Energy Service Companies (ESCOs) in Developing Countries

This report examines the potential, status, and barriers facing Energy Service Companies (ESCOs) in developing countries. It analyzes how ESCOs use energy performance contracting (EPC) to reduce greenhouse gas emissions and energy consumption, highlighting China as a major success story while identifying systemic financing, administrative, and policy hurdles in other regions.

• China has experienced massive growth in its ESCO industry, reaching an annual investment of US$1 billion in 2007, which was equivalent to half of the U.S. investment for the same year.
• The primary financing barriers for ESCOs in developing countries include immature banking sectors, a lack of awareness among ESCOs on how to access funds, and a perception by lenders that ESCOs or their clients are not creditworthy.
• Conventional commercial banking rules often conflict with the Energy Performance Contracting (EPC) model, as banks typically prefer asset-based financing, large projects, and short payback periods over cash flow-based project financing.
• Government energy policies often disincentivize energy efficiency through artificially low energy prices and a lack of enforced energy codes or standards.
• Administrative and transaction costs are high due to complex contract negotiations, a lack of legal frameworks for ESCOs, and government procurement rules that often prohibit multi-year financing or prioritize lowest initial asset cost over life cycle costs.
• Clients in the industrial sector often prefer in-house solutions to protect trade secrets, avoid temporary production shut-downs, or focus on increasing market share rather than energy efficiency.
• International agencies, particularly the World Bank, the European Bank for Reconstruction and Development (EBRD), and USAID, have been critical in jump-starting ESCO industries through funding, capacity building, and loan guarantees.
• The 'outsourcing model' is an emerging remuneration approach in China and Mexico, where an ESCO manages and upgrades equipment on an ongoing basis for a specified fee over a long-term contract (10 to 15 years).
• South Korea is cited as a success model because the government removed institutional barriers in 1998, changing procurement and accounting laws to allow public entities to enter into multi-year contracts.
• To foster long-term sustainability, the report recommends moving toward cash flow-based financing, eliminating energy price subsidies, and establishing accreditation programs to reassure clients of ESCO reliability.

APA

International Institute for Sustainable Development (n.d.). Energy Service Companies (ESCOs) in Developing Countries. https://www.iisd.org/system/files/publications/bali_2_copenhagen_escos.pdf

Chicago

International Institute for Sustainable Development. Energy Service Companies (ESCOs) in Developing Countries. n.d. https://www.iisd.org/system/files/publications/bali_2_copenhagen_escos.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Energy Service Companies (ESCOs) in Developing Countries |url=https://www.iisd.org/system/files/publications/bali_2_copenhagen_escos.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopmentndenergy, author = {{International Institute for Sustainable Development}}, title = {{Energy Service Companies (ESCOs) in Developing Countries }}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/system/files/publications/bali_2_copenhagen_escos.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }