Energy Service Companies (ESCOs) for Energy

Efficiency – Uganda Market Guide

Sector Network Energy SSA – Working Group Energy Efficiency

Tuesday, 31.01.2023
Agenda
1. Working Group Energy Efficiency

2. Presentation: ESCOs for Energy Efficiency –

Uganda Market Guide

3. Discussion

Page 2 January 31, 2023 ESCOs for Energy Efficiency – Uganda Market Guide
Overview of the WG EE exchange series
• Working group speakers
• José Mestre – GET.pro Mozambique
• Kilian Blumenthal – WE4F Kenya

• Communication channels Working Group

• MS Teams Group
• Email list

• Exchange Series on Energy Efficiency topics

• Connecting GIZ colleagues working on similar topics
• Short presentation “out of your project” followed by Q&A
• We are always looking for presenters to continue with
this format
• Interested? Contact kilian.blumenthal@giz.de

Page 3 January 31, 2023 ESCOs for Energy Efficiency – Uganda Market Guide
Exchange Series #1: ESCOs for EE – Uganda Market Guide

• Today’s presentation: Open Capital Uganda

• Contracted by WE4F to assess the opportunities, set up and
financing for ESCOSs in Uganda.
• Market guide is ready, but is currently edited from a media
agency before publishing.
• Presenting: Perez Magoola, Senior Analyst Open Capital

Page 4 January 31, 2023 ESCOs for Energy Efficiency – Uganda Market Guide
 DRAFT – FOR DISCUSSION ONLY

Energy Service Companies (ESCO)

for Energy Efficiency in UG
Insights from market guide
January 2023

Supported by:

1
 DRAFT – FOR DISCUSSION ONLY

• About Open Capital

• Background and context of the study

• Introduction to ESCOs

Contents
• Market opportunities for ESCOs

• Incentives to set-up ESCOs in Uganda

• ESCO financing landscape

• Discussion

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About Open Capital DRAFT – FOR DISCUSSION ONLY

Open Capital is a management consulting and financial advisory

firm committed to Africa’s growth
• Global-quality advisory business in Africa
• Blend of investment, finance, & management consulting
Who we are skills
• Capital raising expertise and global investor network
>500 investors
• Founded 2010 in Nairobi
• Team of 150+ with 4 offices in Nairobi, Kampala,
Lusaka and Lagos (with team also in Ghana, Senegal,
Experience
and Ivory Coast)
• Deep market experience in 27 SSA countries
• 1,200+ client projects, over USD 1.2 B raised

• Deep local market expertise engaging businesses,

investors, and development organizations
Unique
• Geographic and sector expertise
differentiators
• Strong team with a blend of local and international OCA Team Presence
consulting expertise Completed engagements
3
Background & Context
We assessed the ESCO market potential & opportunities in UG,
this presentation is a summary of the full report
Objective of the Market Guide
• Provide private sector actors with insights into the
electricity sector and institutional frameworks relevant
for ESCOs in Uganda
• Explore the market potential and analyze market
dynamics & opportunities for ESCOs in Uganda
• Highlight the procedures to be followed in setting up
ESCOs, such as licensing and necessary permits
• Define financing models & arrangements available for
ESCOs in Uganda
This presentation presents a summary of the full report which will be published in the next
few weeks
4
DRAFT – FOR DISCUSSION ONLY
Methodology
• Conducted secondary research
• Held consultations with key stakeholders
• Analyzed the market landscape of ESCOs in Uganda
to understand the models being implemented and
potential opportunities that can be leveraged
• Consolidated and synthesized learnings into a 60-70
slide report
• Conducting a validation workshop to present
findings, incorporate feedback and finalize the
market guide
Introduction to ESCOs DRAFT – FOR DISCUSSION ONLY

ESCOs provide technology and finance services to save energy,

typically through 2 Energy Performance Contract models
• ESCOs are businesses that provide ESCOs can adopt either a shared or guaranteed savings
technology & finance services to model; guaranteed savings model is more widely used
replace or improve existing energy Shared savings model1,2
ESCO facilities targeted at achieving energy
Bank ESCO Client
Definition savings.1,2 Loan
Payment based
on savings

