About a decade ago, the ESCO market in the UAE struggled with inertia, stemming from a lack of awareness and an equal lack of interest. Today, notes Henrique Pereira, it has made the decisive shift towards receptiveness and engagement. Pereira is CEO, Taka Solutions, one of the ESCO players in the UAE. That said, the market still has a long way to go to reach the level necessary to achieve sustainability targets of the UAE, including achieving net-zero goals or tackling carbon emissions, he says. But for now, it is satisfying that a positive shift has taken place – a shift, he says, that can be attributed to the change in perception among end-users of the significance of energy efficiency as well as retrofit projects.
Jason Prince, GM – Sales & Business Development, EFS Facilities Services, shares a similar perspective as that of Pereira. He says the ESCO market in the UAE has evolved for the better. The upcoming COP28, he says, is bringing much traction to the market along with the changing perspectives of end-users relating to energy-efficiency measures. In addition, Prince says, the government’s proactive approach to ESCO projects, characterised by a high level of organisation, is now evident and is gaining momentum. He says: “Government organisations have implemented a systematic tendering process, allocating companies to carry out the projects. This approach benefits private companies by demonstrating that the government is fulfilling its responsibilities, paving the way for private companies to contribute. Moreover, the government is committed to guiding and supporting private enterprises, offering project financing assistance, when needed.”
Prince says a significant development in the UAE is the widespread implementation of Energy Conservation Measures (ECMs) in several buildings. In the last few years, he says, there have been many ECM installations, and the projects assisted by ESCOs, when financial challenges led to delays in retrofit projects, were instrumental in yielding significant energy savings. “For instance, in areas like JLT (Jumeirah Lakes Towers) or JBR (Jumeirah Beach Residences), in Dubai, where buildings are around 15-20 years old, the immediate impact of chiller replacement in the buildings, by utilising an ESCO model, is significant energy savings of 30-40%.”
Andrea Di Gregorio, Executive Director, Energy Efficiency and Renewables (Reem) Office, Ras Al Khaimah Municipality, is another votary of the ESCO model. He believes that the ESCO market in the UAE, which began over two decades ago, is vibrant, with active participation from multiple ESCOs. He says: “Initially, the main contracting model was a guaranteed savings model, where the customer invests, and the ESCO offers a guarantee of minimum savings throughout the contract period. Gradually, more ESCOs with financing capabilities have entered the market, and we observe an increasing share of shared savings contracts, where the ESCO invests and the customer has an obligation to share part of their savings.” He points out that while the majority of CapEx still is in the guaranteed savings model, there has been a noticeable trend towards a more balanced distribution between the guaranteed and shared savings models. Also, while most projects were with government entities or government-owned companies, a decade ago, the private sector now contributes a significant share of the overall project portfolio, he says.
Di Gregorio, who in his capacity has supported several ESCO projects, says many projects in the UAE have gained industry recognition for unique financing, scale and successful execution. He points out that retrofitting government buildings in Ras Al Khaimah demonstrated new approaches in dealing with contracting by consolidating multiple customers and facilities into a single tender. “This approach allowed for the inclusion of smaller buildings that may not have been individually considered suitable for retrofit projects,” he says. “By bundling them together, the project achieved economies of scale, benefiting customer entities and expanding the overall scope beyond what would have been possible with separate retrofit initiatives for each government entity.”
Adding to the discussion, Pereira says the growth of the retrofit market has a significant role in achieving sustainability goals, and it is essential to educate the end-users about why retrofit projects should not be ignored and why they should be undertaken. He says, “People’s mindset should focus on the benefits, importance and the necessity of taking action rather than debating whether or not to pursue energy efficiency measures.” The ultimate goal, Pereira says, is to reach a point where the decision to implement these projects becomes a matter of how and when, rather than if they should be undertaken. “To achieve this, creating awareness through educating about energy efficiency services is vital,” he says.
Pereira also notes that while creating awareness among end-users is crucial, more is needed to bring out a change in mindset immediately. “Creating awareness is a long process, and this is where government regulations come into the picture,” he says, adding that regulations will be crucial in driving action and establishing guidelines for individuals and organisations to adhere to, regardless of their personal beliefs or attitudes. Moreover, he says, regulations will be instrumental in accelerating the adoption of energy-efficient practices and ensuring alignment with sustainable measures. “By combining awareness campaigns and regulations, the market can advance more effectively to reach a stage where the decision to prioritise energy efficiency is not a matter of uncertainty but rather a question of strategising the implementation of energy efficiency measures,” he says. And Taka Solutions’ objective behind offering Cooling as a Service (CaaS) is to simplify the end user’s journey to achieve energy efficiency, he says.
“The willingness of all the stakeholders involved in the ESCO projects to collaborate and find solutions to the problems at hand is one of the key factors behind the success of projects that have achieved significant savings and left a positive impact,” Pereira says. At the same time, he says, it is essential to look at why many projects fail, even though most companies in the industry are knowledgeable and capable. These failures, he says, are often due to delays in contract negotiations, disagreements, resistance to certain aspects of the project, unsigned contracts, lack of capital allocation or incomplete execution. “I strongly believe that many people within companies often hinder progress instead of facilitating it, driven by self-interests, job security, personal gain or differing motivations, and this is where most projects fail,” he says.
