**5. Discussion**

Although ESCO in Poland is not a new form of accounting for investments aimed at improving energy efficiency, many entities still do not have sufficient knowledge about it, which was clearly confirmed by the results of the survey. The process of accounting for investments in the ESCO mechanism is perceived as time-consuming and complicated, and above all, has been researched to a much lower degree than, for example, the procedures of using EU funding. These factors and other conditions highlighted in the study demonstrate that the ESCO market, although in existence for nearly 30 years, is still in its early stages of development [3]. The result of our research was in line with the expected results [9]. Often

this lack of knowledge means that local governments or enterprises expect deep energy retrofits to be absolutely necessary for ESCO projects and find it difficult to understand that even small, local investment projects combined with optimisation of energy managemen<sup>t</sup> processes can significantly improve energy efficiency and thus lead to lower monthly energy costs. Meanwhile, research confirms that the benefits of energy savings and reduced energy costs are the key criteria for investors to become interested in the ESCO mechanism. The statement agrees with Trianinin et al. [13], which shows that an economic driver is crucial for companies regardless of their size.

Potential investors using the ESCO mechanism, i.e., local governments and enterprises, have an only superficial knowledge of the working principles of this mechanism. Because research has shown that in many cases, interest in this topic only arises in connection with incoming offers from ESCO companies, the common belief in this topic is that it involves incurring expenses for various types of consulting services and thus having to accept the risk of investment failure. Few entities are aware that in the ESCO mechanism, increasing energy efficiency does not have to involve capital expenditure.

Polish local governmen<sup>t</sup> units and enterprises have become accustomed to using gran<sup>t</sup> or loan formulas, so the solution of placing the burden of financing an energy project on an ESCO company is still quite innovative and even arouses incredulity. Other innovative financing models, such as energy cooperatives or crowdfunding, however common in other countries [25,26], are not known in the Polish public sector. They are the domain of activities, such as technology start-ups, also in the energy sector. The public sector remains conservative. The fact, proved by the research, that knowledge on the subject is mainly drawn from the Internet and not from professional advisors is not conducive to a proper understanding of the ESCO financing mechanism. For many investors, the method of financing energy investments by an ESCO coupled with its commitment to achieving a certain level of savings from energy utility expenses raises many questions. Innovative elements appearing in this model (e.g., an escrow account, used for settlements with the ESCO) or ambiguities (e.g., the necessity of appropriate recognition in financial statements of costs and revenues from the ESCO mechanism) also negatively influence interest in this form of financing energy investments.

Reliable and comprehensive information and promotion activities conducted by public institutions should, therefore, be considered crucial. They should serve to present the ESCO mechanism in an objective manner, considering its advantages and limitations. Above all, however, they should serve to educate investors in energy projects about energy efficiency itself and the possibilities of improving it using the ESCO mechanism. When such knowledge is missing, the simplest solutions are resorted to (e.g., grants or loans), which are also burdened with disadvantages or at least result in various types of limitations.

According to the research, the task of popularising the ESCO mechanism should fall to both the entities responsible for the national energy policy, as well as ESCO companies themselves. Barriers to the use of ESCO in Poland were identified and diagnosed several years ago, and specific recommendations were formulated. The report by the World Bank and Ministry of Development [20] also pointed out the need to develop model templates and documents, introduce changes in the budgeting rules for the procurement system to enable EPC contracts, establish nodal energy agencies and recruitment of project facilitators, launch incentive mechanisms and financing schemes, develop of targets for energy efficiency indicators for public offices and prepare measurement and verification reports, etc. This can contribute firstly to the process being promoted and popularised at all times, secondly to the gains in energy efficiency being sustained, and thirdly to measures being put in place to realise more significant potential energy savings [20]. Our research supplemented the results with the needs resulting from the specificity of EU funds and changes in the conditions in the 2021–2027 period.

It is difficult to pinpoint why, despite recognising this problem, not enough has been done to improve the promotion of ESCO companies in the energy market. ESCO companies competing for customers have found it challenging to demonstrate the attractiveness and competitiveness of this formula against, for example, grants. In the case of grants, many public and local governmen<sup>t</sup> institutions had high budgets for information and promotional activities to attract applicants and beneficiaries and ultimately demonstrate the achievement of indicators in EU programs. As a result, respective resources were used to promote gran<sup>t</sup> programs, but ESCO was not mentioned in energy projects.

In light of the research, however, it appears that the most work remains to be done in the legislative area. The legal barriers are identified by Bertoldi and Boza-Kiss [9] and Trianni, Cagno and Farné [13], and we agree with the authors cited in this regard. This concerns primarily unambiguous jurisprudence and implementation of uniform formal and legal solutions facilitating the use of ESCO both by public sector entities and commercial entities, by both housing associations, and cooperatives. Insufficient or unclear legal regulations regarding the ESCO mechanism are primarily related to the fear of receiving state aid, which is consistent with Rogi´c Lugari´c, Dodig and Bogovac [7]. Exceeding public aid limits may mean the necessity of returning the resources with statutory interest. There is also insufficient interpretation on how to record liabilities from using the ESCO mechanism in local governments and enterprises (especially the impact of ESCO on local governmen<sup>t</sup> debt rates. Great interpretive difficulties also pertain to accounting for savings from the ESCO mechanism. In the latter regard, it is worth citing the examples of Germany and the United States, where, in order not to exceed debt ceilings, contractual EPC payments qualify as an operating expense. In some countries, EPC contracts are included in calculating the debt ceiling of public sector entities. In contrast, in Germany and the US, for example, EPC contracts are permitted provided the following criteria are met:


As long as the above conditions are met, payments to the EPC contractor are counted as operating expenses (building maintenance) and not as debt repaymen<sup>t</sup> [30].

