Necessary conditions to develop energy service company (esco) market in vietnam

Nội dung text: Necessary conditions to develop energy service company (esco) market in vietnam

1. NECESSARY CONDITIONS TO DEVELOP ENERGY SERVICE COMPANY (ESCO) MARKET IN VIETNAM MA. Phan Thi Trang phantranghl@gmail.com Green Growth Strategy Facility, Ministry of Planning and Investment, Hanoi, Vietnam Dr. Nguyen Quynh Hoa quynhhoa@neu.edu.vn Faculty of Planning and Development National Economics University, Hanoi, Vietnam Abstract The ESCO concept has been implemented in Vietnam since the beginning of 2000s, up to now there are 17 ESCOs however there is no an official ESCO market in Vietnam so far. By applying in deep interview method, the study finds out that difficulty in financial access, weak legal framework for ESCO contract implementation and lack of government supportive measures are the three common barriers for ESCO market development in the country. These lessons learned in government regulations and supportive measures were considered appropriate in Vietnam to first establish a formal ESCO market in the country and then expand and develop a market commensurate with the potential. Accordingly, the first step the Government should do is to shape the market through legal documents and guidelines for implementation. Vietnamese government should play a role in managing the quality of ESCO projects and providing financial support to ESCO enterprises and energy users, especially in the early stages of market entry. Keywords: Barriers of Development, Energy Service Company (ESCO), Necessary Conditions 1. Introduction The global economy has recorded a downward trend for amount of primary energy consumed to create one unit of economic output over the years. However, according to Climate Action Tracker, the results achieved so far are not enough to meet the goal of global warming as we expect. Therefore, all energy solutions need to be considered and implemented more intensively. Energy service companies (ESCO’s) are seen as an important vehicle to overcome some of the barriers in promoting energy efficiency (Vine, 2005). The important roles of ESCOs in 1014
2. improving energy efficiency and developing a green economy are also mentioned in other papers such as Stoughton & Venkatachalam, 2010 and Fang, Miller & Yeh, 2012. The definition and concept of the ESCO models was first mentioned in the Directive 2006/32/EC of the European Parliament and of the Council published in 2006 and the Discussion paper of the researchers Bleyl-Androschin & Ungerbock conducted in 2009. Vine (2005) conducted a survey aiming to collect information about ESCO's operations in 38 countries outside of the United States. The survey results showed that despite the differences in market characteristic, barriers are common in different countries. According to the research, the key barriers are financial challenges, perception of risk, lack of information and understanding, shortage or conflict of government regulations and lack of government support. These barriers were also reported in previous ESCO studies by other researchers, such as Bertoldi et al. (2003), Biermann (2001), Fraser (1996), Murakoshi et al. (2000), Poole and Geller (1997), Schleich et al. (2001), Singer & Lockhart (2002) as cited by Vine (2005). Besides the barriers, a variety of methodologies have been used to analyze the key factors that lead to successful ESCO market development in different countries or regions. Vreeken (2012) conducted a master thesis on ESCO market development in Netherlands - which at that time was still an undeveloped ESCO market - though the analysis of experiences from the developed ESCO markets including Germany, France and Austria. According to Vreeken (2012), the main successful drivers for developing ESCO market could be categorized into three groups: government regulation, stimulation measures and ESCO sector initiates. Based on the separate analysis of key drivers lead each country mentioned above to be success in developing the ESCO market, Vreeken synthesized and gave recommendations of what can be applied for the Netherland case. Bertoldi & Boza-Kiss (2017) reviewed the ESCO industry in European through conducting a large-scale expert survey and analysing the key characteristics as well as drivers and barriers of energy service markets in 43 European countries. According to Bertoldi & Boza-Kiss, market forces, policy measures, regulations and financial solutions are the main factor that driven the ESCO market. Hamed (2018) performed a research using strength, weakness, opportunity and threat analysis (SWOT) and internal and external factors matrix to prove that WO strategies is appropriate and necessary for Iran to promote the development of the ESCO market in the country. The ESCO concept has been implemented in Vietnam since the beginning of 2000s (Hansen, Langlois & Bertoldi, 2009). Although Vietnam is considered as a potential ESCO market (Strahil et al, 2014), an analysis about the potential to development ESCO model in Vietnam has not been conducted yet. By using 1015
