ENERGY SERVICE INDUSTRY AND IT’S AND CHALLENGES IN MALAYSIAN MARKET

The energy efficiency market is growing in stature and maturity, but it is developing more rapidly than the ability to properly evaluate and understand it. A particular priority is to improve our capability to measure the size, nature and impact of energy efficiency markets and the outcomes from investments made in them.

Energy Service Companies (ESCOs) have started making their presence Malaysia toward the end of 90s and they were mainly involved in promoting technologies on how to save energy costs. Most of them merely were technologies suppliers and using energy saving features of their products as additional marketing strategy to convince the market. Most of these technologies often brought by foreign promoters or companies who worked with their local partners to penetrate the domestic markets.

Then slowly energy service businesses expand into consultancy and training services where among the main objective was to educate the market on energy efficiency in bigger perspective other than just energy efficient technologies. This was done through collaboration and jointly-organized programs such as seminars and conferences between technologies and services providers with government agencies and government linked companies such as the department of electricity and gas supply(now known as Energy Commission), Malaysia Energy Centre(now Malaysia Green Technology  Corporation, Malaysia Timber Industry Board, SIRIM and Tenaga Nasional Bhd.

In the same time, there were internal organizations related to energy efficiency such as from Japan and Denmark which offered some assistance technically and financially to Malaysian government for activities such as technical assessment to identify energy efficiency potentials in various sectors, market and policy studies and also training programs for local government and private personnel.

Energy service industry development has been identified as one of the key component s under the United Nation Development Progarm-Global Environment Faclity(UNDP-GEF) and Malaysian Government Funded project named Malaysia Energy Efficiency Industrial Improvement Project (MIEEIP) from year 2000 until 2005. This has led to the formation of Malaysia Association of Energy Service Companies (MAESCO) in 2001. However, the growth of energy service industry to be further explored by ESCOs  has not been fast as initially expected despite very promising findings from the MIEEP implementation. The project has identified how much businesses and investment potentials with very attractive returns available in industrial and also building sectors from hundreds of energy audits carried out.

MAESCO has been proactively involved with key stakeholders to create awareness about potentials of energy service industry since its formation in 2001.

The table below summarizes the potentials saving, investment required and returns expected based on types or energy intensive industry.

Industry Type	Potential energy  saving (GJ/year)	Energy Consumption (GJ/year)	% of energy saving potential	Investment Cost(RM)	Potential cost saving per year (RM'000)	% of cost saving from energy bill per year	Payback period (Year)
FOOD	272,354	1,418,625	19.2	2,299	4,382	13.7	0.5
WOOD	457,494	874,200	52.3	9,904	4,822	38.9	2.1
CERAMIC	212,974	774,061	27.5	5,760	5,992	24.8	1
CEMENT	4,887,239	14,956,563	32.7	39,456	33,752	16.5	1.2
GLASS	81,660	4,000,370	2	3,586	2,120	2.1	1.7
RUBBER	97,215	460,913	21.1	5,079	3,063	22.6	1.7
PULP & PAPER	811,547	5,080,208	16	29,883	18,174	21.3	1.6
IRON & STEEL	270,053	4,215,761	6.4	4,443	5,247	3.4	0.8

Source: Malaysia Energy Centre, 2005

With the several tariff increases occurred from the time of the project implemented, returns from the investments should have been bigger and faster to be achieved if companies selected have implemented all energy saving measures recommended to them.

For energy audits performed by Malaysia Energy Centre at the buildings sector, they identified energy efficiency potentials of 40% to 50% reduction of energy consumption of new buildings, 15% to 25% in reduction in energy consumption of existing buildings and also the possibility of shifting some electricity demand for some building operations from day to night by improving its load factor.

The MIEEP and many other studies have shown that there are undoubtedly huge potentials of investments and business opportunities in implementing energy efficiency measures in industrial and building sectors.