The above proves that for the formula to grow on the Polish market, it is crucial to clearly define whether repayments to ESCO should be reported as debt or included in operating expenses [20]. Such solutions have been introduced in Poland in the amended Act on energy efficiency, where a provision has been added: obligations resulting from an energy efficiency improvement contract do not affect the level of public debt and the deficit of the public finance sector, where the energy services provider bears most of the construction risk and the risk of achieving a guaranteed level of average annual energy savings, taking into account the impact on these risks of factors, such as guarantees and financing by the energy services provider as well as asset allocation at the end of the contract. However, while clarifying much, this provision still does not entirely convince potential investors from the public sector to use ESCO.

Although many barriers indicated by the studies (e.g., competition from grants, the too-small scale of savings from ESCO) cannot be fully eliminated, this formula can be successfully improved, e.g., by combining it in certain variants of financial engineering with grants and forgivable loans or by transferring more innovative and effective technological solutions to the Polish market, allowing for the generation of greater savings from the use of the ESCO mechanism.

It is also worth emphasising the important role played by companies providing such services in popularising the ESCO mechanism. The research clearly showed that the elements of ESCO service that are essential in proper project planning are expert advice and professional performance of energy audits. Unfortunately, practice shows that in many projects, this element is omitted or implemented incorrectly, as a result of which even correct implementation of the investment does not guarantee obtaining the expected improvement in energy efficiency. ESCO companies should therefore do much more to advise and even educate their customers on the importance of the planning process for the final results of an energy project.

ESCO companies recognise the potential of this market and are able to identify target groups with whom they would like to carry out energy projects now, and in the future, but the principles of the functioning of this market depend on many conditions, including many which are completely independent from this market. One such factor is the international and domestic energy policy, which has a large impact on the viability of the ESCO business model. The current form of documents, such as the European Green Deal [54], NextGenerationEU (European Instrument for Reconstruction and Increasing Resilience) [55] and EU Cohesion Policy 2021–2027 (European Cohesion Policy 2021–2027) [56] indicate a very large proportion of energy projects in financing the development processes of the European Union in the coming years. This opens a number of new possibilities for the use of the ESCO mechanism and is an important argumen<sup>t</sup> for its further improvement. In this aspect, the current level of interest in particular types of ESCO services which emerges from the research may increase significantly in the coming years, which opens new prospects for this market.

We should also not forget the growing awareness of institutional and individual customers about the impact of industrial production and other human activities on climate change. It is to be expected that consumers will increasingly attach more importance to the way in which a product or service is produced or provided, and more specifically, will be interested in ensuring that this process takes place in the most sustainable manner possible, with the least possible damage to humans and the environment. Therefore, many entities will seek to intensify energy efficiency measures for their operations in a way that does not increase costs and maintains the existing competitiveness of their products and services.

When referring to the business models that can be applied to the ESCO mechanism, it is hard to ignore the fact that they generate risks primarily for the energy service company itself. Such a company may rely on its own or returnable capital, e.g., on repayable financing in the form of a preferential loan fund granted to it by state institutions. The company, in turn, organises an open call for proposals for ESCO projects within a specific technical and technological framework. In order for the whole project to be successful, it is necessary to introduce an appropriate formal and legal framework and for public institutions to run educational campaigns aimed at encouraging both entities (ESCO and investors) to implement the ESCO mechanism. An important element facilitating the functioning of this mechanism may be, for example, an escrow account, which serves as collateral for the repaymen<sup>t</sup> of the liabilities of the investor towards the ESCO. It should be emphasised that it is the energy service company that bears the entire risk of not achieving energy savings and return of funds from the loan fund to state institutions, which must be factored in its business activity and included in the contract.

The way in which the parameters of each project are approached depends primarily on its scale, size and potential environmental and financial effects. Therefore, a case-bycase approach is recommended for selecting the parameters of a specific ESCO contract. Research-based criteria for evaluating target groups should also be part of the contract. The key criterion is the profitability of the contract with the entity, which should be correlated with the level of risk the ESCO is willing to bear. Other important elements of the contract include the contribution of the investor, the interest rate on the preferential loan, the payback period, the preparation fee, and how the cost savings will be distributed in correlation with the planned payback period.

The main benefit of using the ESCO mechanism is the reduction of the need for the investor to make a contribution and the quick benefits from the savings on energy costs, which appear immediately after the completion of the investment and start of operation which is in line with the European Energy Service Initiative [34].

The application of the ESCO mechanism usually binds the owner of the facility to the ESCO for many years in terms of defining the effects (e.g., by means of an EPC contract), and during the operation–monitoring the effects, which are the basis for accounting settlements. This approach reduces mismanagement on the one hand but at the same time requires patience on both sides when it comes to the rate of return on investment. Taking into

consideration the results of the audit of energy efficiency investments made in public-use organisations by the Polish Supreme Audit Office [42], the results of our research confirm the need for and gaps in specialist knowledge and ineffective investment implementation mechanisms. Major shortcomings were also identified at the initial stage of defining design assumptions and later at the stage of monitoring energy effects during operation. The popularisation of investments within the ESCO mechanism should be accompanied by procedures and formal documentation at each stage of investment (planning, tender, implementation, monitoring and settlement) so that it is not possible to repeat the mistakes indicated in the cited audit report.
