Energy service activities: current issues and financing models

In the context of the Russian Federation public policy realization aimed at rational and efficient energy resources management within the Federal law of the Russian Federation No. 261-FZ dated November 23, 2009, development of energy service activities in our state is obstructed by a number of objective and subjective circumstances. An essential issue consisted in the absence of legislative provisions defining relevant contracts as civil obligations. Realization of Law 261-FZ as a legal framework for energy service activities offers new challenges for the market development. On the one hand, it is facilitated by incorporation in Law 261-FZ of Chapter 5 titled "Energy service contracts and energy resources purchase, supply, transfer agreements containing clauses of energy service contracts", amendments to budget legislation and legislation on order placement for state and municipal needs. On the other hand, active political support of energy saving and efficiency both on federal and local levels provide an impetus for energy service activities. The development of energy service activities is stimulated by the Russian Energy Agency (REA). Risks related to realization of energy service contracts seem to be substantial. Despite a great deal of risks and issues in the area, current practice is shaped by funding energy service projects through long-term loans and leasing mechanisms when industrial manufacturers lease their equipment and facilities. It is possible to single out several financing models. The first one is based on direct financing of energy saving companies (ESC) by EBRD funds when realizing energy service activities in public sector. The second model reflects mechanisms of ESC financing at the expense of special regional and/or municipal funds, and also of budgetary means. Participation of alternative investors concerned is favored. The third model relies on realization of energy saving activities via an appropriation line for commercial banks. The model assumes commercial credit institutions available in the area, being ready for creating new financial products and sharing risks of energy service projects financing in particular with EBRD. According to experts' assessment, market potential of energy service activities reaches 3 billion US dollars within contract terms from 5 up to 7 years, i.e. energy service activities assume a necessity of long-term money. Banks estimate possible revenue performance of Russian energy service companies at the level of 15 %. However, there is a number of still open issues considered fundamental. Regarding public sector, the question of effective energy resources allocation due to energy efficiency activities is insufficiently developed. Legislation on public procurement (both state and municipal) requires energy saving companies to be backed. For obtaining a loan, an energy service company must furnish security deposit and grant 10-30 % to the ordering party as security interest. To encourage energy service activities investment it is essential to provide tax incentives for energy saving companies realizing energy service contracts. A control system over contractual compliance should be established. Moreover, a significant condition for international financial institutes and commercial banks is availability of federal and municipal guarantees on energy service projects and readiness of local authorities to undertake obligations as interest holders regarding project documentation development and problem solving throughout realization. It is essential to improve the legislative framework since the development of this branch of activities is still obstructed by a quantity of gaps and antimonies in a new legislation on energy saving, in certain cases impeding its execution or making results inappropriate to the objectives of state policy. Considering a great number of recurring issues in the given sector of Russian economy, energy service activities still have huge financial and technical potential.

Keywords

Authors

References