3. quantitative methodology, the study aims to identify the necessary conditions to develop Energy Service Company model (ESCO) in Vietnam 2. Data and Method 2.1. Method The first research method for the study is desk research on scientific reports, working papers, books and relevant websites. This step aims to provide ESCOs understanding and knowledge in general and Vietnamese ESCO market in particular, thereby better prepare for the in-depth interviews. The second chosen method is in-depth interviews of key stakeholders. A questionnaire is designed and sent in advance to interviewees who are outstanding experts of ESCO markets from government and private sector as well as leaders and employees in the energy service companies. After that, a face-to-face and/or telephone interview will be undertaken. The aim of the interviews is to identify the advantages and disadvantages of the ESCO implementation in practice. The in-depth interviews were conducted through the following steps: Step1: The 1st round in-depth interview The 1st round in-depth interview was implemented in August 2018 through 03 face-to-face interviews with three selected key persons from both public and private sectors including: 01 Deputy Director of Department of Science, Education, Natural Resources and Environment, Ministry of Planning and Investment; 01 Deputy Director of Department of Science, Technology and Energy Efficiency, Ministry of Industry and Trade; and 01 national expert on energy working for RCEE-NIRAS – an enterprise applying ESCO contract in Vietnam. The 1st round in-depth interview aiming to get knowledge on ESCO background, review existing legal framework and develop the questionnaire for the research. Step 2: The online survey Based on the result of the first round interview, a survey was developed and sent to key person from 17 enterprises running ESCO model in Vietnam. The following questions are included in the questionnaire to collect basic information of enterprises applying the ESCO model and identify the main barriers in the implementation of ESCO projects by enterprises in Vietnam: - What is the size of your company? (Large, Medium & Small or Super small) - What sectors are targeted by your company? - What energy services are offered by your company? - What are the most important barriers facing the development in your company? 1016
4. These questions are consistent with the survey conducted in the research of Vine (2005). The barriers listed in the answer sheet were common barriers, according to survey results in 38 countries by Edward Vine in 2005. Respondents were asked to rate the importance of the barrier to their company on a scale of 0 (unaffected) to 5 (significant affect). The survey was implemented in September 2018; The questionnaire was developed as an online form of multiple-choice tests and sent to 17 key contacts in 17 enterprises applying ESCO model. The interviewees including: 05 Directors, 01 Deputy Director, 06 Managers/ Deputy Managers of Marketing and Communication Department; 03 managers of Sales Department; and 02 managers of Human Resources Department were selected based on personal networking of the writer and recommendations from RCEE-NIRAS expert. After 2 weeks sending the questionnaires, the researcher collected 17/17 answer sheets from enterprise representatives as mentioned above. Step 3: The 2nd round in-depth interview The 2nd round interview aiming to share the questionnaires result and then discuss on policy recommendation for the government of Vietnam was implemented at the end of September 2018 through 01 telephone interview with the Deputy Director of DSENRE, MPI representing for public sector and 01 face-to-face interview with the national expert of RCEE-NIRAS representing for private sector. 2.2. Data source: The basic information (size, targeted sectors, provided services ) of ESCO enterprises in Vietnam using in this study are taken from the survey conducted by the author on 17 enterprises running ESCO model in September 2018. 3. Results 3.1. Vietnam ESCO market status There is no an official ESCO market in Vietnam so far. The “unofficial ESCO market” in Vietnam means that although the market already exists (reflected by the appearance of enterprises and its clients applying ESCO contract), it has not been legalized so far (shown through the lack of definitions and criteria for classification of ESCO in legal documents). Since the legal framework that directly regulates ESCO operation hasn’t been established yet, there is no set of criteria to identify and classify the current enterprises running ESCO business model in Vietnam. Enterprises surveyed within the framework of this thesis are companies applying ESCO model through signing ESCO contracts with energy users. 1017
