**4. Results**

### *4.1. Factors Influencing the Interest of Local Government Units and Enterprises in the Implementation of Energy Projects Using the ESCO Formula in Poland*

In-depth interviews revealed that the ESCO formula is potentially interesting, especially for those entities which do not have many other possibilities to develop energy industry projects due to reasons such as the limited amount of European funds available, the demand for innovative financial solutions and the need to be supported in energy industry projects by professional consultancies. Local governmen<sup>t</sup> units and enterprises are interested in ESCO services either as an alternative to grants and loans or in linking such sources of financing for energy projects, but so far, this mechanism has not been sufficiently researched by the respondents.

An analysis of the reasons for interest in the ESCO formula presented in Table 2 concludes that the target groups of the ESCO formula are eager to learn more about this mechanism when they have access to the appropriate information (44.44%), when there are favourable economic conditions for projects based on the ESCO formula (13.89%) and when they receive offers from ESCO companies and other entities (11.11%).


**Table 2.** Reasons for interest in the ESCO formula. Source: CAWI survey.

The above findings were confirmed by the representatives of target groups that participated in the focus group interview. They stated that interest in the ESCO formula could not be linked with the innovative attitude towards new solutions supporting EE, but it results rather from access to reliable and objective but convincing information on this subject (e.g., campaigns conducted by public institutions) or from observing the positive effects of implementing the ESCO formula in other energy industry projects.

Concerning the sources of knowledge about the ESCO formula, the key conclusion coming from in-depth interviews was that the entities which can be potentially interested in implementing this mechanism are afraid whether the promises of ESCO companies and the conditions of implementation offered will be achievable in reality. The key reasons are not only the potentially improperly provided ESCO company services of but also the changing operating conditions of local governments units and enterprises (for example, changes in legal-administrative matters or to public aid rules). Considering the above-mentioned concerns, as well as a very dynamic situation in the energy market, many entities highlight that they cannot rely on the most available sources of information concerning the ESCO formula, as they may be out of date. One can say that the knowledge of the ESCO formula is quite superficial as evidenced by the respondents' identification of the Internet as a significant source of knowledge on the subject. Obviously, the Internet can be a source of information concerning the ESCO formula in the initial stage; however, the energy industry projects based on those mechanisms are very difficult and complex. They require interdisciplinary knowledge and experience, which cannot be provided based mainly on the Internet.

Table 3 shows that the largest number of respondents stated they were interested in the ESCO formula because of participation in the projects co-financed by European funds (36.01%) or participation in commercial projects. It should be stated that participation in the projects does not mean that the respondents have a positive approach to the ESCO formula. Their opinion is based on the individual experience arising from particular projects. Another very popular source of interest is the Internet (22.23%) as well as conferences and events (13.88%). These sources of information are not equal in terms of information quality. Conferences and events have a very limited range, although they can deliver professional knowledge. The Internet provides more general information, whereas experiences related to participation in the project are much more concrete, although they can be either positive or negative.

The focus group interview confirmed that the Internet should be taken into account as a primary source of information when planning information campaigns about ESCO companies targeted at potential investors, including local governments units (e.g., owners of public buildings) and enterprises. The focus group interview participants showed that a highly specialised topic such as the ESCO formula could not be effectively explained based on general information and data because its effectiveness must be related to the specific scope of investment in each case. If an entity, when calculating the effectiveness of the ESCO formula, relies on information from the Internet rather than professional advice, mistakes or misinterpretation of the results are possible. The focus group interview participants, therefore, strongly advocated encouraging local governments units and enterprises to seek expert advice from ESCO companies. One also pointed out that the low interest in the ESCO formula results mainly from the lack of recognition of this instrument among potential users and a lack of knowledge about it.

**No. Response Option Responses (in %)** 1 Participation in the EU projects 36.01 2 Participation in the commercial projects 8.34 3 Internet 22.23 4 Training 2.78 5 Information publications 5.55 6 Scientific articles 2.78 7 Participation in conferences and events 13.88

**Table 3.** Sources of knowledge about ESCO formula. Source: CAWI survey.

Do not remember

> No opinion

8

Regarding the activities to increase the interest in the ESCO formula, the ESCO companies interviewed strongly emphasised the need to involve governmen<sup>t</sup> institutions in popularising this mechanism in order to increase its credibility and objectively and reliably present it to potential investors, while information about the ESCO formula by companies providing such services is perceived as marketing activity rather than as reliable information.

