With the progressive and rapid changes in the economic growth trends in the local market, businesses must embrace and run with the changes or facing risks of being less competitive and subsequently out from the race. It is similar to Energy Service Companies(ESCOs) in Malaysia. They should move away from the conventional business strategy which depending so much on the availability of capital available with the prospective business target groups.
Based on my observations from my over twenty years of experience in Malaysian market in providing energy efficiency services, the regular business models related to energy efficiency implementation such as the supply of energy efficient technologies, energy audit etc. still may continue to have some demand for some organization in coming years. However, with the more challenging economic climate which resulted in reducing capital expenditure among private companies and within the government sector, to stay afloat for core business activities often will take the centre stage and priority for budgeting purposes.
This is where energy efficiency may be an opportunity or burden in the budget allocation. In the present market in Malaysia, it would be realistic to say that energy efficiency budget would be an easy victim for any measure to reduce operating and capital expenditure although most of them would not deny its potentials and benefits in long term. However, the word long term may too long for decision makers especially when measures on energy efficiency that require capital expenditure are not that straight forward for them to see the direct impacts to reduce costs. This is due to the nature of energy efficiency measures often been complementary measures by support services with no direct impact to the overall core business activities.
Among decision makers especially at the strategic level, energy saving measures are always about something direct and simple that often done with no and little costs involved. It may vary from switching on and off equipment at no cost to using sensors or timers to control the operating hours of certain equipment which have some cost to be incurred.
For bigger assets replacement or total retrofitting of the building or its major energy using systems such as chillers for air conditioning systems, such projects are often seen as the operational requirement that require normal capital expenditure and not as energy saving measures or projects to reduce current and future operational costs. I came across a lot of such projects being implemented mainly due to the age factor that require for the replacement and nothing to do with the energy performance or energy efficiency level of the equipment or system.
Top executives and decisions makers must be made understood that to invest in large scale energy saving projects can bring much higher value and medium to long term financial benefits for their organisations. It needs to be seen as the next strategic action after they have enjoyed the benefits from the no and low-cost energy saving measures that have been implemented.
This is the main gap that need to be addressed where decision makers need to be educated enough to see the potential of energy efficiency measures in wider perspective especially for intensive energy users. Other than about the energy costs and non-energy costs reduction potentials to be benefited from the large-scale energy saving projects, they must also be exposed to alternative and attractive options on the way to embark on such projects. This is where the energy performance contracting (EPC) is one of the most feasible and attractive option to be considered.
EPC model has been proven as one of the effective tools to achieve bigger and faster results in energy efficiency projects implementation. It is a business model where the fund for the project is from the ESCO and not from the facilities owner. The ESCO is responsible to implement the projects from the identification of energy cost savings and investment potentials, the execution of the proposed and agreed energy saving measures and later to prove the actual energy cost saving have been achieved to the owner. The ESCO is expected to recoup the investment for the project from the actual energy cost saving achieved based on agreed percentage with the owner and other conditions as signed under the EPC contract.
Throughout the contract period, the ESCO is responsible on the operation, maintenance and spare parts replacement of the newly replaced equipment or system involved in the project.
In other words, the owner will not incur any initial capital costs or other additional costs to implement the project because the payment to the ESCO comes only from the actual energy cost saving achieved from the project. On top of that, the owner also enjoyed a portion of the energy cost saving achieved based on the percentage agreed with the ESCO.
Another important aspect of the energy efficiency impacts created by ESCOs through the EPC projects implementation with EPC model is that they are at least recession-proof and probably recession-breakers. This is because this project financing can help to save much more than the facilities owners can cost in a faster time. When the economy getting worse drives our growth, because of the budget for the government state or companies get very limited, they must need to find creative ways to make capital improvements. The EPC gives them the ability to do that and save money at the same time.
The Lawrence Berkeley National Laboratory 2009 report stated that despite a general downturn in the broader economy and the onset of a severe economic recession, in the United States, the energy service sector managed to grow at about 7% per year between 2006 and 2008. The report also predicted an average annual growth rate of 26% per year between 2009 and 2011 and aggregate revenue growth of USD7.1 billion to USD7.3 billion in 2011.
The market potentials for EPC projects implementation
In the International Finance Corporation China ESCO Market Study Report in 2012 stated that the annual investment in ESCO projects for the whole industry in 2011 was at CNY42 billion with over 100 ESCOs invested more than CNY50 million. The whole industry in 2012 at least has 378,000 employees with the total output of the industry for 2011 has reached the value of CNY125 billion. By the end of 2012, there were over 2,000 registered ESCOs and ESCOs financed projects worth about CNY55 billion in a market where financing requirements are estimated to be at CNY165 billion per annum, and growing quickly.
Meanwhile based on the American Council for Energy -Efficient Economy Summer Study on Energy Efficiency in Buildings report titled The U.S. ESCO Industry Recent Trends, Current Size and Remaining Market Potential in 2014 stated the U.S. ESCO industry continued to grow at a steady pace in recent years despite the onset of a major recession. It reported revenues of USD5.3 billion in 2011 and estimated the remaining investment potential in facilities typically addressed by the ESCO industry is significant, ranging from USD71 to USD133 billion.
