ESCO

ESCO is an acronym of an Energy Service Company (에너지절약전문기업/能源節約專門企業), which is a commercial business providing a broad range of comprehensive energy solutions including designs and implementation of energy savings projects, energy conservation, energy infrastructure outsourcing, power generation and energy supply, and risk management.

Key words
energy-saving, ESCO, special purpose vehicle, off-balance sheet, financial and tax support, subsidy

History
The start of the energy savings business can be attributed to the energy crisis of the late 1970s, as entrepreneurs developed ways to combat the rise in energy costs. One of the earliest examples in the United States was a company in Texas, Time Energy, which introduced a device to automate the switching of lights and other equipment to regulate energy use.

The primary reason that the product did not initially sell was because potential users doubted that the savings would actually materialize. To combat this doubt, the company decided to install the device upfront and ask for a percentage of the savings that was accumulated. The result was the basis for the ESCO model. Through this process, the company achieved higher sales and more return since the savings were large.

In the 1970s and 1980s, as more entrepreneurs saw this market grow, more companies came into creation. The first wave of ESCOs were often small divisions of large energy companies or small, upstart, independent companies. However, after the energy crisis came to an end, the companies had little leverage on potential clients to perform energy-saving projects, given the lower cost of energy.

This prevented the growth experienced in the late 1970s from continuing. The industry grew slowly through the 1970s and 1980s. However, the energy-saving business model proved sustainable by:
 * Investing in energy saving facilities in place of an energy consumer;
 * Taking advantage of cost reduction or government subsidies related with energy saving technologies;
 * Collecting the initial investments from the cash flows of the energy consumer.

So such energy consumers as big commercial buildings, factories, etc. may put an energy service company to work with no economic and technological risk at all, and save energy cost to pay back the initial investments.

ESCO Financing
Take an example of a big building which is supposed to consume a lot of energy for electricity, lighting and heating. The landlord or employer may get a proposal for energy saving from an energy service company.

ESCO financing includes off-balance sheet vehicles (SPVs) which own a range of applicable equipment configured in such a way as to reduce the holistic energy cost of the building. The building occupants, or landlord, then benefit from the energy savings and pay a fee to the ESCO SPV in return. At all times, the benefit (saving) is guaranteed to exceed the fee.

In all instances, the ESCO starts by performing an in-depth analysis of the property, sometimes at risk, designs an energy efficient solution, installs the required elements, and maintains the system to ensure energy savings during the payback period. The savings in energy costs are often used to pay back the capital investment of the project over a five- to twenty-year period, or reinvested into the building to allow for capital upgrades that may otherwise be unfeasible. If the project does not provide returns on the investment, the ESCO is often responsible to pay the difference.

Statutory ground
ESCOs are established and operated pursuant to the Energy Use Rationalization Act (the "Act" 에너지이용합리화법).

Article 25 (Support to ESCOs) of the Act
 * (1) The Government may provide necessary support to energy-saving projects and projects to reduce the emission of greenhouse gases by saving energy, conducted by any person who operates the following business entrusted by a third person and has registered with the Minister of Knowledge Economy (hereinafter referred to as an “enterprise specialized in energy saving”or "ESCO"): 
 * 1. Management and service projects of energy-using facilities for energy saving;
 * 2. Projects concerning investment in energy-saving facilities prescribed in Article 14 (1);
 * 3. Other energy-saving projects determined by Presidential Decree.
 * (2) Anyone who intends to be registered as an enterprise that specialized in energy saving should meet the standards for the registration of machinery, equipment or materials, assets or technical human resources and should apply for registration to the Minister of Knowledge Economy, as prescribed by Presidential Decree. 

Article 29 (Energy-saving Project) of Enforcement Decree of the Act
 * Other energy-saving projects determined by Presidential Decree as stated in Article 25 (1) 3 of the Act shall refer to one of the following subparagraphs:
 * 1. Development and dissemination of new and recyclable energy;
 * 2. Research and development of energy-saving facilities and equipment.

Article 30 (Registration, etc. of ESCOs) of Enforcement Decree of the Act
 * (1) Any one who intends to register an ESCo pursuant to Article 25 (1) of the Act shall submit the Registration Application as stated by the Ordinance of the Ministry of Knowledge and Economy to the Minister of Knowledge and Economy.
 * (2) The registration criteria for ESCO pursuant to Article 25 (1) of the Act shall be provided for in Schedule 2.

Article 25-2 of the Tax Reduction and Exemption Control Act (조세특례제한법)
 * If a Korean national invested in energy-saving facilities by December 31, 2008, 10 percent of such investments shall be deductible from income tax (business income tax) or the corporate tax of the taxable year.
 * 10 percent (previously 7 percent) of investments which has been conducted since January 1, 2005 shall be deducted.

ESCO Promotional Measures
At present, about 150 ESCOs including Samsung Everland, Taeil Precision (태일정밀), Shingwang Co. (신광기업), etc. have been registered with the Ministry of Knowledge and Economy. In order to promote ESCO business and projects, the government is ready to provide ESCOs with low cost funds and investment tax deduction.
 * Operation expenses for small- and medium ESCOs (since 1998)
 * Bank loans with no collateral (since 1998)
 * Factoring of receivables (since 1999):
 * Performance guarantee contract (since 2004)
 * Distinguished ESCO certification (since 2006) based on job performance, techological capacity, financial condition, etc.

Achievements
Energy-saving efforts by ESCOs are exemplified by:
 * Air conditioning, ice thermal storage (빙축열) system
 * High efficiency lighting system
 * Cogeneration system in apartment complex
 * Waste heat recovery facilities (폐열회수시설)
 * Waste heat recovery boiler and recuperator
 * Building automation control system
 * Air-conditioning heat exchangers (냉난방 열교환기)
 * Production process improvement: e.g., Steam ejectors were replaced by EG ejectors.