Although the majority of federal states have resolved such
problems or offer help through market facilitators, there are remaining
uncertainties at least among new clients.
EC directive 32/2006 for end-use efficiency and energy services demands a
systematic promotion of the market for energy services. With respect to existing
market traditions and cultures as well as market liberalization with its vertically
disintegrated market actors, Germany refused to follow EC recommendations and
did not impose any obligation on energy companies, as was the case in Italy,
France, the UK or Denmark.
In order to observe and promote the markets for energy services and energy
audits, Germany established the Federal Office for Energy Efficiency ("Bundesstelle
2
3
Mietrechtsänderungsgesetz – MietRÄndG: Gesetz über die energetische Modernisierung von
vermietetem Wohnraum“ [Referentenentwurf BMJ vom 25.10.2011]
prognos 2010:_Rolle und Bedeutung von Energieeffizienz und Energie-dienstleistungen in KMU, final
report for KfW Bankengruppe.
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World ESCo Outlook: Germany
für Energieeffizienz", BfEE) in 2010. The BfEE has launched several studies for
market observation and is planning to take action to remove a series of barriers.
As a general conclusion, the German market for energy services has a long
tradition of solid growth, especially over the last two decades. The majority of
activities were market-driven. However, there are barriers remaining in each
market segment. The implementation of the BfEE might be a first step to better
observing the markets and systematically removing some of these barriers.
According to German Market experts, financing typically has not been an unsolvable
bottleneck for market development. Nevertheless, convincing potential customers
to outsource comprehensive energy service packages to an ESCO still takes a long
time, causes high transaction costs and requires solving a variety of obstacles. Not
to mention that it is often times rooted in the “human factor” and the reluctance to
change established organizational routines rather than in factual barriers.
ESCO Market Development: Lessons Learned
German ESCO markets have shown a good market development, which was mainly
driven by different market actors in different regions. There was no centralised
federal action for any obligation scheme or any coordinated federal support
scheme. Market development, however, could have been more dynamic. Different
policy measures, for example the new established Federal Office for Energy
Efficiency (BfEE) might give a valuable impulse for a more dynamic development.
The Energy-Contracting approach offers integrated solutions for the entire
project life cycle (planning, construction, O&M and optimization) and is
interdisciplinary (technical, economical, financial, organizational and legal
aspects) in order to achieve guaranteed performance and results of the efficiency
technologies deployed. The ESCO concept opens up solutions, which are not
achievable through standard, disintegrated implementation processes (lifecycle cost optimization across investment and operation budgets, integrated
planning or performance guarantees over the complete project cycle…). However,
these opportunities also imply a highly complex product.
There are no easy or one-fits-all solutions to how to implement energy efficiency
projects. In any case, the decision of the building or business owner to tap
into energy efficiency resources (either voluntarily or forced by regulations)
remains a basic requirement – independent of the implementation model. In other
words, efficiency markets need ”educated” customers to demand energy
efficiency (services) in the market. Furthermore, even the most ”educated”
customers will require independent facilitators/intermediaries to support them on
their journey through this complex matter.
We have learned the following key lessons for ESCO market development:
1. Successful market development – in particular for EPC in the public sector
– was demand-side driven. (Potential) ESCO customers defined their goals
and needs for energy efficiency service packages and put out requests for
proposals on the market. On the contrary, studies and even investment
grade audits (IGAs) are not sufficient to create projects.
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World ESCo Outlook: Germany
2. To foster market development, the role of independent market and
project facilitators as intermediaries between ESCOs and their
(potential) clients has proved to be a key success factor (as represented,
e.g., by energy agencies).
The role and sample activities of project facilitators as intermediary between
the demand and supply sides on the ESCO market are summarized in the
following figure.
Clients
Facilitators/Intermediaries EE Suppliers
Feasibility Study
Structuring + Business Model
Procurement Procedure
Client
Tender Documents
Proposal Evaluation
Source: [after Bleyl 2010]
ESCO Contract
Finance
Subsidies
ESCOs
Engineers
Manufacturers
…
Quality Assurance, M & V
This facilitator role requires more active and knowledgeable players as well
as better funding.
3. Contracting to an ESCO is a strategic “make or buy” decision of a
(potential) client. Outsourcing to an ESCO competes with a standard inhouse implementation and has substantial implications on the standard
buying routines of the outsourcing institution. The decision also implies
either entrusting one general contractor (ESCO) versus contracting to
individual subcontractors for planning, construction, O&M as well as
optimization.
4. Outsourcing requires new organizational routines on the customer
side; e.g., with regard to procurement practices, interdisciplinary cooperations between different departments and project engineers or longterm cross-budgetary financial management.
5. Energy-Contracting is a flexible and modular energy service
package. This also implies that the ESCO customer may define – depending
on his own resources – what components of the energy service will be
outsourced and which components he carries out himself.
6. Energy efficiency often is not the driving force and not a stand-alone
business case but a (beneficial) side effect. Better listening to the “real”
needs expressed by customers and building strategic alliances with facility
managers, security, automation and other building technology tasks to
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World ESCo Outlook: Germany
incorporate energy efficiency goals or minimum performance standards early
on in project development is required.
7. Financing is not necessarily the core business of ESCOs. Their core
competence usually lies in technical, economic and organizational matters of
an energy service package. ESCOs should serve as finance vehicle, not
necessarily as financiers themselves. Nevertheless, of course, payments
to ESCOs must be secured.
Many obstacles to energy efficiency root in the fragmented nature and small units
of end-use energy conservation potentials, the low interest in energy efficiency
itself and must not be attributed to the Energy-Contracting approach or ESCOs in
general. A well designed obligation scheme might be a helpful driver for the
development of free ESCO markets, but is not sufficient. It cannot replace a more
differentiated approach in each market segment. On the way to better developed
energy service markets, strong efforts on all levels of policy framework, capacity
building, removal of barriers and concrete product development remain to be done.
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