According to James Dixon, a Con Edison Energy vice president and the chair of NAESCO National Association of Energy Service Companies (NAESCO) USA in 2011, the energy service industry has provided USD50 billion in energy savings. That is a lot of money freed up to invest in renewables and other infrastructure. He added, the industry has, over the last two decades, generated USD25 billion in public infrastructure improvements and created roughly 330,000 jobs with every USD1 million of project value is estimated to create about 10 direct jobs in engineering, construction and equipment manufacturing. In the same time, the income created by these direct jobs provides another 10 to 12 indirect jobs.
Based on the studies done at the two economic super powers, the impacts on the investments in energy efficiency projects is far beyond than just reduced energy costs for organisations and addressing some of the environmental impacts. Other than keeping the business sustainable and helped the government to reduce its expenses, these investments could provide new jobs for citizens at a country to support their families and communities as well. In these two countries, the investments by ESCOs has been identified as the key driver to enable more aggressive implementation of energy saving projects at much larger scale than before. Other than the two countries, more economies have embarked in implementing energy efficiency projects with the involvement of ESCOs using EPC mechanism as well such European Union members, Thailand and Japan.
All the facts from the success stories at these countries, it would be a very wise move for Malaysia to start to look at investments in energy efficiency projects not just as a supplementary or supporting activity in the economy but as a new source to grow the economy itself. The benefits should no longer to be seen as the cost reduction measure alone but as the tool to create new jobs opportunities to benefits Malaysians in many ways in the near future and in the way forward. Investments in energy efficiency such a through EPC projects implementation also promote a healthier and more robust economy that support higher levels of employment.
Based on the South East Asia Energy Efficiency Market report 2011 by ReEx Capital Asia, the potential energy efficiency investments in Malaysia estimated at USD907 million and USD530 million for industrial and commercial sector respectively. The reports showed that Malaysia also has huge potential for investments in energy efficiency and the most encouraging part of it is the market is still left untapped due to many factors.
However, there is no specific or official data on the estimated number of jobs to be created from EPC or energy efficiency projects implementation yet. Nevertheless, it is realistic to assume that the jobs creation potentials would be as attractive as what have been achieved at countries that have embarked to tap their energy efficiency markets as indicated in the United States of America , China and others.
Jobs from EPC projects implementation
The EPC projects to implement energy efficiency measures will also create jobs for existing ESCOs and also new jobs when more projects need to be implemented. The EPC projects implementation involve a process to save energy cost that consist of steps that require different expertise, skills and resources for each step directly and indirectly.
For example, for an investment grade energy audit to be perform, the audit team requires technical experts from different fields and engineers as energy auditors and technician to install measuring equipment. The size of the team will depend on the size of the facilities and complexity of processes to be audited. Another example, for the project implementation, it will involve other parties such banks to finance the projects, the suppliers of energy efficiency technologies and sub-contractors for the installations, testing and commissioning works.
The early part of impacts from the expenditure in implementing energy efficiency projects will drive direct, indirect and induced jobs in the market for the labour-intensive industries such as for construction, engineering, operation and maintenance works.
Direct jobs are for workers employed to develop and implementation of energy efficiency measures such as dismantling an old equipment and later installed with a new and energy efficient one. Indirect jobs are for other parties in the supply chain such as manufacturers and distributors of energy efficient products.
Then, these newly employed workers and companies involved in supplies for the project will spend their earnings and from this, it will create the induced jobs from other sectors such as in the retail and service within the economy itself.
The second part of impacts from the energy efficiency projects implementation where individuals and businesses to spend the money that they have saved from the reduced energy costs through lower energy bills. For businesses that are in a very competitive environment, energy cost reduction will keep them competitive or even to have more advantage against their rivals. This saved energy cost could also be the strategy for the business to sustain during the difficult economic climate instead of using the conventional measures such as retrench their workers and stop some operations.
Here are two examples on how jobs were created from the implementation of energy efficiency projects in government sector and private sector.
Through a smart partnership with Johnson Controls and Wisconsin Energy Institute for Wisconsin Energy Initiative, in 1992, USD35 million energy saving projects for lighting implemented at public buildings in the State of Wisconsin and saved USD3.7 million annually. It continued 1998 where USD60 million energy saving projects implemented for more energy using systems and equipment at public buildings in the State of Wisconsin. From the total USD96 million investment, it resulted in USD10million saved annually and created 1,500 jobs for 50 private-sector companies employing architects, engineers, electricians and maintenance workers.
In 2008, the state continued the program under the Conserve Wisconsin program with the ESCO and implemented energy saving projects valued at USD50 million for higher education and correctional facilities. The programme saved USD9 million annually and supported 800 jobs during the implementation period.
For General Electric(GE) plant in Appliance Park, Kentucky with 5,000 full time employees in 2012, the company discovered that from process improvement that reduces wastes and saves energy, it is increasingly possible and more cost-effective for the company to bring their manufacturing jobs into the United States. Then the company invested USD800 million to upgrade and add new product lines for its facilities in Kentucky.