Pereira says one of the challenges the stakeholders often face is not the lack of funds but in obtaining funding. “In most cases, stakeholders we (Taka Solutions) collaborate with have significant financial resources, evident in their construction of multimillion-dollar towers,” he says. “However, the problem lies in securing funding for non-revenue-generating initiatives. In real estate, for example, the primary objective is to make money; thus, investing in projects like improving the energy efficiency of chillers, which do not generate direct revenue, can be challenging to justify and obtain for approval,” he says.
Adding to the discussion on funds, Prince says there is a lack of a proper system for raising funds. “For instance, if a client needs to finance a chiller costing one million dirhams, the bank might impose an interest rate of approximately 5-8% directly or via an ESCO, which the client sees as an additional burden,” he says. “This cashflow issue becomes a deterrent for clients.” He notes that unlike some countries with dedicated Green Funds, such incentives are currently not well promoted in the UAE. The absence of Green Funds, as a separate category, he says, hampers the accessibility to funds for energy conservation and sustainability projects, and it is a significant problem faced by anyone seeking financial support for such initiatives in the UAE.
Di Gregorio says that while Green Bonds are a financing option used in various parts of the world, they have yet to be extensively considered for retrofit projects in the UAE. “Simplified financing mechanisms have been found effective for ESCO projects,” he says. “However, Green Bonds can be attractive, especially for governments with high credit ratings, and they may be beneficial for funding energy efficiency initiatives.” He also notes that CaaS is appealing, as it avoids upfront capital expenditure. “Its natural scope of application are buildings designed for central air conditioning, either new buildings or buildings where the existing chillers needs to be replaced,” he says. “However, CaaS may not be easily applicable for distributed systems with individual air conditioning units, where the traditional ESCO model tends to be more competitive.”
From the perspective of stakeholders, Prince says, one of the challenges is that they have been promised specific savings in the past but have had limited control over the procurement process, since they are not directly funding the projects. He says that as a result, stakeholders often receive unfamiliar systems that they are expected to maintain once the project is completed. “These systems may not be from well-known brands or may not function in as user-friendly a manner as anticipated, and the manufacturer’s support may not meet their expectations,” he says. “This has made stakeholders more cautious regarding installations and upgrades.” He notes that as a result, there is also a shift towards a guaranteed savings model, as it provides assurance to the client and ensures that the project progresses smoothly and delivers the desired outcomes.
Weighing in, Di Gregorio notes that limited market awareness and familiarity with energy performance contracting models and standards still pose some challenges to ESCOs, who suffer from long from long contracting processes. Furthermore, he says, alignment between technical and legal teams can take time, sometimes leading to delays in decision-making by customers, in the case of retrofit projects. To tackle the unwanted situation, he points to Ras Al Khaimah Municipality’s approach as a possible way forward. “Tender processes have become faster and more efficient by establishing contract standards in 2018 with a dedicated facility,” he says. “Reem, within the Municipality, operating as a super-ESCO, supports customers and ESCOs along the contracting process.”
Other local governments in the UAE, Di Gregorio points out, have established super-ESCOs, entities that are either governmental organisations or government-owned companies that support energy performance contracting end-to-end, from tendering to execution and to the monitoring of projects. Accreditation schemes, like the ones managed by the RSB Dubai and Ras Al Khaimah Municipality, reduce contracting risks for customers by qualifying ESCOs based on their financial and technical capabilities. In addition, he says, Ras Al Khaimah has introduced incentives – including waivers or discounts on government fees – making entry into the market cost-effective for ESCOs. This has been successful, with 24 ESCOs accredited in Ras Al Khaimah, some of which have established their regional offices in the emirate, he adds.
Pereira says the government should play a more significant role in regulating the market in a timely manner to ensure progress. “Regulations can take various forms, such as incentives, obligations or penalties, but they should be implemented continuously to drive us towards the desired outcome within the set timeframe,” he says. “Though the long-term vision and objectives established by the government of the UAE set a clear path to achieve the sustainability objectives in a timeframe, there is still a gap between our current status and the methods to reach those objectives. That being said, although we have – and continue to face – many challenges, over the last 10 years we have observed the market evolving positively and look forward to the best which is yet to come. Taka Solutions is keen to continue contributing to the Net Zero by 2050 strategic initiative set by the visionary leaders of the UAE.”
Prince says the UAE government has supported developing the ESCO market and has implemented policies and incentives to encourage energy efficiency and reduce carbon footprint. However, he says, there is a need for more robust regulations and guidelines to ensure the accuracy of promised returns on investment and calculations. “Establishing a separate channel or portal, where project calculations and proposals can be submitted to funding agencies or banks for approval, is important,” he says. He adds that countries such as Canada and Saudi Arabia have made significant progress in this area, with certain provinces in Canada offering a portal for low-rate financing of energy efficiency projects via Central Bank. “We have been informed that the regulatory authorities of each emirate are aware of this and are working towards developing a system that will be better than the currently available options,” he says. “Given the UAE’s spirit of excellence in everything they do, soon we will witness the creation of a solution tailored to GCC region conditions, setting a role model for others, as well.