Flash report: ESCOs Go Mainstream
The ESCO Roundtable Borderless has now concluded, read TowerXchange’s market update and get excerpts from our speakers
The ESCO ecosystem now has a home. On Wednesday May 27th Towerxchange at last ran the ESCO Roundtable to unite the whole ESCO value chain. Before we launched the ESCO Roundtable there were no meeting place which brought together ESCOs, their clients, their investors and their suppliers. That has now changed.
This flash report includes exclusive market data and insights from TowerXchange’s opening presentation as well as excerpts of the comments of speakers at the ESCO Roundtable Borderless. More will follow later.
Thank you to our lead sponsors Camusat, i-eng and IPT Powertech and our Co-Sponsor Caban Systems for making this possible. And thank you to Orange for being a major instigator of the industry and the event.
- Herve Suquet, Orange
- Siphile Sibaya, MTN
- Thibaut de Rodellec, Camusat/Aktivco
- Kadri Hakim, i-eng Group/CREI
- Gabrie Bou Gebrael, IPT Powertech
- Matthew Edwards, TowerXchange
What is an ESCO?
TowerXchange define an ESCO simply: An energy services company, sometimes known as a TESCO (Telecom Energy Services Company) or RESCO (Renewable Energy Services Company) is a company that deploys its own capital to acquire energy equipment for telecom cell sites, then sells that energy back to the site owner, whether they are an MNO or a towerco.
Sometimes those ESCOs charge a fixed monthly fee or charge by the kWh consumed. An alternate model is the ‘guaranteed savings’ model, under which the towerco or MNO continues to deploy their own capex, but their ESCO partners takes a risk in guaranteeing the performance of their systems.
As you can see from the accompanying graphic ESCOs do not act alone. ESCOs predominantly rely on development finance, which likes their combination of emerging market telecom and energy investments, their steady cashflows and their quality counterparties. While some of the most successful ESCOs produce their own energy equipment, all of them rely on the wider passive telecom infrastructure supply chain to complete their offering. And while today ESCOs predominantly supply towercos and MNOs, there are ESCOs which have already moved into community power and other opportunities beyond the tower.
ESCO Pioneers by site count
How successful is the ESCO model?
When we began covering ESCOs in 2015 they were a niche segment of the industry. When we published our 2018 ESCO Market Report, they were still only just reaching launch velocity. Today ESCOs are well-established industry players with scale to rival the largest towercos. In 2015 telecom ESCOs had contracts to manage 8,664 cell sites, and since then the number of sites under ESCO management has grown at a 43% compound annual growth rate.
TowerXchange has identified over 20 active telecom ESCOs, who between them now own and operate the energy equipment at 51,433 cell sites. 45% of contracted ESCO cell sites are in the fastest growing geographical market: Africa and the Middle East. 48% of sites are in the oldest ESCO market, India, where growth has begun to accelerate once again. Despite the popular assumption that grid power is too widely available and reliable for the ESCO model to work in developed markets, 7% of the world’s ESCO sites are in the Americas or Europe. The remainder are in other developing markets like Myanmar.
The ESCO whole supply chain
Of the sites where ESCOs own and operate the power systems, a little under two thirds of those sites are owned by towercos, predominantly in India. A little over a third are owned by MNOs.
MNOs and towercos alike increasingly recognise ESCOs as proven business partners, able to deploy capex into long-term payback hybrid and renewable energy solutions, reducing energy opex and carbon footprints, while improving uptime and quality of service (QoS).
ESCOs deploy anything from US$10,000-$40,000 of up front ‘improvement capex’ to hybridise the power systems at a cell site, with India generally at the lower end of that range, and Africa at the upper end (see chart).
Where will ESCOs go next?
We can compare the ESCO trajectory to that of towercos. The accompanying chart compares ESCO and towerco growth in Africa and the Middle East from 2009-2025. Today ESCOs have 22,993 sites under management in MEA. In 2015 there were zero. Towercos managed zero sites in MEA in 2009 and today control over 80,000. We think there is similar sized addressable market for ESCOs, and that they will enjoy steady growth to around 60,000 sites in MEA by 2025.
Comparing towerco growth in MEA from 2009 with ESCO growth six years later
Globally, we forecast an addressable market for ESCOs of around 400,000 sites, although that could be an undercount. Today ESCOs have reached around 12.5% of their potential. By 2024 TowerXchange forecasts ESCOs will operate the power systems at 108,566 cell sites, or around 27% of their addressable market. In 2018, TowerXchange forecasted that the ESCO industry would celebrate contracting its 50,000th site during 2021, but that threshold has been crossed early.
Our estimate is based on the assumption that most of the future addressable market for ESCOs lie with MNOs, but towercos could become significant customers in time too. Towercos own the energy equipment at over 50% of the world’s cell sites, and many of those towercos can access capital at a low single digit cost. ESCOs are generally less mature businesses, with the majority dependent on debt and equity which mean their cost of capital can be five times that of a towerco. As the ESCO model matures we may see towercos turning to them to manage power on their sites, so that towercos can focus on lease-up and network roll-out, not power management.
