With the founding of Etihad and others, Energy Service Companies (ESCO’s) have established a position in the UAE energy market. This article will discuss why they have become so popular and what we can expect in the future.
In the value chain of energy, ESCO’s take a role close to the end-consumer and are active in what we call Demand Side Management. To illustrate the role of the ESCO’s in a changing energy market, I like to use 2 different definitions, the classical ESCO and the new ESCO
“ESCOs are usually differentiated from other firms that offer energy efficiency improvement or energy services, such as consulting firms and equipment contractors, by the concept of performance- based contracting, which means that the ESCO’s payment is directly linked to the amount of energy saved (in physical or monetary terms)” (An assessment of Energy Service Companies (ESCOs) worldwide, World Energy Council, 2007)
Classical definition cost picture of an ESCO (Source: MEEF, Middle East Economic Forum)
In the classical definition, often with Demand Side Management is meant Demand Side Reduction. The business case should follow that the present value of incremented energy savings outweighs the currently made investments to increase efficiency in buildings and energy infrastructure.
The new definition embraces the future of the energy market. The ESCO will be literary a service company, which has the aim to let ‘prosumers’, comparable to telecom markets, download or upload energy to the grid.
The trend is that in the energy market, energy will start being produced and consumed more locally, often by the same customer (or prosumer). Sustainable innovations allow for local energy production. Using smart grid technology and price incentive the energy use should be managed in such a way that there are no over- or under capacity risks to the grid infrastructure and that energy use is optimized locally and regionally to the client portfolio of the ESCO.
As such, I want to propose a new definition for an ESCO: “A business which aims to allocate and optimize energy delivery and backdelivery between energy prosumers or customers within a certain region”
Currently, ESCOs in the UAE energy market seem to be more closely to the first definition. However, with increasing information provision on energy use, and smart grids, opportunities for the new definition of ESCOs will open up in UAE markets.
Ralf Klein Breteler was formerly energy consultant in the Netherlands at a specialized consultancy firm which covers the entire span and value chain of the energy market. He now lives and works in the Middle East where amongst others he shares his vision on the Middle East Energy Markets.