Overview of activities

Development of ESCO

ESCOs before the ELI project

The European Bank for Reconstruction and Development (EBRD) office in Latvia had had the most experience with ESCOs prior to the ELI project. The EBRD commenced market investigation activities for a district heating ESCO with a workshop in Riga in 1993. Unfortunately, the EBRD’s efforts to establish an ESCO in Latvia were not successful in that (heating) sector. The main barriers to their success mentioned by representatives of EBRD are listed below.

1. Society is not ready to accept ESCO services because:
· There is general lack of awareness in Latvia of the ESCO concept
· There has been no experience with the operation of an ESCO in Latvia.
2. There is no legislative experience with ESCOs in Latvia.
3. There are no existing models for performance contracting.

Very few lighting companies have tried to act as ESCOs. Those that have attempted to do so found it difficult to convince clients because of what was perceived to be clients’ general lack of awareness concerning ESCOs.

The City of Olaine (population: 10,000) has had some experience working with an efficient street lighting service company called Elkom Ltd. Olaine has a contract with Elkom Ltd for the improvement, operation and maintenance of street lighting. A certain amount of money has been set aside in the annual municipal budget for investments to replace old and inefficient lighting fixtures and bulbs with new, more efficient ones.

ELI program’s ESCO building activities

The ELI Latvia team is in the process of implementing an action plan for sustainable development of a lighting ESCO system in Latvia. A step-by-step approach was used.The ELI Latvia team started with capacity building. The team analyzed the best experiences with ESCOs (particularly in the lighting sector) in different countries:

• Examples of performance contracting in USA, United Kingdom, Czech Republic were analysed and,
• Cases involving of the operation of ESCOs in the Czech Republic, Germany and Austria were studied.

Based on what the team learned from other countries’ experience, ESCO systems were established in Latvia to proceed in two parallel directions:

• Preparation of the market for lighting ESCOs by developing of a list of potential users and then,
• Creation of a system of lighting ESCOs themselves.

The main goal was to create one of the key links in the chain of efficient lighting technology procurement, i.e., to build a system to finance efficient lighting projects by establishing a legislative authority, an effective information system and a strategy for organizing lighting ESCOs.

Creation of a system of ESCO clients

The ELI Latvia team paid specific attention to potential lighting ESCO clients. The team developed a database that included schools, public and commercial buildings, sports halls, industries and a catalogue of the street lighting of various municipalities. Activities to be carried out are presented in an organizational diagram in Figure 3.

Figure 3. Organizational diagram of creation of system of ESCO clients

The preparation of the market for lighting ESCOs started with the investigation of potential energy savings and lighting levels among typical end users, which could be potential clients of the ESCO. Energy and lighting audits of street lighting in two municipalities as well as two public buildings showed a high potential for reconstruction in lighting systems. The audits indicated that lighting ESCOs could be financially and economically justified in at least three end-user sectors: street lighting, public sector buildings (schools and hospitals), as well as the commercial sector (industrial enterprises, offices, retail shops, etc).

There are two main barriers to implementing energy efficiency: the financial risk of the initial investment and the lack of a legislative requirement, which would have the effect of leveling the playing field for everyone. Thus one promising approach would be for all the parties in a project to share the financial risks. Financial institutions both have to take an active role in the development of energy efficiency projects and also look for ways to assist project beneficiaries in realizing energy efficiency improvements.

Energy audits were supplemented with both information dissemination and training for municipal officials. Training courses helped to initiate a number of energy efficiency activities in municipalities. These were presented on two levels – a more general one for management and a more specialized one for energy professionals.

All these activities allowed the ELI Latvia team to define the market for lighting ESCOs and to prepare an action plan, which was presented and discussed during a workshop with representatives from 79 municipalities. Participants accepted the idea of pilot projects.

In September 2001, a pilot project for street lighting was started with the decision of the Council of the municipality of Tukums (population: 20,000). It began with the preparation of tender documents, proceeded through a technical investigation and an analysis of the data collected and finished with development of a business plan by assistance of ELI programme.

Development of an ESCO system in Latvia

One of main tasks of the ELI programme is to develop the necessary foundation for establishing lighting ESCOs. Ekodoma investigated the potential of ESCOs for use in street lighting and public sectors and prepared a database.

The preparation stage included information dissemination and training components. The following are the first steps in capacity building activities:

Preparation Stage: Round table discussions. Training and Education

Ekodoma organised two roundtable discussions and invited potential lighting ESCOs and representatives from financial institutions and funds, including the Energy Efficiency Fund, Nordic Investment Bank and others to participate. Participants took part in a discussion of the principles of, as well as the barriers and risks associated with, ESCOs.

Ekodoma organised lectures and presentations about ESCOs. Its various forms, possibilities and opportunities, potentials, risks, partnerships, etc. were discussed. These forums took place between September 2000 and March 2002. Participants of training courses and workshops included the following target groups:

• Representatives of manufacturers or distributors of efficient lighting technologies (manufacturers and retailers)
• Potential ESCOs or partners in consortiums of ESCOs (project designers, installers, O&M companies, financial institutions, etc).

Each participant in the training courses analysed lighting project alternatives. Their valuation of these projects allowed the ELI Latvia team to evaluate the level of knowledge of efficient lighting project designers and installation companies.

Market investigation stage: Interviews with selected potential ESCOs

Consultants from Ekodoma Ltd carried out a pre-investigation of potential local lighting ESCOs (or partners in a consortium). They selected and interviewed potential ESCOs in Latvia. Analysis of the team’s findings allowed for preparation of a list of potential ESCOs.
Potential ESCOs in Latvia were grouped into four categories:

1. A high skills, economically stable group formed from companies with common past inside the utility company, Latvenergo.
2. A group formed from companies well-known in the Latvian energy sector usually those with shares of foreign capital
3. A group formed from companies experienced in O&M in the lighting sector
4. A group formed from companies experienced in installing lighting technologies

The second step in the market study was the preparation of a questionnaire and survey of 14 companies. The questionnaire included technical, financial, economical and organisational questions as well as a question concerning the willingness of the surveyed group to participate in an ESCO.

The results of the survey showed there were between three and five local companies capable of forming strong ESCOs in Latvia. These companies were both financially stable (with annual revenues ranging from $4 million to $24 million USD) and experienced. The most experienced tended to be the installers of street lighting, however. In any case, they are capable and ready to start efficient lighting ESCO projects.

Performance contracting stage.

The performance contracting stage started with an investigation and comparison of the relevant existing legislation in Latvia and the Czech Republic. The next step was to develop relevant tender documents and contracts.

The main principles of performance contracting are based on a concession agreement between the municipality and the ESCO. The municipality will lease out the street lighting to the ESCO with specific conditions attached. The conditions specify that the ESCO has to invest in new efficient lighting technologies, install them and operate and maintain them for a set number of years.

The financial strategy is based on cash flow. The municipality receives its money from the energy savings. Responsibilities of each of the parties involved in energy efficiency project are:

· For the municipality

• Invest in new street lighting technologies
  
• Cover electrical energy costs
  
• Make annual payment to the ESCO

· For the ESCO

• Invest in reconstruction of street lighting
  
• Cover operation and maintenance costs
  
• Repay the loan taken out to cover those costs.