Shared savings – the alternative to public investment

In several previous opinion articles I have already talked about the business model of shared savings, led by Energy Service Companies (ESCo), as an alternative to public investment. Now it seems appropriate to do so in more detail because I believe it will become increasingly important soon.

This model is linked to the need to increase energy efficiency (EE) in the public sector, due to climate change and carbon emissions concerns. This goal is at the origin of the Directive 2006/32/EC of the European Parliament (EP) and of Council “on energy end-use efficiency and energy services”. This directive sets an EE target of 9% for Member States and encourages them to build a market for energy services, creating the necessary mechanisms for the private sector to collaborate in the effort to reduce energy consumption.

This is a turning point, as central and local administrations are large energy consumers and do not always have the capacity to invest in EE. Quoting DL50/2021, which establishes the legal framework for energy efficiency management contracts to be concluded between the State and energy service companies, “energy consumption in buildings accounts for 40% of total energy consumption in the European Union, and 75% of buildings are not energy efficient, which means that excessive energy consumption is necessary to ensure the comfort and safety of people and property”. From this legal framework emanate the rules for the creation of an ESCo, whose qualification as such is the responsibility of the DGEG (the Portuguese energy and geology agency).

How does the model work?

The efficiency processes of an ESCo are based on a very simple principle: saving energy. In other words, once a project has been implemented, the object (e.g., street lighting) must consume less than initailly observed, thus promoting savings.

The ESCo makes the necessary investment and ensures the maintenance of the infrastructure and is only remunerated for the gains resulting from the energy savings (which are also financial), which are shared with the public entity. In other words, the municipality has no investment costs and receives a percentage of the guaranteed savings, while the ESCo assumes the risk and keeps the rest of the energy savings. This amount, over the course of the contract, will pay for the initial investment and operating costs.

By placing the risk and investment on the side of the private ESCo, this model has been chosen by municipalities for public tenders aimed to replacing traditional street lighting with LED technology, thus accelerating the adoption of this measure that allows energy efficiency gains of around 70%, or even higher if it includes the implementation of smart management lighting systems, and contributes to environmental and public treasury sustainability.  It is a “win-win-win” model: for the public sector, for the private sector and for all of us (citizens), with the great advantage of being transparent and competitive.

ARQUILED’s role in the process

At ARQUILED we realized the benefits of this model early on and have been actively bringing it to life in innovative street lighting projects implemented in municipalities such as Valongo, Tomar or, more recently, Palmela, to name just a few.

We work directly with the ESCo:

• Assessing the municipalities’ street lighting systems;
• Conducting energy efficiency studies to define the baseline energy consumption to be used to measure future savings;
• Designing the best technical solution.

One final note: in March 2022, in response to the global energy market disruption caused by Russia’s invasion of Ukraine, the European Commission created the RePowerEU program, which raised the energy efficiency target from 9% to 13% by 2030. Therefore, it is to be expected that the ESCo business model will become even more attractive and necessary, so that the measures to achieve this target can be implemented.

Miguel Allen Lima
ARQUILED CEO