8.34 0.00

The CAWI survey found (Table 4) that two important actions to increase interest in the ESCO formula are to improve access to knowledge about it (30.95%) and to include it in gran<sup>t</sup> projects (26.19%). Both should be subordinated to the key action of improving access to expertise and objective information about this financing model. As many respondents (21.42%) pointed out, much-needed action should be focused on the promotion and recognition of the ESCO formula. This also results from the fact that the financial engineering of an investment project based on a subsidy in connection with the ESCO formula may, in individual situations, raise doubts concerning the due amount of the subsidy and the eligibility of all costs or other conditions of using the subsidy, while the investor is unable to clarify these doubts. This may be the case particularly for companies preferring non-refundable financing, with much higher requirements for obtaining the gran<sup>t</sup> compared to refundable financing. In these situations, a lack of expertise in the principles of the ESCO formula may discourage its use.


**Table 4.** Activities to increase interest in ESCO projects. Source: CAWI survey.

The interviewees pointed out the important issue of an objective presentation of the advantages and disadvantages of using the ESCO formula in energy industry projects because promoting this solution without pointing out the significant limitations and risks will not help increase credibility among local governments and enterprises in the long run. Reliable information regarding the ESCO formula should serve well to popularise it in various sectors of the energy market.

During the focus group interviews, it was clearly stated that the activities related to increasing the interest in ESCO projects are strongly linked with the process of mitigating the barriers which restrain such investments in the energy industry. There are many more obstacles than incentives for local governmen<sup>t</sup> units, as well as the enterprises which would like to implement the ESCO formula in their projects. That is why it is necessary to indicate and analyse the key barriers of ESCO formula implementation in public and commercial projects related to the energy industry.

In the question regarding the factors reducing the interest of local governments and enterprises in investing in the ESCO formula, a rather diverse set of answers was obtained (Table 5). A significant percentage of respondents said that savings possible under the ESCO formula were not enough to tempt them into using the model in the first place (45.23%). Other factors cited by a relatively large percentage of respondents (lack of regulation–21.42% or insufficient legal regulations–26.19% as well as the issue of debt increase–23.80%) once again confirm that those potentially interested in the ESCO formula are not familiar with the details of its principles of operation.


**Table 5.** Factors reducing interest in ESCO investments. Source: CAWI survey (multiple choice questions).

Knowledge regarding the barriers that local governments and enterprises identify in relation to the ESCO formula was expanded through the focus group interview and in-depth interviews. The feedback collected from respondents indicates that:


• complicated decision-making and ownership processes regarding the ESCO formula relating primarily to the problems of determining the ownership of the components of the ESCO installation, the adoption of uniform rules for the accounting and depreciation of fixed assets and the recognition of expenses incurred and savings generated in the financial statements, further multiply the legal doubts regarding the proper inclusion of such operations in the accounting ledgers.

### *4.2. Solutions Supporting the Implementation of the ESCO Formula in Poland*

The study found that despite many barriers limiting interest in the ESCO formula, local governments units and enterprises are generally eager to implement particular types of ESCO services in combination with various financial supports. The in-depth interviews revealed that a general problem of projects co-financed with grants or loans is the lack of comprehensive consulting services available throughout the project life-cycle. Such services

are necessary in order to choose the optimal path of energy industry project implementation and to take all required standards and requirements into account. Meanwhile, local governmen<sup>t</sup> units and enterprises often lack the expertise to independently design solutions best suited to their particular conditions and needs. They focus on those activities that are, for instance, eligible for co-financing as part of a grant, omitting those that cannot be considered eligible.

Financial support, without additional activities of a formal and informative nature, may lead to inefficient use of the funds, as exemplified by energy efficiency investments in public buildings implemented under the green investment scheme audited by the Polish Supreme Audit Office [42]. Therefore, it is crucial to correctly identify the solutions which can be possible and most beneficial to implement energy projects using the ESCO formula in Poland.

The results of the in-depth interviews were confirmed by the CAWI survey (Table 6). The majority of respondents want expert consulting (61.90%) and energy audits (52.38%), that are necessary to determine the scope and method of implementation of an energy industry project. The high demand for technical services in the project (45.23%) once again confirms the lack of competence of local governmen<sup>t</sup> units and enterprises to handle this type of investment on their own. This is an important factor to consider when taking steps to popularise the ESCO formula. As one interviewee stated during an in-depth interview, "the financing entity does not really need an energy audit; it is in the interest of the investor".


