Energy service companies (referred to as ESCOs) have become successful business models, popular in many countries around the world, contributing significantly to the expansion of the energy efficiency (EE) market and gradually reducing government budget capital by mobilizing more investment participation from the private sector and stakeholders. However, in Vietnam today energy saving services and ESCO market are still limited and facing difficultlity. Among the reasons of the above situation, it mainly is due to the lack of a specific legal framework and a support on financial mechanism to develop and implement energy efficiency projects through the form of ESCO. This article presents the current situation, challenges, opportunities and proposes solutions to promote ESCO activities in Vietnam.

1. Concept and current status of ESCO activities

An Energy Service Company (ESCO) is a type of company whose business model is to use Energy Efficiency Contracts (Energy Efficiency)/Turnkeys as a basis to pay for themselves when implementing projects. HQNL. ESCO's customers do not have to invest capital but are provided with comprehensive energy efficiency solutions including energy audit, planning, construction, installation, operation and maintenance or energy infrastructure leasing.  Thereby, customers can not only reduce energy costs, control production situation, increase competitiveness and reduce risks, but also be shared by ESCO in profits from saved energy costs, be enjoyed the entire system of energy equipment that ESCO has invested in after the date of the initial investment cost reimbursement agreement between two parties and be fully guaranteed about the amount of electricity and cost savings in the  time of the contract. ESCO provides energy services to customers through Business Contracts with similar names such as Energy Performance Contract (EPC), Energy Service Agreement (ESA) ). Within the scope of the article, we generally refer to it as an Energy Efficiency Contract (EPC).

The EPC contract can be considered that a user representative allowing ESCOs to implement energy efficiency solutions through the EPC which normally provides a level of energy saving guarantee to the beneficiaries, furthermore it allows sharing future energy saving between two parties. EPC is carried out with the participation of ESCOs or equipment manufacturing companies. In the EPC contract, ESCO provides a service package that includes technical design, financing, installation, maintenance and monitoring of equipment to improve energy efficiency and use saved costs of energy for returning on investment. EPC is widely applied in many countries such as EU (Germany, Latvia, ..vv), USA, China, Singapore, Thailand, Malaysia, etc.

There are two types of EPC Contract: Energy Efficiency Sharing Contract and Energy Efficiency Guarantee Contract. In the Energy Efficiency Sharing Contract, ESCO invests in the project and is responsible for paying capital to financial institutions (FIs). With the Energy Efficiency Guarantee Contract, the customer borrows, repays the bank debt and then invests in the project.

Thus, depending on the financial capacity of ESCO, customers can choose one of the  above two models. In Vietnam today, the Energy Efficiency Guarantee Model is more popular because most of the ESCO companies are small and weak in finance. However, the Energy Efficiency  Sharing Model can also be applied in Vietnam in the future when the ESCO companies will be stronger in both capital and professional capacity.

Figure 1 Two Models of Energy Efficiency Contract EPC

                    EE Sharing Contract – model 1                     EE Guarantee Contract - model 2

Source: www.efficiency-from-germany.info

In Vietnam, ESCO has been introduced and implemented at different levels on a small scale (pilot, demonstration) for small and medium-sized enterprises in energy efficiency projects since 2005 in the industrial sector ( PESME project).

Since then, many experts and energy managers have been continuing to be trained on ESCO and Business Service Contracts such as: EPC/ESA Contract through Energy Efficiency Projects/Programs in industry and construction such as: "National program on economical and efficient use of energy in 2006-2015 (VNEEP 1,2)"; “Energy efficiency and cleaner production (CPEE)”; “Low Carbon Transition in Industry and Construction (LCEE)”; “UNIDO-Promoting the use and operation of industrial boilers” and a project cooperated with the Korea International Cooperation Agency (KOICA): "Promoting the energy efficiency investment market in Vietnam's industrial sector". There are also on-going projects such as: “Improving energy efficiency in high-rise buildings (EECB)”; “Energy efficiency in industry (VEEIE)”; and "National Energy Efficiency Program for the period of 2019-2030" (VNEEP3). The projects such as CPEE, KOICA, LCEE, EECB, etc. have introduced many topics such as: (i) EPC concepts, advanced training on ESCO and guided EPC project implementation to businesses, consulting firms, contractors. energy managers and experts at ESCO seminars; (ii) Evaluating financial and investment mechanisms for energy conservation projects; (iii) surveying ESCO services in Vietnam. Among them, the clear activity coveraging  broader sectors on ESCO was in the VNEEP 1 and 2.