• Consultancy/technically based ESCOs:

Consulting firms that have a general
expertise in engineering or energy Fixed repayment ESCO implements
efficiency project

• Vendor/technology-based ESCOs:
Energy technology suppliers, usually Guaranteed savings model1,2
ESCO with a connection to energy-efficiency Bank Client ESCO
Categories equipment manufacturer Loan Payment based on savings

• Energy audit
• Finance
ESCO • Procurement Fixed repayment ESCO implements project &
Services • Monitoring provides savings guarantee

5
Introduction to ESCOs DRAFT – FOR DISCUSSION ONLY

Energy access in UG has rapidly grown, however, high energy

costs are creating a strong business case for ESCOs
Uganda’s energy access has rapidly grown by 30% due Uganda implements cost reflective tariffs which have
to government investment in electricity generation led to increased tariffs in recent years
National access to electricity in Uganda1
% connected • Gov’t is heavily leveraged through
60% 57% borrowing to construct electricity
generation & transmission assets
High • Several cost overruns on recent
40% 27% 45% investment projects e.g., the Karuma hydropower
47%
40% costs project
30% 35%
20% • Foreign investors provide most of the
financing in foreign currency
• Fluctuations in foreign exchange rates
0% Fluctuating lead to forex losses which are
2015 2016 2017 2018 2019 2020 2021 forex rates recovered through tariffs
• Inflation is a key driver to high tariffs
National electricity access has grown mostly due to off-grid
in UG which experiences one of the
sources coupled with government investment in
highest inflation rates in the region
hydropower, solar and biomass
Inflation • Tariffs are adjusted to reflect inflation
rates effects on the price of fuel
6 Sources: 1 MEMD, National Electricity Survey for ERT III ; 2 AfDB, Uganda Launches Last-mile Connectivity, 2021 [Link] ; 3 MoFPED, The impact of COVID-19 on Uganda’s Energy Sector, 2021 [Link] ; 4
ERA, Uganda’s Electricity Supply, 2021 [Link] ; 5 Africa Barometer, 2021 [Link]
Market opportunity for ESCOs DRAFT – FOR DISCUSSION ONLY

By providing reliable power & low-cost solutions, ESCOs have the

potential to generate energy savings of USD 160M by 2030 in UG
ESCOs can support companies manage unreliable Studies suggest ESCOs can support companies achieve
power supply, reduce energy costs and CO2 emissions energy savings worth USD 160M1
Sectors Achievable Tariff Energy
Unreliable power supply: Consumers continue economic (USD/kWh) savings
to face power outages (unscheduled electricity savings (GWh) (USD)
interruptions) which affect productivity3
Residential 327 0.180 59M

High electricity costs: Some energy customer

categories (commercial and medium industrial Commercial 209 0.169 35M
customers) grapple with high energy costs due
to relatively high electricity tariffs3

Industry 516 0.127 66M

Environmental gains: Industries using diesel
generators (DG) as a main source of electricity
or as a backup, are switching to captive solar PV Total 1,052 160M
to reduce costs as well as their CO2 emissions3
7 Source: 1 USAID, Energy Efficiency Roadmap For Uganda, 2017 [Link] ; 2 UMEME, Q2 2022 Tariffs [Link] ; 3 OCA consultations
Market opportunity for ESCOs DRAFT – FOR DISCUSSION ONLY