**Table 6.** Services offered in the ESCO formula. Source: CAWI survey (multiple choice questions).

The focus group interview participants noted that utilising the wide range of services of the ESCO formula increases the chance that an energy industry project will achieve the expected savings. In their view, the framework scope of ESCO services in an energy project should include:


According to in-depth interviews results, the solutions related to investing in energy industry projects that involve the use of the ESCO formula should consider two equally important elements:


Additionally, the participants of the in-depth interviews noted that ultimately, a move away from direct gran<sup>t</sup> funding to a mixed mechanism, i.e., grants with forgiveness, should be recommended.

The local governmen<sup>t</sup> units and enterprises surveyed evaluated the attractiveness of various financing instruments for energy projects in different ways (Table 7). Obviously, the most popular are European funds (33.33%), but it should be stated clearly that it is probable that this source of capital will be limited gradually in the next European financial perspectives of the cohesion policy. Traditionally, loans, either long-term and returnable (21.42%) or forgivable (7.14%) are also popular. It is very puzzling that as many as one-fifth of the respondents have no opinion at all.


**Table 7.** Interest in types of ESCO services. Source: CAWI survey (multiple choice questions).

The CAWI survey confirmed that respondents are unable to identify the solutions that work best in conjunction with the ESCO formula. Opinions on this topic are very divided. Below is the distribution of responses to the question as to what types of projects the respondents would want to associate with the ESCO formula:

• projects with repayable funding (7.14% of respondents),


A total of 80.96% of the respondents had no opinion on this issue. It confirms again that the key challenge to increasing the number of energy industry projects based on the ESCO formula is to educate target groups in terms of its usefulness. Otherwise, they are not aware of what projects can be the implemented using the ESCO formula and what financial models can be applied with such a formula.

The assessment of ESCO formula value for the potential investors should consider identifying the potential benefits expected by those who use or intend to use ESCO services. The respondents in the CAWI survey identified the following benefits:


Energy savings that translate into financial savings are a key benefit of the ESCO formula for the vast majority of respondents (80.95%). At the same time, such factors as the scope of investment and its potential connection with public aid (e.g., energy retrofitting, the replacement of lighting systems, the purchase of electric busses) and the type of entity implementing the investment (local government, enterprise) are factors which objectively condition the different scope of benefits possible to obtain from the energy project. It is lamentable that environmental benefits are important for only 7.14% of respondents, which indicates that sustainable public and business strategies are not core policies for the potential beneficiaries of the ESCO formula.

ESCO companies shape their offerings in relation to the expectations of different target groups in the energy market while being guided by criteria such as profitability or potential market size for a given service. The results of the in-depth interviews indicate that the current dominant investor groups in the ESCO services market are:

• local governments at all levels, and


Due to the dispersed structure of this market, it is currently difficult to quantify its size. The CAWI survey identified the likeliest prospective target groups for ESCO services as:


The in-depth interviews resulted in the formulation of key characteristics that encourage investment projects to use the ESCO formula:


The focus group identified the leading types of energy industry projects that are feasible under the ESCO formula while providing the potential for satisfactory savings. At the same time, they indicated the potential current and future target groups of the ESCO formula in Poland (sectors and branches). One agreed that these are projects related to:


Lighting replacement and industrial projects were found to be the most financially viable. On the other hand, investments in the energy retrofitting of public utility and residential buildings, including the so-called deep energy retrofits, are characterised by a longer payback period, which is not always acceptable for the investor. The ESCO formula is particularly suitable for projects that combine energy retrofits with other investment activities, such as energy source replacement. As the interviews show, the role of ESCO is also important in the context of construction. This is true not only in industry, where financial efficiency is higher but also in local governmen<sup>t</sup> construction projects, where procedures for energy efficiency improvement, e.g., standards for energy audits, have already developed. Energy audits are much more expensive in industry as they have to be more extensive and are often carried out on the basis of measurements, as they are the basis for the formulation of contracts and future settlements between the energy service company and the investor. The technological complexity, but also the need to monitor the effects, substantially justify the involvement of qualified entities such as ESCO companies.
