With the trend of rising energy costs at energy facilities, investing in energy efficiency is increasingly attractive. Therefore, ESCO is a potential business model in the future.
After the economical and efficient use of energy was legalized in Vietnam by the Law on Economical and Efficient Use of Energy (passed by the 12th National Assembly on June 28, 2010 and took effect from the year In 2011), the concept of Energy Service Company (ESCO - Energy Service Company) is also better known. The ESCOs provide services to customers through its All-inclusive Energy Efficiency Contract (EPC). A good ESCO business model will bring great efficiency and promote energy saving activities. One of the forms that ESCO chooses is to provide the entire solution from consulting, design, construction - installation, operation, financial arrangement, service management for the energy system after investment and share profits with customers on the basis of energy-saving efficiency. Currently, the ESCO model is very developed and has become an important solution to implement Energy Efficiency Programs/Projects in many countries such as the US, EU, Japan, China, Thailand...
However, in Vietnam, the ESCO model is facing many difficulties and obstacles. According to VECEA so far, no foreign ESCO organization has officially registered to operate (as major fuction) in the Vietnamese market. Almost of them are equipment providers which implement after-sales maintenance and provide equipment maintenance solutions.
The following are the opinions that Reporter received through discussions with a number of related organizations and individuals, especially the comments recorded at the seminar "ESCO, the future business model of Vietnam - Lessons learned from international and national ESCO activities/models" organized by the Vietnam-EU Energy Sector Technical Assistance Project (EVEF) in collaboration with the Ministry of Industry and Trade (which was held in Ho Chi Minh City at the end of October 2020) and at some other forums. The mentioned opinions will give readers an overview of the ESCO market in Vietnam.
Mr. Tran Viet Nguyen - Deputy Head of Sales Department of EVN
“Need to promote awareness about ESCO”
While the Government has not yet issued the financial mechanism for the ESCOs’ activities, the banks are also very hesitant in lending ESCO loans to invest in energy saving projects. Hopefully, in the coming time, the Government will continue to study and issue really practical policies and help ESCOs, at least at the beginning stage, so that they can firmly exist and expand the market, then the ESCO market could develop.
As a corporation that has been implementing energy efficiency activities, including the ESCO model, we think that the communication to people about energy efficiency solutions is still very limited. Although EVN is willing to give free advice, as long as more and more businesses are interested in applying energy conservation solutions, just only EVN to do propaganda work it is not enough. State management agencies, businesses, especially ESCOs need to have more voices and actions in propaganda together with projects to help raise awareness of businesses and people, create spillover effect in the community about the benefits of solutions that ESCO brings.
Mr. Nguyen Duong Tuan - General Director of Bach Khoa Solar Energy Development and Investment Joint Stock Company - SolarBK
“Choosing a 3rd party to support ESCOs”
If you want to be an ESCO, you must be determined, but also must have the ability. The consultant must stand with the client, judge the bid, and sign the savings commitment with the client. Besides, you must constantly update new technology solutions to advise customers.
A model that I think is also very good is choosing a 3rd party to support ESCOs to invest with peace of mind such as signing through EVN or through banks. Having these agencies’ guarantee, we will feel more secure; accordingly our Company signs with EVN so that EVN finds customers, then we come to consult and share profits each other.
In case an enterprise steps into ESCO work, it could enter if it sees a guarantee of profit. But if it continues to wait for the mechanism, it could not do it. Therefore, we accept the game, invest by ourselves and do not wait for the state. When I invest my own money, the initial survey will be very thorough. But the risk exists when the survey is in the order season, that means it may not correctly reflect the capacity of the manufacturer. Therefore, from the very beginning, you must be open and clear with each other. If the real data is to be surveyed, then there would be real saving results. When we commit to ensure investment efficiency and businesses can see profits, they will do it anyway and don't worry about lack of market.
