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News Analysis

Fortnightly Magazine - April 15 1998

Dreessen, CEO of Energy Performance Services Inc., reports that the average U.S. ESCO efficiency project is $500,000. For projects of that size overseas, there's limited financing. He says that's just the start of the barriers to foreign business. During his company's work with a customer in the Czech Republic, his company couldn't understand the financial statements. Once they were reconstructed, EPS discovered its customer had a huge net worth and no debt. "It was recently privatized and they placed a value on their fixed plant. Just placed [a value] right on [their financial statements]," he said, shaking his head.

He said privatization also has made legal compatibility a problem. And forget about logging payment history, he said. "They don't pay their bills. And they never have. They negotiate that or pay higher taxes. They deal with the government. They say we understand that's the bill, [but] that's not what we pay [for energy]."

Jaime Millan of the Inter-American Development Bank blamed the lack of project financing on communication: Banks say they have no money while project promoters say they have no money; the customer says he's not being asked about energy efficiency projects in the first place.

Eduardo C. Bandeira de Mello of the National Development Bank of Brazil (BNDES) agreed there's pent-up demand for energy efficiency in his country. Helping that is inflation, down to less than 5 percent a year from 4,000 percent annually. His biggest issue, he said, is convincing clients to invest despite Brazil's high interest rates. The maximum rate is about 14 percent, and dropping. It's a floating rate, fixed every quarter.

Geller said that under a broad definition of energy service contracting (em a fixed fee coupled with performance-based guarantees of savings (em there are 30 ESCOs in Brazil. Most are small and all but one, Johnson Controls-Brazil, are Brazilian. Most of the projects cost less than $50,000, although some were $1 million-plus. Some 100-120 projects were implemented by companies in 1996. Total dollar value of ESCO projects in 1996 was $16 million. Fixed-fee contracts are the most common, and performance guarantees are rare. ESCOs depend on the clients to finance the projects and PROCEL and BNDES provide third-party financing.

Europe: A Risk Worth Taking?

Speakers working in Eastern Europe and Russia voiced the same sentiments of their antipodal colleagues.

Bernard Jamet of the European Bank for Reconstruction and Development claimed ESCOs "can make good business" in eastern Europe. The key barrier is the lack of financing and the difficulty of commercial banks to assess the risk in public sector clients (especially those being privatized). Through the EBRD, ESCOs must not only arrange financing, but bear the financing risks by borrowing against their balance sheet, he said. There's no financing given to the client, as there is in the U.S. Small ESCOs, he admitted, aren't able to do this. His bank has invested in four multi-million dollar projects, including a $25-million Honeywell project in Poland. EBRD is a one-third stakeholder, with another third financed through equity and the final third through debt.

Jamet estimated $50 billion