Because site acquisition has been faster and we are seeing increased interest from towercos, we think there is significant upside to the ESCO model over the medium and long-term.
TowerXchange forecasts ESCOs will operate the power systems at 108,566 cell sites by 2024
MNO attitude to ESCOs
Herve Suquet, Orange MEA’s CTIO explained that MNOs need to upgrade and expand their networks, whether that means expanding the network geographically, densifying existing networks or upgrading core networks and site technology for LTE or 5G. For that they need capital, and they need to spend less time worrying about non-core competencies like energy. Towercos are one potential power-as-a-service partner, but ESCOs can also deploy their capital into cell site energy assets.
Orange has looked at working with towercos to release capital for some time, but think that towercos can be rigid and store up concerns for the future. This was a sentiment shared by Siphile Sibaya of MTN, who spoke later during the session. However, both MTN and Orange want a partner to invest in energy assets and manage power at their sites. MNOs are not energy experts, and so in 2017 Orange turned to ESCOs as their key partner to modernise their site energy management. Following the 2019 TowerXchange Meetup Africa, MTN decided to follow suit and issue some preliminary ESCO RFPs.
Both Orange and MTN emphasised the importance of following local conditions and devolving decision making to local opcos, while supporting from the centre with resources. There can be resistance to change from parts of the organisation or long-term partners, but both emphasised the importance of education and central leadership in resolving any difficulties.
The Renewable Energy Ratio is one of three key KPIs for Orange. Orange has committed to renewables making up more than 50% of its energy mix by 2025. So long-term CSR strategies are affecting energy decisions made now. MTN don’t have as stark a target as Orange, but they do have major challenges in managing energy in some of their more emerging markets, and in South Africa they are facing a carbon tax which will require them to invest in renewables.
Besides outsourcing energy capital spending, and shifting to renewables, site availability is a key concern for MNOs. Orange have a target site availability of 99.6%, which its ESCO partners are currently fulfilling. In emerging markets, a significant share of network outages are caused by site power failures, and both Orange and MTN were looking to ESCOs to eliminate this perennial headache.
India vs SSA: Where does the capex go to hybridise a cell site for the ESCO model?
How ESCOs are solving their partners’ power problems
Here we will excerpt from the comments of our Lead Sponsors Camusat, i-eng and IPT PowerTech. A fuller summary will follow in the ESCO Borderless Report.
Thibaut de Rodellec, Deputy CEO of Camusat emphasised the key competencies needed for ESCO success. Top of the list was operational excellence. Without boots on the ground and a capacity for field operations and maintenance you will be unable to fulfil the promise of the ESCO model.
As well as protecting ESCO financial performance, and eliminating unpleasant surprises for MNO partners, operational excellence brings more flexibility to energy management and makes necessary changes to sites easy to fulfil. This flexibility is a key requirement for MNOs and has helped Camusat drive a 15% annual organic growth in its markets.
Kadri Hakim, Co-CEO of i-eng discussed the short-term and long-term improvements in availability ESCOs can generate. i-eng have three key strategies in place to improve availability. The first is designing and manufacturing their own hybrid power systems in India. They have deployed over 2,000 so far and have used their expertise in the field to ensure their model works well.
In addition to smart technology, their IT Service Management (ITSM) and Global NOC (Network Operations Centre) allow them to coordinate and monitor systems globally to identify problems and resolve them before they affect local KPIs. Lastly they too emphasised their O&M and field work experience. They have 10 years’ experience and now manage over 20,000 sites.
IPT PowerTech are one of the longest running ESCOs in the world and have already started diversifying the model. Gabriel Bou Gebrael, their head of ESCO discussed how in one market, IPT PowerTech now operates as an ESCO to two MNOs, this allows for significant cost savings and improvements in operations. Power can now be co-located which reduces overall cost and site complexity, which improves reliability. They can also eliminate duplicated management, warehousing et cetera. They can achieve 25-40% improvement in efficiency through a single ESCO deal, a dual deal is even better.
IPT PowerTech also operate a guaranteed saving model with a towerco, in which the towerco uses its lower cost of capital to invest in energy equipment, but IPT PowerTech takes over operational control and the energy risk. This means savings are realised up front by the towerco which can enjoy a 50% reduction in opex.
This is a flash report of the ESCO Roundtable Borderless. The ESCO Borderless Report will follow in June.
TowerXchange will be holding a series of energy focused digital events over the year, Greening the Network. The next of these is due to take place on July 15th and if you are interested in participating please contact me at: firstname.lastname@example.org.
Why Greening the Network?
- Before investing in telecom infrastructure, investors are demanding green action plans
- Telecom Corporate Social Responsibility Strategies require emissions reductions in it supply chain
- 5G and changing site typologies are increasing power complexity in developed markets
- Carbon taxes are pushing up the cost of carbon-based energy
- Operational excellence demands improved site autonomy, cleaner energy and more efficient network equipment
ESCOs will be major players in the new greener network, and I hope you will be too. See you in July.
Thank you again to our lead sponsors: Camusat, i-eng, IPT Powertech and co-sponsor Caban Systems. And thank you to Herve at Orange and Siphile at MTN for speaking too and sharing their thoughts.