5. No. of ESCO in Vietnam period 1995 - 2016 18 16 14 12 10 8 6 4 2 0 Figure 1: Number of ESCOs in Vietnam Source: RCEE-NIRAS in 2018 The survey under this study conducted in September 2018 found that most of the enterprises running ESCO model in Vietnam are small and medium enterprises, except for EVN and Solar BK. The energy service provided in Vietnam mainly focus on industry (seafood processing, cement production ) and commercial buildings. The financial sources for ESCO investment in Vietnam come mostly from private sector (14 private enterprises out of 17 enterprises surveyed, accounting for 81%). Figure 2: Capital source of ESCO enterprises in Vietnam Source: Calculated from data’s survey 1018
6. The energy services provided by ESCO in Vietnam market are shown at the Figure 3. It can be said that the energy services provided in the Vietnamese market so far is not diversified. Except for EVN and Solar BK, other enterprises with limited capital, mainly provide energy consulting services and/or low value EE equipment packages. The survey on 17 enterprises running ESCO model shows that energy consultancy is the most popular energy service in Vietnam market. Accordingly, energy services such as energy audit, technical & financial analysis and design consultancy are provided by 13 out of 17 enterprises, accounting for 76.5 percent. Besides, services related to energy efficiency equipment such as equipment supply, installation, operation & management (O&M) are also heavily invested in the market, with 64.7% ESCO enterprises answered EE equipment supply are their main service. Due to the small scale of investment and simple technology used, the average contract term for providing EE solutions in Vietnam ranges from one to five years. Figure 3: Energy services provided by ESCOs in Vietnam Source: Calculated from data’s survey On the demand side, according to the Law on Energy Efficiency and Conservation, more than 2000 key energy users are required to carry out energy audits every three years and must develop and submit the annual and five-year plan of energy savings. Besides, enterprises need to implement energy savings methods to ensure energy consumption does not exceed the benchmark values in the same industry and/or manufacturing sector. In addition to complying with government regulations on energy efficiency, the implementation of energy solutions will help enterprises reduce costs and increase competitiveness in the market. 1019
7. 3.2. Barriers of ESCOs’ market development in Vietnam 17 ESCOs in Vietnam were invited to rate the importance of barriers to business development on a scale from 0 (unimportant) to 5 (very important). To determine which barriers, have the greatest impact on businesses, the scores for these barriers will be calculated as follows: Sum of score rated by each enterprise for barrieri Score of barrieri = x 100% 5 (maximum score) * 17 enterprises surveyed The results of questionnaires show that difficulty in financial access, weak legal framework for ESCO contract implementation and lack of government supportive measures are the three common barriers for ESCO market development in the country. Financial access with the score of 88.2% is considered the biggest barrier for ESCO businesses. Similar to other markets in the world, financial access and investment attraction of ESCO enterprises in Vietnam are difficult for many reasons. Firstly, it is not easy for banks to provide loans to small and medium enterprises, especially the type of enterprises that do not have clear regulations such as ESCOs, because of the high risk of loan repayment. ESCOs do not have fixed assets for mortgage, while the banks are currently not accepting savings contracts of EPC projects as collateral for loans. Secondly, the lack of awareness of ESCOs concept and energy efficiency technologies from stakeholders leads to a low confidence index for this kind of business. Figure 4: ESCO market barriers in Vietnam Source: Calculated from data’s survey 1020
8. The weak legal framework for ESCO operation was voted as the second important barrier by interviewees with the score of 82.4%. The lack of legal documents to regulate, guide and support the operation of ESCO model as well as a monitoring and evaluation agency to manage ESCO enterprises increases the risk for both ESCOs and their clients. Because regulations on EPC contract implementation, especially profit-sharing mechanism is unclear, most of the contracts between ESCO and customers are signed by trust. In addition, due to a lack of arbitration, conflicts between the parties, if any, are resolved in accordance with the civil law. In fact, the unclear regulation has led to some situations where ESCOs could not recover capital after investing equipment and implementing contract. On the other hand, the available regulations on accounting, asset transferring and tendering in Vietnam are in conflict with ESCO contracts. For example, the current regulations regulated that state-owned companies must account for revenues and expenditures in