ESCO - a way to achieve green transformation with zero upfront investment

ESCO - a way to achieve green transformation with zero upfront investment

Inefficient infrastructure and limited investment budgets are two of the main challenges faced by medium and large industrial enterprises in Poland. Managers of these companies must find solutions that deliver immediate savings while ensuring long-term efficiency. In this context, the ESCO financing model emerges as a viable option — a method in which the client implements an investment project without using their own capital.

What is ESCO?

The financing model of ESCO (Energy Saving Company) is based on the fact that the ESCO company designs, implements, finances, and manages projects aimed at improving energy efficiency and reducing energy consumption in enterprises or institutions. A key element of this model is that the ESCO company assumes a significant part of the risk related to the execution and results of the project, including investment costs. In return, the contractor pays the ESCO company for the savings obtained from the implemented actions.

How does the ESCO model work?

The ESCO financing model is based on an agreement in which the ESCO company covers the costs of purchasing and installing equipment, modernizing infrastructure, and other activities aimed at improving energy efficiency. The client then pays the ESCO company a fixed amount or a percentage of the savings achieved thanks to the completed projects. This can be a fixed monthly or quarterly fee, dependent on the actual savings compared to previous energy costs, or a variable fee depending on the scale of financial benefits gained by the client.

This financing model brings many benefits to clients, including immediate savings, minimal or zero costs during the investment implementation, significantly reduced investment risk, and professional support in energy management. For ESCO companies, it is a way to generate income by providing energy efficiency services and encouraging enterprises to invest in green technologies.

The first and most attractive benefit offered by the ESCO model is immediate savings. Already in the first year after the investment, the modernized installation generates positive cash flows for the enterprise. This is especially important in today’s dynamic business environment where quick paybacks are crucial to maintaining competitiveness. In the ESCO model, the remuneration is usually dependent on the achieved results, which means that the company implementing and financing the investment is strongly motivated to achieve the greatest possible savings for the client.

The ESCO model eliminates the need to use the client’s own financial resources for investments. The enterprise does not have to engage its capital and can at the same time enjoy the benefits of improved energy efficiency. Additionally, a very important aspect increasing the attractiveness of the ESCO model is the possibility to account for such a project off-balance sheet.

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In the model of ESCO contract execution developed by us, these contracts do not have to increase the client’s liabilities and can be off-balance sheet. Moreover, the lack of involvement of own funds translates into immediate improvement of the client’s financial liquidity.
Ph.D. Eng. Piotr Danielski President of the Management Board
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Financial flow in the ESCO model, source: own study.

Benefits of the ESCO model

The esco company not only finances the investment but also ensures long-term improvement of the energy efficiency of the industrial installation. Thanks to this, the client can be sure that their infrastructure will operate optimally, which translates into operational stability and long-term profit growth for the enterprise. transferring responsibility for the investment implementation to the ESCO company also means reducing technical risk for the client. The ESCO company handles all stages – from diagnosis and design, through execution, to long-term servicing. For the client, this means peace of mind and certainty that the project will be carried out professionally and effectively.

In traditional investment models, the company commissioning a general contractor often has to face conflicting interests of that entity in relation to its own interests. With an agreed (usually lump-sum) remuneration for the general contractor, this entity must maintain the assumed level of project costs, which in a dynamically changing market environment often leads to a reduction in execution quality. In the case of ESCO, both the client and the ESCO company share an economic interest – maximizing savings. thus, within such an investment, the most important decision criterion is the ratio of economic benefits to the incurred investment expenditures, not only the costs. Additionally, the ESCO company does not end its role after the investment is completed. On the contrary, it often offers analysis of ancillary tasks that may contribute to further reduction of energy consumption. Thanks to this, enterprises can continuously improve their infrastructure, achieving greater savings in the longer term.

We’ve prepared an infographic with key information: DB Energy infographic - how does ESCO model work?

View infographic

Summary

The ESCO financing model is an ideal solution for enterprises seeking effective methods to improve the energy efficiency of their infrastructure. Thanks to immediate savings, financial optimization, long-term guarantee of efficiency improvement, and reduction of technical risk, esco enables polish companies to carry out green transformation without the need for large investments of their own financial resources. The value of the esco market in poland is steadily growing, which indicates increasing awareness and acceptance of this financing model. For polish entrepreneurs, the ESCO model is not only an opportunity for savings but also for sustainable development and increased competitiveness in the market.

Knowledge base

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