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close this bookPhotovoltaic Household Electrification Programs - Best Practices (WB)
close this folderInstitutional models
View the document(introduction...)
View the documentEnergy service company (ESCO)
View the documentLeasing arrangements
View the documentConsumer financing
View the documentCash sales
View the documentThe role of governments and donor agencies
View the documentRole of the world bank and other donors

Energy service company (ESCO)

5.3 An ESCO sells energy services but retains ownership of the system that provides them—that is, the hardware is neither sold nor leased. An electric utility is, by definition, an ESCO. Cooperatives, NGOs, and private companies can also function as ESCOs. Working examples of such ESCOs include the Tuvalu Solar Electric Cooperative Society in the Pacific Islands and SOLUZ in the Dominican Republic (see Box 5-1). Typically, an ESCO procures solar home systems in bulk from regional distributors or on the international market, installs the system and services the power-generating components (which, at a minimum, include the PV module and support structure). The ESCO is also responsible for financial management and administration. ESCOs may also retain ownership of controllers, inverters, and batteries, so that customers pay only for energy service.

5.4 The ESCO model has several advantages. First, the monthly cost to the consumer can be reduced by spreading the cost of the solar home system over a period comparable to its physical life (ten years or more). The smaller monthly payment makes the system more affordable, allows the ESCO to serve a larger population within its service territory, and creates a "critical mass" of demand. A large consumer base can help the ESCO provide cost-effective maintenance and administrative service and reduced equipment costs, through standardization and high-volume purchasing.

5.5 By aggregating demand, the ESCO can obtain favorable financing terms that are not generally available to individual consumers. ESCOs are often eligible for low-interest loans or grants from private or public sources and are generally considered to be better risks and more creditworthy than individual rural customers. In addition, the transaction costs associated with one large loan are lower than they are for a large number of small consumer loans. The favorable terms can then be passed on to customers in the form of lower service fees.

5.6 The ESCO is a useful model for delivering least-cost rural energy services in areas where offgrid household PV initiatives can be coordinated with conventional electrification efforts by electric utilities.

5.7 Despite its attractive features, the ESCO model does present some disadvantages. First, an ESCO generally requires an existing organization, since setting up a new ESCO is difficult and expensive. Second, a sustainable ESCO model will need a broad base of local support. A handful of temporary personnel, no matter how qualified, will not be able to guarantee strong institutional capability. Third, a full cost-recovery mechanism must be in place in order to ensure the program's sustainability. Programs that rely on grant funds for initial capital investment, must, at a minimum, secure payment to cover recurrent costs. Fourth, since customers do not own their PV systems, the product may be misused.

5.8 Operation of an ESCO also requires a broad range of technical and business capabilities within a single organization, as well as a long-term view of debt servicing that may involve repayment schedules of ten years or more. The decades of experience with grid-based rural electrification programs provide some key lessons for ESCOs.

· The ESCO must be operated as a business with gross income greater than gross expenses.

· ESCO users should participate in capital formation, either through cooperatives or through significant contributions to the initial costs of the system. This will instill a sense of ownership in participants and reduce dependence on outside financing.

· While it is preferable for user or participant fees to include all costs, including capital recovery, at a minimum they must cover the operating costs of the service and be collected regularly.

· The staff must be proficient in business management, photovoltaic systems installation, trouble-shooting and repair, and routine maintenance.

· The ESCO must adopt technical and operating standards to ensure that good quality components are procured, maintenance and repair procedures are simple, and the cost of stocking spare parts is minimized.

· The ESCO staff must have access to information, technical assistance, and continued training in order to maintain their technical and managerial effectiveness.

· Fiscal and technical oversight is required to maintain financial "due diligence" and to detect and correct problems with service resulting from poor management or technical error (Waddle 1994).

Incorporating these features in the design of ESCO programs increases the likelihood that customers will receive efficient, effective services.

5.9 Since ESCO administration can impose significant overhead costs on a household PV program, a critical mass of customers is required for a sustainable program. If there are not enough participants, the administrative cost burden will overwhelm the program and make the systems unaffordable. In a small 600-household program proposed by Sarvodaya in the Southern Province of Sri Lanka, levelized administrative costs are estimated at Rs. 1,750/year per system ($35), which is equivalent to 12 percent of the initial installed cost. This sum covers the costs of collecting fees, administration, service technicians (one per 60 systems), fuel for transporting components, motorcycles and bicycles, office supplies, tool kits, and training. It approximates the 10 percent administrative charge levied by the Rural Electric Cooperatives in the Philippines for their relatively small household PV programs. Instead, in parts of Indonesia, where many more solar home systems are deployed, consumers are only charged a shipping and handling fee of Rp. 25,000 ($12.50) at the time of installation and a bill collection fee of Rp. 6,000/year per system (less than $3, or about 0.5 percent of the installed cost). Maintenance costs are borne directly by the customer.

Box 5-1
Examples of Solar Home System Projects Implemented by ESCO

SOLUZ Inc., a private US company working with Industrias Electricas belle Vista in the Dominican Republic, operates as a commercial, for-profit venture (Hansen 1994). Within months of its creation in early 1994, SOLUZ was providing PV systems services to 100 customers in the Dominican Republic. The company expects a ten-fold increase in customers by the end of 1995.

Five rural electric cooperatives in the Philippines serve as ESCOs for solar home systems. The cooperatives own the PV modules, the supports, and the controllers; consumers own the remaining components and pay a fixed monthly fee to cover loan repayments plus administrative and maintenance costs.

The ESCO approach is also used by the Tuvalu Solar Electric Cooperative Society and in other PV systems projects in the Pacific Islands. Consumers pay a $40 connection fee, plus a monthly fee of $5 for a one-panel system ($6.10 for a two-panel system) to cover administrative and service expenses; the ESCOs absorb the cost of the PV module. These programs depend on government or donor startup funds and therefore are not financially self-supporting.

Two US utilities, Southern California Edison and Idaho Power, have pilot programs that offer their customers grid-quality electricity, using relatively large PV systems (the minimum system size is 1 kWp). The utility owns the PV system and provides installation and maintenance. The consumers pay a 5 percent connection fee and 1.6 percent of the net installed cost per month.