Commercial and medium industrial energy segments present the

highest market potential for ESCO services
Commercial & medium industrial segments have the highest market potential mainly due to high energy costs
Segments Residential Commercial Medium industrial Large industrial
Characteristics • Low voltage single • 3-phase low voltage • Low voltage • High voltage 11kV or
phase supplied at load ≤ 100A supplied supplied at 415V; 33kV; max demand
240V at 415V max demand of up >500kVA but ≤
to 500kVA 1,500kVA
Average Tariff 0.18 0.169 0.155 0.099
Potential Unexplored even in Highest potential for UG ESCOs given high Lower potential due to
demand advanced markets energy cost and type of energy needs low tariff costs
ESCO solutions can be grouped into three categories:
1• Optimizing energy usage: ESCOs 2• Installing energy efficient 3• Installing renewable energy
can support agribusinesses to technology: ESCOs can support sources: ESCOs can support
understand their energy usage & agribusinesses to identify and agribusinesses assess, identify and
costs, providing key information to install energy efficient, and install a suitable renewable energy
optimize their operations monitoring equipment sources
Agri-businesses in diary, fish processing & coffee sectors present the highest opportunities in the commercial
segment while flower farms, tea factories & abattoirs present the highest opportunities in the medium industrial
8 Sources: 1 GET.Invest, Captive Power: Uganda Developer Guide, 2018 [Link] ; 2 OCA consultations
Market opportunity for ESCOs DRAFT – FOR DISCUSSION ONLY

ESCOs leverage non-EPC models due to limitations of EPC models;

modifications to current models can support ESCOs scale
Currently there are no companies in UG that Limitations of traditional ESCO models
predominantly operate a conventional EPC-ESCO model
• Disputes arising from energy savings measurement
in the market1
and the resulting monetary savings
Model Description • Most clients in developing countries such as UG are
often less financially viable hence prone to payment
Energy company arranges financing,
Lease to defaults
designs, installs, operates, and maintains
Own model 2 • The lack of a financial guarantee in a non-performing
an energy efficiency facility
situation may lead to ESCOs defaulting on loan
repayment
The owner pays for the energy efficiency
Direct Modifications to existing models to scale ESCOs
service upfront, financed using their own
purchase 2 capital or external financing • Offer a performance and technical guarantee on
minimum energy savings or the output of a power
facility
The energy company arranges financing • Align with the client on the required M&V devices to
through a third party, designs, installs, measure the achieved energy savings
Tripartite
operates and maintains a captive power • Request for refundable deposits to protect the ESCO
agreement2
plant on either the client’s premises or in case the client defaults or pays late
nearby premises
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Market opportunity for ESCOs DRAFT – FOR DISCUSSION ONLY

Gov’t and dev partners can support the growth and scalability of
ESCOs by strengthening the enabling environment
Gov’t & dev orgs can create the enabling environment GoU through MEMD, is looking to set up a super ESCO
High level
structure of ESCOs
Develop financing support structures or
Economic & funding mechanisms Super ESCO
financial Customers:
Investors Super ESCO Private
Sector
Develop more energy efficiency
programs and institutional laws Government
Regulatory

The super ESCO is expected to:

Promote awareness of the energy
efficiency benefits and services • Function as a dev’t pillar for private ESCOs
Social
• Create a pipeline for large scale projects
• Create a regulatory environment for ESCOs
Build energy efficiency capacity and
human resources • Finance potential large scale projects
Technical
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Incentives to set up ESCOs in UG
UG has several incentives to catalyze growth of ESCOs with
additional policy developments expected spur further growth
Various tax exemptions are in place to catalyze the
development of ESCO services
• 50% deduction for first time
investors who set up plants
Income tax
• Accelerated depreciation of 20-40%
allowances
for plant, equipment & machinery
used in certain industries
• VAT exemptions for LED lights,
Value Added panels & other equipment
Tax (VAT) • Supply of goods & services to
exemptions contractors in RE projects is VAT
exempt
• Specialised equipment for the
development & generation of solar
Custom Duty
and wind energy, including
exemptions
accessories which use and/or store
solar power, are exempt
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DRAFT – FOR DISCUSSION ONLY
Ongoing policy developments are expected to further
catalyze the development of ESCOs
Energy • Expected to set out minimum
efficiency performance requirements for
energy equipment & mandate large
and
industries to conduct energy audits,
conservation
bill and install management systems
• Bill prescribes the circumstances
The
under which a holder of a
electricity
generation licence can supply
amendment
electricity to persons other than a
bill
bulk supplier
• Expected to enable ESCOs seeking
to set up renewable energy
Net metering
generation facilities, to be credited
code
for electricity they supply to the
grid
ESCO financing landscape DRAFT – FOR DISCUSSION ONLY