Through the process of working as a consultant, I think that the important thing is that the solution must always be improved. The business that has research and development will be sustainable. Therefore, every year SolarBK has poured a lot of money into research and development in order to always bring the most advanced and effective solutions to customers. That is what makes SolarBK brand.
Dr. Nguyen Thanh Quang – Indochina Import-Export Industry Investment Joint Stock Company
“Businesses do not have the concept of ESCO”
The ESCO development in Vietnam still has many barriers. The State's policies are not synchronized, small in each locality. For example the Government does not have a policy on the use of specific fuels such as industrial and civil waste. For small businesses the procedure and permission for electricity production are still difficult.
On the other hand, in Vietnam, enterprises are mainly small and medium-sized enterprises with scattered activities and do not yet have the concept of ESCO. Many businesses are afraid of revealing their business secrets, afraid of being affected in their production and business activities, so they do not want to participate in ESCO. Even when participating, their initial information may be not complete and accurate, so ESCO invests a lot but the profit is not as expected. In cases of contract disputes, the parties also rarely submit to economic arbitration and often the ESCOs suffer to keep the relationship. These are the most common barriers to the operation of ESCOs in the Vietnamese market that need to be overcome in the near future, when the mechanisms and policies are still not synchronized, in order to ensure profits for investors.
Mr. Huynh Kim Tuoc, Director of the Center for Science and Technology Application in Ho Chi Minh City
“It is necessary to build a financial linkage model between enterprises and ESCO companies and credit institutions”
To form an ESCO company in Vietnam, three conditions must be met: Consulting capacity, Finance and Technology solutions.
The current market for providing ESCO services has great potential and is flourishing. However - in order for this model to work effectively - in addition to choosing appropriate technology, negotiating energy efficiency levels with partners, determining capital recovery time, calculating investment efficiency, etc., it is necessary for ESCO companies to carefully study the market stability of enterprises because this is a high-risk factor. And above all, it is necessary to develop a complete policy, mechanism, criteria and accompanying credit institutions, build a model of financial linkage between enterprises and ESCO companies and credit institutions.
Currently, the State and some financial institutions also have preferential capital for energy efficiency projects, which we can exploit. However, that's just less than the need. In order for businesses to participate more in this field, it is necessary to implement tax incentives or other policies suitable for ESCO businesses.
Mr. Ma Khai Hien - Director of the Energy Conservation Research & Development Center (ENERTEAM)
“ESCO activities are lacking effective financial solutions”
The State has promulgated the Law on Economical and Efficient Use of Energy and policies on energy conservation, but the implementation of the Law is still inconsistent and incomplete. There is a lack of policies and incentive programs from the Government to support enterprises in energy conservation such as deduction of income tax from energy conservation to create motivation for enterprises to actively participate. There are no clear and specific policies related to ESCO promotion including specific guiding circulars etc, although there have been capacity building activities, demonstration models, or guidance on ESCO contract templates.
Besides, ESCO activities are lacking effective, reliable and sustainable financial solutions, for example lack of commitment on binding compliance from business owners using ESCO services, leading to high risks for ESCOs. There is a lack of standardized efficiency measurement tools in ESCO projects as a basis for payment appraisal as agreed between the parties. ESCOs themselves also lack the ability to communicate with financial institutions, so they have limited access to finance. Profit sharing results are dependent on the operating situation of the business. It is not to mention that the constantly changing and updating energy saving technology is also an obstacle during the capital recovery period for ESCO.
Mr. Toby D. Couture - Director of E3 Analytics
“Government can make the leading-by-example and invest in ESCOs”
In the US, ESCO has been operating since the 1980s, based on a formula of “shared savings”: Energy Services Companies (ESCOs) offer to use their capital, invest capital, and “share” the saved energy with tenants or owners of energy users. The actual amount of saved energy is regularly verified (e.g. monthly or annually) and shared based on a pre-agreed formula. Initially, ESCOs in the US were used primarily by public organizations and were seen as a way to share risks with the private sector. Over time, ESCO models have gradually moved away from traditional “shared savings” models (profit and risk sharing) to “guaranteed savings” models (tenants or building owners are guaranteed certain minimum energy savings) and have now become the industry standard. Since then, the adoption of ESCO models has spread to the private sector.
