**2. Literature Review**

This article explains ESCO as a model investment financing mechanism (referred to forthwith as the "ESCO formula" or "ESCO"), in which one of the parties is a specialised company providing energy services based on the energy performance contracts (EPC). The two most common types of EPC are referred to as a (1) shared savings or (2) guaranteed savings model [8].

In essence, the ESCO formula is a comprehensive approach to financing investment projects, including financing using EU funds [7]. Other innovative methods of financing energy projects in the context of the challenges of the energy transformation are also used, such as energy cooperatives, analysed by Yildiz et.al [25], or crowdfunding models as the philanthropic–crowdfunding partnership model proposed by Ari and Koc [26].

Due to the complexity of ESCO projects in the public sector, the simplest and most popular projects are lighting modernisation [27] and energy efficiency in the municipal and housing sectors [6,28,29]. Advanced solutions concern the generation of energy for own needs—in CHP installations [19] for example. Advanced energy projects the industrial sector have also been realised using the ESCO formula.

The definition of EPCs depends on the country [30]. Common to all EPCs, however, is the fact that they are drawn for a specific period and detail the delivery of specific energy effects, monitored and linked to financial settlements.

In the Energy Efficiency Directive 2012/27/EU [31], EPC is defined as a contractual arrangemen<sup>t</sup> between the beneficiary and the provider of an energy efficiency improvement measure, verified and monitored during the whole term of the contract, where investments (work, supply or service) in that measure are paid for at a contractually agreed level of energy efficiency improvement or other agreed energy performance criterion, such as financial savings.

### *2.1. Drivers of Interest in the ESCO Formula*

To stimulate the development of the energy services market using the ESCO formula, governments use incentives and drivers. Trianni et al. [13] classify drivers for development as follows: regulatory, economic, informative and vocational, distinguishing external and internal drivers for each category. The importance of public financing is emphasised which, apart from commercial financing, constitutes essential support, especially for small and medium-sized enterprises (SMEs) [13]. Bertoldi and Boza-Kiss [9] used the following categorisation in their international research: (1) legal and political; (2) procedural factors and tools; (3) financing; (4) information and awareness; and (5) structural and marketrelated changes. Those areas of the research that concerned the situation in Poland, white certificates are identified as the legal driver.

To stimulate private sector investments and promote energy efficiency through public– private partnership arrangements, the public sector uses private companies, that is to say, an energy service company (ESCO) [6].

### *2.2. Risks and Barriers in the Application of ESCO Formula*

Barriers to implementing the ESCO formula have been well researched and described by scholars using qualitative research methods [9,13,15,32,33].

ESCO solutions raise numerous concerns and risks [34] and encounter various barriers. Lee et al. used the following risk categorisation: economic; financial; project design; installation; technology; operational, and measurement and verification [18]. Garbuzova-Schlifter and Madlener [17] distinguished the following risk factors: project preparation and execution phases; contractual; technical and operational; financial; clients; human and behavioural; political and regulatory, and market.

The barriers are: legal; unfamiliarity with ESCO contracting; public debt; ownership issues; ownership of energy savings; competition from subsidies; reluctance to enter into PPP (public-private partnership); in-house implementation of projects; reluctance among the company's engineers, and decision-making processes [22]. Other researchers classify the barriers to information and awareness: legislative and accounting; behavioural; market and external; financial, and technical and administrative [3]. According to [1], the main barriers in developing countries are institutional and financial.

Bertoldi and Boza-Kiss indicate the problem of the cost of projects implemented using the ESCO formula to the public debt by local governments. This approach follows the EUROSTAT methodology and places restrictions in EU legislation on the requirements of the budgetary frameworks of the Member States. Although the text of the legislation is ambiguous, almost all countries have interpreted the EUROSTAT methodology as a barrier to ESCO projects, including Slovakia, the Czech Republic, and Poland. Others, such as Spain did not take a stand. The second problem was the limited liquidity and creditworthiness of public administrations, especially following the financial crisis [9].

Another barrier indicated in literature is the limited knowledge of the possibilities of financing energy efficiency projects in the form of ESCOs amongs<sup>t</sup> potential beneficiaries [2]. Such barriers have been ling since identified [35]. On the other hand, current research shows more detailed knowledge needs have been formulated-the publishing of model EPC contracts [27], the dissemination of good examples, the modification of tender procedures [14,18] and public–private partnership [3].

Stagnation and decline must be taken into account, particularly in developing markets. For example, in 2010, the ESCO market was perceived as a fast-growing market in Sweden [35]. However, nine years later in 2019, it was noted in an international study that it was the only market in Europe to record a steady decline [10].

It is worth paying attention to the beneficiaries' expectations that the ESCO formula will produce visible savings immediately while also avoiding risks [36]. Even though this example concerns a business model of heat sales in Finland, this expectation is universal and demonstrates the need to create business models which promote risk-taking by companies that provide ESCO services.