To do that ESCOs are supposed to play very significant roles to ensure the successful energy efficiency implementation in both sectors. Support for setting up ESCOs and industry groups has been undertaken in emerging countries by international agencies. The GEF program in China to support start-up ESCO is representative and the role of GEF and the World Bank in development of China’s ESCO industry was extremely comprehensive and also effective. In India, the US Agency for International Development (USAID) provided support through a program of information transfer to ESCOs, and through a special program with the support for foundation of an ESCO association. Also, in Malaysia and the Philippines, ESCO associations were set up with support from governments initially and they are expected to grow further with the growth in energy efficiency industry in their respective country.

While in Japan, until now Energy Conservation Center of Japan(ECCJ) and Japan Association of Energy Service Companies(JAESCO) have carried out activities as the core of the ESCO movement. Then, the ECCJ functions are being integrated into JAESCO, to complete the functions of an ESCO association.

The establishment of MAESCO for meeting the demand for energy service market in Malaysia in 2001 has clearly intended for the same intention like those countries. The key objectives outlined its constitution as follows:

• To develop recognized ESCO businesses in collaboration with Government and private sectors.
• To actively promote the activity of cost reduction and efficiency standards of the industrial and commercial sector
• To oversee the well-being of its members and to facilitate and do all things necessary towards developing successful energy related projects.

• To introduce related products and services for the industry

• To foster healthy co-existence amongst members through ethical professional practices and ensuring  the prestige of services delivered  by its members

At present MAESCO has about over sixty members with almost half of them are stated in the list in the official website with the capability to perform EPC projects.

However, the growth of ESCOs in Malaysia has been hampered by several factors that are still unresolved despite some progress made by some ESCOs in local and regional markets.

One of the key issues is how the energy service itself defined and understood among by the market. At present, most ESCOs are still being seen to push for energy efficient products and technologies as solutions to reduce energy costs. The whole spectrum of works in energy service before reaching the energy saving solutions, requirements to implement energy saving measures and measurement and verification of the actual saving achieved have not been made aware and highlighted to the potential markets.

Other main barriers that are still faced by ESCOs in Malaysia are as follows:

i)               Immaturity of the energy efficiency market

In general, the costs of project development are relatively high and most small ESCOs find it difficult to finance project development costs. On top of that there are limited experience with successful ESCO projects and ESCOs have not yet developed good credibility with intensive energy users, policy makers and financial institutions.

ii)              Lack opportunities that suit ESCO’s  business model

The typical approaches in the implementation of energy efficiency projects in Malaysia is based in budget allocated or approved by the organization in their annual budget planning.

The unique feature of EPC business model where they can source the fund from the third party such as ESCO to implement energy saving measures that require bigger budget are not something common and easily accepted conceptually especially within the government agencies and locally owned companies.

The idea of involving the external parties to save energy costs by doing almost everything to get the results is not well accepted yet the local market until today. In the same time, most purchasing made for energy related technologies and products still looking at the purchase price as the main evaluation criteria.

There are some efforts by government entities to opt for EPC approach to implement energy saving measures but some conditions that they imposed do not match with the EPC business model. For example, the duration of EPC contract period and percentages of energy cost saving to be shared have been predetermined by the owner and qualified ESCOs have been asked to agree with the predetermined requirements before the investment grade energy audit carried out. As a results, no or very limited ESCOs were interested to participate and finally no progress made at all.

On-going engagements with fellow industry players and other key agencies in the government  have been always the most effective way in shaping the way forward for energy service industry.

iii)          Limited understanding of decision makers among public and private sectors on the true values of engaging ESCOs in their energy efficiency programs.

For example they are more prefer to adopt the conventional model of sourcing energy service using their normal procurement process where the upfront costs or the purchase price of energy efficiency solutions is their main consideration in decision making. Other than that, EPC model is the least preferred option to implement big scale energy efficiency projects although it often seen that internal budgets are limited with many other priorities.

In some cases, when they embarked on EPC approach, some unreasonable conditions imposed to ESCOs where finally the projects become not feasible for ESCOs to invest and making reasonable profits for their business.