For example, VNEEP 2 has had the following results of activities on ESCO:

- Implementing pilot ESCO business model and providing consulting services/financial support to implement investment projects on EE. At least 6 companies have been established and registered to operate under the ESCO model.

- Working with donors to mobilize domestic and foreign capital sources for investment projects related to EE to promote the ESCO model.

- In the years 2012 -2016, the Energy Efficiency Office (EECO) cooperated with EVN, Bach Khoa Solar Company, VietEsco etc. to invest in the successful ESCO models when participating in the investment in an industrial-scale system of solar energy water heaters across the country.. Up to now, EVN and other ESCOs have continued to expand and develop the ESCO pilot model to provinces and cities in renewable energy and electrical equipment such as air conditioners, pumping systems, inverters etc. ESCO and customers share the energy saving benefits gained from the investment project.

However, in general ESCOs in Vietnam are still mostly energy efficiency consulting companies for implementing energy audits, installing and maintaining equipment etc. To promote ESCO, the Ministry of Industry and Trade (MOIT) is currently drafting guidelines for EPC implementation under the ESCO model. However, these guidelines will only be implemented synchronously after the issuance of the revised Decree No. 21/2011/ND-CP in the near future.

Most recently, in March 2021 the World Bank (WB) on behalf of the Green Climate Fund (GCF) signed a grant agreement (worth USD 11.3 million) with the State Bank of Vietnam to support the development of a trade finance market for energy efficiency investment in industry. Financial support from GCF also includes a $75 million guarantee. The remainder of the aid and the guarantee will be used to set up a Risk Sharing Fund to provide partial credit guarantees to assist domestic commercial banks in managing risks when lending to projects on energy efficiency. Through support to reduce lending risk, the Fund is expected to raise approximately $250 million in trade finance that will enable industrial enterprises and ESCOs to borrow on more competitive terms and low mortgage guarantee requirements. Therefore, this project will make it easier for ESCOs to access credit guarantee capital.

2. Opportunities and challenges

ESCO is evaluated as an effective solution in promoting energy efficiency activities in the fields of industry and buildings. ESCO integrates all energy services at the project stages into a single EE contract. Moreover, the foundation of ESCO's benefits is energy efficiency, which ensures reasonable solutions that suit the needs of customers. As such, ESCO enables customers to innovate their technology, improve the competitiveness and productivity from their assets. In the case of ESCO providing project capital (model 1), the customer is also not affected by the financial flow and the credit risk is only on the ESCO side. Therefore, by applying the ESCO model, businesses can not only access green solutions, invest in equipment innovation and new technologies with the best investment costs and achieve the highest efficiency, but also help reduce risks and together with stakeholders (banks etc.) have conditions to participate in national and international programs/projects on energy efficiency, contribute to environmental protection and response to change climate.

In Vietnam, the potential investment market of ESCO can be mentioned as public lighting system, commercial center building, office & service, industrial park/factory, renewable energy etc. According to the assessment of EE experts, the estimated energy saving potential of all sectors is large for ESCOs' investment such as 20-40% in industry, 10-20% in construction and building, 15-30% in service and daily life.

Although there is a lot of potential for development, there are still certain difficulties in the process of ESCO implementation. Specifically:

- Lack of legal basis to implement specific guiding documents on ESCO;

- Lack of a financial support mechanism for the development and implementation of ESCO's energy efficiency projects. Therefore, with the current financial mechanism it is diffcult to realize the implementation of payments to ESCO by state-owned enterprises for savings and for application of tax incentives for the increased profit due to savings. For example, an ESCO company invests in a public lighting system. After the system is completed to operate, the customer pays for electricity according to the bill which provided by EVN. Due to the lack of issued regulatory mechanism, the cost difference originated from savings cannot be taken out to pay investors (ie. ESCO company). This causes difficulty for ESCO businesses.

- Investment regulations for energy-saving projects are still in encouraging stage. There are no mandatory regulations for some types of public investment projects which ESCOs can implement such as upgrading hospitals, schools, public lighting, etc.