accordance with state regulations, where there are no regulations on accounts that can enter the entry for ESCO installment payment. The common ESCO contracts stipulate that after the termination of the contract, the property will be transferred to the customer at an agreed price. This clause is in conflict with both current asset valuation and procurement regulations, not to mention for ESCO business is state enterprises such as EVN, the transfer of public assets is extremely complex. The lack of government supports, particularly corporate income tax, import tax and interest incentives, is also a major challenge for ESCO enterprises reflected through the score of 68.2%. Although running a different operating model and providing specific services through special types of contract, ESCOs in Vietnam currently are regulated by the similar tax, interest rate and procurement procedure regulations as normal business models. In addition to the three major barriers mentioned above, the development of the ESCO market in Vietnam is also limited by the high price of energy efficiency equipment and technology due to high import taxes (leads to increase cost and then limit the energy services to provide); the low electricity price (leads to decrease benefit) and; the lack of information, knowledge and awareness of ESCOs and energy efficiency solutions (leads to reduce confidence and corporation opportunities) 4. Policy recommendations and conclusion Based on an analysis of international experiences, current situation and barriers in Vietnam, the authors suggest recommendations aim to expand and develop the ESCO market in the country as follow: 1021
9. Government regulations It can be seen that the current energy law and circulars of the Vietnamese government have fuelled the demand for energy services in general. This is considered as the initial advantage to build and expand the ESCO market in Vietnam. However, as analysed in previous sections, the lack of legal documents on ESCO projects caused difficulties in lending loans of financial institutions, entering energy service market of enterprises and making decisions in using energy services provided by ESCOs of energy users. Therefore, the first action should be legalizing ESCO definition and model concept. In Vietnam case, ESCO policy formulation should be implemented by the Ministry of Industry and Trade with the involvement of relevant ministries such as the Ministry of Planning and Investment and the Ministry of Finance) and financial and technical supports from international organization such as World Bank, ADB Then, in addition to business registration as usual in accordance with the Ministry of Planning and Investment regulations, enterprises that meet the criteria defined in the law will be registered in the ESCO business list. In addition, the issuance of regulations on the implementation of ESCO contracts, standard contract framework as well as the arbitration mechanism is necessary to reduce risks and ensure the rights of involved parties including ESCO enterprises, energy users and financial institutions. On the other hand, revising and updating government regulations on accounting, bidding and asset management systems should be implemented soon to fix the conflict between existing regulations and terms of ESCO contract models. Moreover, it is important to develop and establish a measurement and verification system (M&V) as well as protocols for measuring energy savings. Based on this system, the appraisal of investment projects in energy efficiency will be carried out reliably and become a guarantee basis for proposing a plan to attract funding for both ESCOs and their clients. Government supports In order to promote the ESCO market, the Government should consider offering tax incentives and financial support to ESCO enterprises as well as energy users. The Vietnamese government can refer to the corporate income tax incentives for ESCO businesses from the policies of China and Korea such as tax exemptions in the first years and then reduction at a certain level for the next years to attract the attention of businesses on providing ESCO model. Besides, Vietnam energy market is strongly dependent on technology imports, so in addition to the income tax and 1022