In some government entities, instead of looking at EPC model as an option to implement energy efficiency projects  to get faster results with risks taken by the third parties such as ESCOs, they started to behave like as normal business entities where the  maximum profits has suddenly become their top priority.

iv)         Lack of financing from the financial institutions for loans, special funds, grants and etc.

Banks and other funding agencies in Malaysia are still not fully aware and understand the concepts and risks factors in business models for ESCO.

To financial institutions in Malaysia, the financing for energy efficiency projects is still considered “high risk” and they are using the same guidelines for all industries and sectors. Although the risk management and credit enhancement is critical, it has been proven that default rates for efficiency programs have been low in many countries such as Thailand and USA.

The failure of some MAESCO members and other ESCOs to source funds from local institutions is one of the most important factors that put a stop to the implementation big scale energy efficiency projects. They are often compared against the typical business entities with conventional projects approach when applying for funding for EPC projects.

Factors that involved financing that have contributed to less funding given for projects by ESCOs could summarized as follows:

·   Most independent ESCOs have a small capital base and often have difficulties accessing project funding from commercial financial institutions.

·     Financing for ESCO projects is also not commonly accepted by financial institutions where ESCO business model is new to them.

·  Investment by ESCOs are smaller compare to other investments where energy efficiency projects are generally small relative to other investment projects being considered by the financial institutions.

·    Lack of expertise among financial institution where their personnel typically has limited knowledge and understanding of energy efficiency projects and the EPC concept. They perceive EE projects (incorrectly) as inherently more risky than other investments.

v)          Lack of clear policy and mechanisms to implement big scale energy efficiency projects

The unavailability of a common and clear policy with targets to be achieved at the national level for energy efficiency is another big barrier for ESCOs to grow. Both public and private sectors do not know on how much should be their contribution to achieve the national efficiency targets because simply there is no targets have been set yet.

Energy efficiency initiatives with capital expenditures often implemented on project to project basis based on existing conventional purchasing mechanisms and procedures.

The foundation of these procedures is based on expenditure by the owner of the facilities and when the budget is not secured, projects implementation will have to wait for another budget to be approved or sourced.

Some progress has been made and one of that is by creating a special registration code for ESCOs to register at the Ministry of Finance to allow EPC business model to be adopted from 2012.However, until today, they mechanism and procedure on how government entities to pay ESCOs their share from the energy cost saving achieved has not been established yet. This has resulted in no EPC project has been implemented in any government agencies yet.

MAESCO has a very good relationship with the current leadership of key agencies such as KeTTHA, Energy Commission and MIGHT with some collaborations to promote investments in energy efficiency industry.

All the above factors have left ESCOs with limited opportunities to tap bigger investment potentials of energy efficiency project and therefore they have to compete among the conventional technology providers and product suppliers to secure clients. As a support services providers in energy efficiency industry, ESCOs would not be able to grow further in this type of competition. This is because the ESCO’s business model such as EPC is meant to get faster results, long term benefits and more risks taken by ESCOs for their solutions while the conventional business approach is mainly based on the most competitive or cheapest price to secure clients.

To develop the healthy and competitive market for ESCOs, several key measures have been identified from studies and experiences of local ESCOs and from other countries as counter measures to the above barriers. It is important to establish or strengthen energy efficiency related policies at the national and organizational levels, reform procurement systems, develop financial mechanisms and obtain business friendly intensive investments by government or private and international organizations with strong involvement of ESCOs in giving inputs as industry players through the association, MAESCO.

More need to be done and they need to be done faster to avoid more potential loss in economic for Malaysia in private investments and business opportunities to spur our economic growth especially for us to rise in this challenging and tough climate.

Energy service has been proven elsewhere as a good and promising investment and business potentials. In sha Allah, in the next post, I will share on what are exactly need to be done by all stakeholders in energy efficiency industry as counter measures to the above barriers.