- Communication and promotion are still weak. In order to deliver messages related to economical and efficient use of energy, the participation of many organizations and localities should be required. For example, Vietnamese banks do not have much experience in investment evaluation and verification in the field of energy efficiency, so they are very afraid of the risks of lending money to ESCO to invest in energy efficiency projects. Besides customers and enterprises still do not realy trust ESCO and mostly be interested in increasing sales rather than reducing costs through energy saving;

- Information is not transparent and the connection between businesses and financial institutions is limited, making it difficult for ESCOs to approach customers using the state budget and accessing energy efficiency capital of financial institutions (FIs);

- The scale of energy efficiency projects of ESCOs is usually small with high costs, so there are many risks of recovering investment capital;

- The profesional capacity of the EE consultants is also a barrier in the development of ESCOs. Up to now, the number of well-trained and highly specialized experts is not large.Currently, some businesses only have energy audit implemented to deal with state management agencies, so they choose low-cost consultants with limited professional qualifications, which resulted to low quality of energy audit report.

3. Solutions and recommendations

The Government should complete the legal framework, including building a financial incentive mechanism to promote the operation of the ESCO business market. The development of ESCO in professional orientation requires not only market expansion but also ESCO quality. Specifically:

- Completing the legal framework, policies and regulations on energy efficiency, including: amending and supplementing Decree 21/2011/ND-CP and guiding documents related to ESCOs as well as supplementing legal regulations and legal entities for the operation of ESCOs to suit Vietnam's conditions;

- The Government/Ministry of Finance should come up with a financial payment mechanism or similar policy so that consumers can resell the saved electricity so that both the state and businesses gain benefits;

- The mandatory target of reducing energy consumption for enterprises and public buildings should be continuously set for each period and strictly enforced according to the National Energy Efficiency Standards and Regulations, which is an opportunity for further development of the EE market and ESCOs;

- Currently, the Ministry of Industry and Trade is drafting guidelines on the ESCO model in the field of industrial production. In addition to that, the participation of the Ministry of Finance, the Ministry of Construction and related ministries is needed to expand the ESCO market to more sectors such as construction, buildings, transport etc. It also requires the feasibility of relevant financial regulations (eg payment regulation for the energy saved...);

- It is necessary to develop a process of appraisal, assessment/measurement, confirmation (EM&V) and report to clarify the effectiveness of the ESCO project, process of post-audit to correctly evaluate energy efficiency implementation. From the above processes, the state authorities will have the basis to issue Certificates/Confirmations after the energy saving results in the ESCO project are approved;

- To form and sustainably develop ESCOs, it is necessary to ensure the capacity of energy efficiency consulting, to establish a close working network between the stakeholders suchs as in the financial cooperation and financial assurance, the network providing technology and solutions for energy conservation. Thus, it is necessary to strengthen training to improve ESCOs’ capacity, build and implement a tripartite financial-technology linkage model between: Enterprises - ESCO companies - Credit institutions;

- Simplify public administrative procedures as much as possible: access to bank capital; registration, licensing, evaluation, review, certification, etc. and give financial autonomy to local energy conservation consulting/service organizations;

- Promote communication and marketing about ESCO through seminars, conferences, newspapers, etc. in order to further disseminate information to businesses and financial institutions about effectiveness through cooperation with ESCO's;

- Finally, one important thing is the leading role of the state in support research and application, survey/update database on energy conservation potential of sub-sectors of industries, buildings and ESCO market; develop Green Procurement packages for state-owned enterprises and public buildings. Note that Green Procurement is concept refering to the purchase of products, services and investments in public-funded constructions with consideration of high energy efficiency and environmental friendliness criteria and standards. Malaysia's experience is a successful lesson of the "Short and Long-term Green Procurement Plan". Applying Green Procurement to public energy projects has helped stimulate the ESCO market as well as the market for energy efficient/environmentally friendly products, materials and technologies.

4. Conclusion

ESCO has great potential and strong development prospects in Vietnam when the legal framework and financial mechanism are improved. The ESCOs solution with EPC Contract is one of the appropriate incentive financial tools for promoting Vietnam's energy efficiency market activities in the coming period because not only its potential and promising prospects, but also because it continues to inheriting and developing results and experiences from previous and current ESCO-related projects/programs in Vietnam.

                                                                             Dr. Tran Thanh Lien,

Vietnam Energy Conservation and Energy Efficiency Association

References

1) Evaluation of the effectiveness of the National Target Program on Energy Efficiency (2011-2015), Institute of Energy, 2015

2) Mapping of energy efficiency financing in ASEAN, ACE and GIZ, 2019