ESCOs require financing at three stages – instruments typically

include debt, equity, grants or mezzanine instruments
1 Technology/venture development2,3 2 Construction2,3 3 Commercial operation2,3

• Conducting prefeasibility and • Construction and commissioning • Operation and maintenance of

Activities

feasibility studies, e.g., of projects projects

commercial &technical
viability assessments, and
energy audits
• Largely operational expenses • High CAPEX requirements to • Mostly O&M expenses to ensure
Capital need

to assess viability purchase equipment, materials, project meets the ESCO’s

and some operating expenses to performance obligations
acquire qualified staff

Depending on the project stage, UG energy companies mostly use traditional financing instruments:
Tradition • Debt is the most common type of ESCO financing
financing
• Equity is leveraged by large ESCOs looking to support growth and develop projects quickly
instrument1,2,3
• Grant funding is gaining traction with most of it being leveraged to support feasibility for ESCOs
12 Sources: 1 European Commission, Financing Energy Efficiency, 2010 [Link] 2 European Commission, ESCO Financing Options [Link] 3 OCA consultations
ESCO financing landscape DRAFT – FOR DISCUSSION ONLY

As the market for ESCOs grows, there is potential to explore other

alternative financing instruments
Instrument Instrument description1,2
Government A lot of ESCO funding is through grant funding by governments. Although ESCO and energy efficiency
grants are becoming a priority to government, there has been no grant support

Debt security, in which the authorized issuer owes the holders a debt and, depending
Bonds
on the terms of the bond. These could support capital raises for ESCOs

Carbon Purchase of project-based greenhouse gas emission reductions usually done through a carbon fund on
finance behalf of the contributor. This could help reduce the cost of projects

ESCOs often have relationships with equipment manufacturers of captive power plants and energy
Vendor
efficiency equipment. Vendor financing helps ESCOs get equipment on credit with the expectation to
financing
pay after cashflows start flowing in

Pooled
Procurement through entities joining forces in procuring energy efficient products or services
procurement

Risk sharing mechanisms such as credit guarantees are also being used by ESCOs in more developed markets
13 Sources: 1 OCA consultations; 2 UN Environment Program, Captive Solar Market: Insights from Uganda, 2022 [Link]
ESCO financing landscape
Scaling financing to ESCOs requires all stakeholders to consider
new approaches in the short, medium, and long-term
Short-term
• Strengthen internal capacity to make ESCOs more
ESCOs
investable
• Improve awareness of ESCOs models & services
• Banks should partner with clean energy funds to
Banks &
funders
increase debt access for ESCOs
• Banks and funders should explore working with TA
providers to boost staff
• Partner with development agencies to conduct
studies to better understand the ESCO financing
Gov’t
• Implement tax credits and tax incentives for energy
users in commercial and industrial sectors
• Designing guarantee programs and other de-
partners
Dev’t
risking facilities to support on-lending to ESCOs
• Funding TA support to key actors to address key
barriers
14 Notes: 1. UNREEEA - Uganda National Renewable Energy and Energy Efficiency Alliance
DRAFT – FOR DISCUSSION ONLY
Medium and long-term
• Lobby for favorable policies for ESCOs
• Explore innovative financing structures that
increase participation from a range of financiers
• Banks should develop tailored lending products for
energy efficiency projects
• Banks and funders should seek out de-risking
facilities with development
• Identify opportunities for ESCO services in gov’t
bodies
• Subsidize initial costs of project development
• Strengthen the enabling environment
• Fund programs to support lobbying of favorable
laws and legislation
• Develop bundling strategies that can help
overcome barriers such as high cost of equipment
 For discussion:
• What other interventions are
required to grow the ESCO
market?

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