The Tripp Umbach Study in 2010 by GE indicated that the company has directly and indirectly generated USD1.6 billion in the state from local purchasing and other mechanisms and supported over 12,000 jobs. For every job at Appliance Park, an additional 1.5 jobs have been indirectly supported through vendor purchases or induced through the re-spending by GE employees from their wages.
Generally, in Malaysia, jobs related to energy efficiency are not truly recognised yet by the market. Specialised jobs such as energy auditors, energy managers, measurement and verification specialists, energy management consultant and etc. are still relatively unknown among all sectors. With not so much growth seen in the energy efficiency industry itself through investments in energy efficiency projects, it is unlikely these jobs will offer much opportunities as well.
Malaysia needs more variations and more innovative ways to catch up with other economies in exploiting the energy efficiency potentials to grow the economy and creating new jobs from it. The implementation of more large scale energy efficiency projects at existing, aging and inefficient facilities through more aggressive investments from the private sector will enable that to happen. This will create the demand for jobs related to it and spark the interest of the existing and future workforce to look and consider their option to move into these jobs as well.
How to tap the energy efficiency investment potentials with EPC?
The above examples indicate that the larger the investment in the energy efficiency projects, the bigger the opportunities to create more jobs for the citizens of Malaysia in the industry. With the current economic which has forced government and private sectors to be more cautious in spending their money, the investment in energy efficiency projects offers a very good and attractive financial decision for medium and long-term gains.
EPC offers one of the best option and provides some comfort with the risks transfer strategy with some guarantee by ESCOs for decision makers as an alternative to create economic activities or additional revenue within the existing large energy using facilities. This alternative funding mechanism to implement large scale energy efficiency projects will ensure no financial barrier for organisations to benefits from energy cost reduction measures despite the limitation of internal funding sources to be spend for such investments.
For Malaysia market, the use of EPC model requires a paradigm shift especially among decision makers for the conventional strategy to save energy costs and to embrace the new method of procurement. They must be ready to work with more on the win-win spirit with strategic partnership to move forward together with ESCOs in the EPC business model compare to the paymaster and supplier or service provider model under the conventional procurement model.
This has often been the main barrier for the adoption of EPC in Malaysian market especially within the government sector. ESCOs always seen as a typical contractor or technologies suppliers when all terms and conditions to be followed are not based on mutually discussed, understood and agreed. In most cases, despite the funding source is totally from ESCOs with other investment risks transferred to them, the owner or the guardian of the facilities are often expecting that they can implement the projects with methods and conditions that have been applied under the conventional procurement.
In the same time, for the government sector, the main goal to adopt the EPC model should not be focused only to energy reduction alone. It must weigh in the much more benefits from creating the economic activities through financial investments involved that comes with new jobs creation in the private sector which will lead to diversify the source of the country’s economic growth.
For the private sector, EPC model to save energy costs should be adopted as one of the business strategies to move forward to increase profitability and business sustainability in a faster way and less risks on their shoulder.
In countries that EPC implementation has worked well by ESCOs, the initiative has started and led by the government with a very clear policy, targets, directives, accountability, guidelines and guidance on how to make it works for government buildings. That allow ESCOs to play their roles effective to penetrate the targeted facilities as outlined by the government policy and directives.
There have been some efforts such as the introduction of the special loan scheme for EPC projects for ESCOs by the Malaysia Debt Ventures in 2017 and also the promotion of EPC model for government buildings since 2011 under the Economic Transformation Programme. However, these efforts have been given lesser and very slower impacts since the introduction until today.
What can be observed in Malaysia, the first and main reason that caused that all that so far, is due the lack of understanding about how the EPC business model to work effectively. This has led to EPC initiatives have not implemented in disjointed manner with different interpretations on how it would work.
The second reason is due to the unavailability of clear policy instructions or directives with regard to the EPC implementation for the government buildings.
Thirdly is the decision makers are not ready to change the way of doing things by adopting the EPC model and this has caused the more and more delays for EPC projects proposed by personnel within the organisation and by ESCOs as the alternative to implement energy efficiency projects.
The brief idea on solutions that will spark the interest and to the ensure the EPC to progress faster in Malaysia are as follows:-
i) To resolve the barriers in the current government procurement procedures to implement EPC projects.
ii) In the same time, to mandate government buildings that has reached certain age to undergo energy efficiency retrofitting with the EPC model only as the government policy.
iii) Set the medium and long term targets and timeframe for the retrofitting projects implementation for government buildings.
iv) Authorise and empower a centralised agency to oversee the overall implementation of EPC projects – qualifications of ESCOs and competencies (i.e. energy auditors), facilitation for financing, technical advisory, procedures, contract documents, M&V and etc.
v) The education programme for local banks on EPC business model.
Malaysia’s nearest neighbours such as Thailand and other developed countries that have been mentioned in this article have been long benefited for the adoption of EPC model to drive the investments in energy efficiency projects with more and direct involvement of ESCOs with more conducive environment created by the government.
In these countries, ESCOs has been recognised as one of the important players to achieve faster results in implementing energy efficiency projects. It would be a wasted opportunity if Malaysia does not jump into the same ship because the potentials available are so huge for new jobs to be created for Malaysians.