10. VAT incentives, the Vietnamese government should consider giving preferential import taxes to lower the price of energy efficiency equipment, thereby reduce the costs of ESCO enterprises. On the other hand, although energy efficiency is a priority task mentioned in legal documents, the allocation of state budget for investment activities in this area is limited. Therefore, the appropriate financial sources for developing energy efficiency in Vietnam should be foreign investment and capitals from private sector. The World Bank is currently the main partner of Vietnam in investing to improve energy efficiency. In addition, Deutsche Gesellschaft fỹr Internationale Zusammenarbeit (GIZ), Asian Development Bank (ADB), Green Investment Fund (GIF), Green Climate Fund (GCF) and Global Environment Facility (GEF) are also active partners in supporting Vietnam in this field. However, the government of Vietnam needs to establish more attractive conditions as well as increase commitment and transparency to continue to attract non-refundable investments or low-cost loans from these international organizations, especially in the context of foreign aid to Vietnam has fallen sharply because Vietnam has become a middle-income country since 2010. The government should establish a financial facility under the management of Ministry of Industry and Trade (or Ministry of Planning and Investment) to attract, coordinate and provide financial sources for energy efficiency projects in general and ESCO project in particular. This fund may focus on offering financial solutions or acting as a multi-functional fund aim to provide financial, technical and legal support for ESCO businesses. The facility operation might be derived from the model KEA from South Korea’s government. In addition, aiming to overcome the financial barriers for ESCOs and energy users, the government should coordinate with the State Bank and commercial banks to issue preferential policies such as lowering the interest rate and increasing the repayment period for loans for investment in energy efficiency. ESCO Association According to international experiences, the establishment of an ESCO association is an effective way to increase market efficiency. This agency will be responsible for managing registered ESCO enterprises, evaluation and appraising energy service projects, connecting stakeholders in the markets. The ESCO Association should be established and managed by the Ministry of Industry and Trade and in close coordinate with the financial facility that was proposed in the previous section. 1023
11. Table 1: Summary of policy recommendations Key barrier Policy recommendation Difficult financing access - Providing financial sources from state budget and for ESCOs and energy users international organization; - Issuing regulations on loans incentives (low-interest and long-term repayment); - Establishing a financial support facility; Weak legal framework for - Legalizing ESCO definition, model concept; ESCO contract - Issuing regulations on the implementation of ESCO implementation contracts, developing standard contract framework, arbitration mechanism and M&V system; - Revising and updating regulations on accounting, bidding and asset transfer; Lack of government - Providing tax incentives; support - Establishing a financial support facility/ ESCO Association; - Issuing low-interest and long-term loans; High EE Equipment price - Encouraging domestic technology development; - Reducing import tax on energy efficiency technology and equipment; Lack of information and - Organizing training courses; awareness of ESCOs and EE Technologies Low electricity price Although the Government together with EVN have a roadmap to increase electricity prices over time, the price range is still low. I assess this barrier is difficult to overcome in Vietnam by the strong opposition in raising electricity prices from normal enterprises, household and individual. 1024
12. 5. References 1. Bertoldi, P., & Boza-Kiss, B., (2017) Analysis of barriers and drivers for the development of the ESCO markets in Europe. Energy Policy, Elsevier, 107(C), 345-355. 2. Bleyl-Androschin, J. W., & Ungerbửck, R., (2009). What is energy contracting (ESCO services)? Concept, definition, two basic business model. Grazer Energieagentur GmbH, Graz. 3. European Commission. (2012). Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on energy end-use efficiency and energy services and repealing Council Directive 93/76/EEC. Brussels, Belgium: European Council. 4. Fang, W. S., Miller, S. M., & Yeh, C. C., (2012) The effect of ESCOs on energy use. Energy Policy, Elsevier, 51(C), 558-568. 5. Hamed, H. J., (2018) Strategies for Development of Energy Services Companies in Iran. International Journal of Energy Economics and Policy, Econjournals, 8(1), 82-89. 6. Hansen, S., Langlois, P., & Bertoldi, P., (ed.) (2009) ESCO's around the world. Lessons learned in 49 countries. Lilburn, The Fairmont Press. 7. Stoughton, M., & Venkatachalam, A., (2010) Green Services and Emergence and Recovery from the Global Economic Slowdown in Developing Asian Economies. ADBI Working Papers 209, Asian Đevelopment Bank Institute. 8. Strahil, P., Labanca, N., Bertoldi, P., Serrenho, T., Cahill, C., & Boza-Kis, B. (ed.) (2014). ESCO Market Report for Non-European Countries 2013. Joint Research Center (JRC). 9. Vine, E., (2005) An international survey of the energy service company (ESCO) industry. Energy Policy, Elsevier, 33(5), 691-704. 10. Vreeken, R., (2012) The developed energy service company market in the European Union. What lessons can be drawn for the development of the Dutch ESCO market? master thesis, Utrecht University. 1025