Contracting: a miracle recipe for financing part of the energy transition?

For many consumers addressing the challenges of energy efficiency or development of local energy production, the question of investment is central. Residential customers do not always have the necessary funds, the industry prioritizes investments in the production tool, public customers seek to reduce their expenses and their debt.

All or almost all can be attracted by the outsourcing of investments, object of contracting models.

But what are these models? In which countries are they deployed? Why do they sometimes remain unrecognized?

First of all, let’s specify what we are talking about: there are several contracting models. The ones I have most frequently met are:

  • The Energy Contracting: this model consists, for a consumer, in buying energy produced on his premises by outsourcing the financing, construction, operation, maintenance and optimization of the generation facilities.
  • The Comfort Contracting, also called “Chauffage”: this model consists for a consumer to buy a performance of comfort such as the temperature, in his premises, by outsourcing, the exploitation, the maintenance and the optimization of necessary facilities.
  • The Performance Contracting: this model allows a consumer to delegate the achievement of energy savings to a third party, who will make the necessary investment and operating decisions and will be paid by capturing, for a certain period, the savings made. This model outsources financing and risks associated with energy efficiency.
  • A more complete “contracting” combining two previously mentioned components.

The deployment of these models in a country necessarily depends on the country’s market conditions: for example, Energy Contracting is necessarily less meaningful in a country where district heating networks are highly developed; Performance Contracting, which is more complex for a consumer to understand than one might imagine at first, requires a network of engaged actors and a model-educated market for many years.

These models are usually difficult to deploy: all of them involve some risks outsourced by the consumer. Managing these risks requires energy service providers to have a thorough understanding of legal and financial engineering. The required level is rarely achieved: the profitability of these models is heavily affected and, as a result, energy service providers are often limited to a shy, defensive approach to prevent competitors from returning to their customers through this process.

The lack of control over legal and financial issues does not only have economic consequences. It very often generates a clumsy, chaotic, sometimes tense relationship between the supplier and his client, which can cause the customer suspicion towards the supplier and the model itself and suspicion of dishonesty. The maturation process of the market and the adoption of the model are greatly slowed down.

This is the exact opposite of what the market needs.

The energy transition must be financed. The only appeal to public funds injected in the form of grants is insufficient and, unfortunately, often counterproductive. All mechanisms allowing private investors to participate are valuable and must be carefully developed.

In the case of contracting models, it is a complete set of measures and conditions that the energy ecosystem needs: a favourable regulatory framework devoid of excessive technocracy, an accompaniment of service providers to build a profitable business, a market education as to the merits of these offers, a way for consumers to know the level of providers who come to them.

In short, contracting models provide an immediate example of the type of global, systemic initiatives that will be required to deploy in the future for successful ecosystem transformation.

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