Since 1990, more than 80% of US’s ESCO projects have met or exceeded their EE targets. This market has reached an estimated annual revenue of USD 7-8 billion since 2017, with a longer and longer payback period. The Government plays an important role by “leading by example”, announcing the results of investments in energy efficiency, and raising awareness (Federal Energy Management Program).
In China, the ESCO market accounts for about 60% of the revenue of the global ESCO market. China's ESCO industry employs about 400,000 people. In contrast to the US and Europe, where the majority of ESCO's customers are in the public sector (i.e. under government), in China and in many other neighboring markets (such as Thailand etc.), its main customers of the ESCOs are in the private sector. Since 2011, ESCO companies are exempt from a substantial amount of income tax: 100% tax exemption for the first three years and 50% for the fourth through sixth years. This has given the market a huge boost, with the number of ESCOs increasing from 2,800 in 2010 to 3,900 at the end of 2011. In China, most ESCO-funded projects have relatively short payback periods (3-5 years), as operational risk and bankruptcy risk are still higher than that in Europe and the US.
However, just like in Vietnam, China also lacks a financial mechanism, a profit-sharing mechanism, expertise and mutual trust among businesses.
Therefore, the lesson for Vietnam is that intensive skill training is very important. The Government can lead by example and invest in ESCOs and energy efficient services. At the same time, it is necessary to research, synthesize and introduce data on energy efficiency (and energy efficiency potential) of different industries to support propaganda for raising awareness. The Government also should ensure the legal protection of Energy Efficiency Contracts (i.e. legal framework). Financial support (including loan guarantees and tax incentives) can become a catalyst to help drive the growth of the ESCO market in the future.
Mr. Thomas K.Dreessen – Chairman & CEO of EPS Capital Group, Senior Consultant on ESCO for UK-ASEAN Low Carbon Energy Program (LCEP)
“It is necessary to amend Decree 21 to provide legal support for ESCOs’ operation”
I think that the amendment of Decree No. 21/2011/ND-CP detailing and implementing the Law on Economical and Efficient Use of Energy (Decree 21) is a possible solution. Because Decree 21 is designed to promote economical and efficient use of energy in all activities of industrial production, agriculture, transportation, civil construction, lighting and community activities.
The LCEP found Decree 21 to be too general and not conducive to mainstreaming the specific processes needed for government agencies to overcome barriers for enabling ESCOs to participate in the development, funding and implementation of energy conservation projects in public facilities on the basis of “receiving fees from savings”.
Therefore, the Decree needs to be revised to remove many barriers and create conditions to strongly promote energy efficiency and conservation activities at the national level, including adding legal provisions for with the activities of ESCO organizations in accordance with the conditions of Vietnam.
Assoc.Prof.Dr. Pham Hoang Luong - Director of Vietnam-Japan International Institute of Science and Technology
“ESCO regulations need to be legislated”
Currently in Vietnam, ESCO operation is an agreement between the parties, mainly by enterprises and consultants (two parties agree with each other), but there is no state’s regulation on that. Therefore, in the amendment of Decree 21, it is expected to institutionalize ESCO services, introduce a number of regulations and contract templates for profit sharing. ESCO regulations need to be legislated, ESCO's legal status must be very clear in order to have a way to identify assets, share profits, pay taxes etc.
We currently have more than 60 Industry Promotion Centers. In fact, none of them do as ESCO but mainly perform communication and training which are the easiest thing. The profit sharing under ESCO is not possible for their activity. Therefore, to implement ESCO’s activities in the true sense, we still need a lot of time.
Ho Nga – Industry and Trade Magazine
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