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The resource hub will be updated throughout May and June, please check back in June for the ESCO Borderless Report. For now please take a look at our latest ESCO research below, and interviews with our four ESCO Borderless Sponsors.
ESCOs emerging as critical new buyers of telecom energy equipment
MTN, Ethio Telecom and Vodacom poised to follow Orange in partnering with ESCOs to drive operational efficiency and green energy
Read this article to learn:
– Orange’s successes as ESCO pioneers in six, soon nine, African countries
– MTN’s appetite for ESCO partnerships
– The requirements of Africa’s two largest ESCOs: Aktivco and IPT PowerTech
– The answers to ten frequently asked questions about ESCOs
By the end of 2020, Orange will be working with ESCOs in nine Sub-Saharan African countries – outside of their partnerships with towercos, almost all Orange’s power systems in Africa will be operated by ESCOs. MTN plans to transition the majority of their 13,000 retained towers in bad grid markets to ESCOs. Safaricom are exploring an ESCO in Kenya, Ethio Telecom has issued a substantial ESCO RFP in Ethiopia, and Vodacom is exploring ESCOs in DRC and South Africa. ESCOs will operate the power systems at more than half of Africa’s off-grid cell sites, or cell sites on unreliable grid connections, by the end of 2021.At the TowerXchange Meetup Africa 2019, in the Energy working group and ESCO round table, it was clear that ESCOs were emerging as critical stakeholders in telecom energy in SSA. Why?
In Africa’s unforgiving operating environment, the gensets and batteries on which most cell sites rely do not last long. Ageing power systems result in increased instances of downtime. Diesel gensets often run 24/7, making fuel logistics critical to continuity of service, yet diesel refuelling is not the core competency of any MNO. Even though the cost of green energy has never been lower, only a single digit percentage of Africa’s cell sites run on green energy. Africa’s MNOs are among the largest power generators on the continent – they don’t want to be!
All these factors are driving a growing number of Africa’s MNOs to partner with ESCOs.
Towercos have made tremendous progress in improving uptime and efficiency in African telecoms. But the towerco business model breaks down in rural, single tenant environments. Towercos cannot achieve the necessary scale in smaller countries, especially where the operating environment in those countries is challenging. Finally, the towerco business model is not calibrated to emphasise green energy – most hybridisation entails renewing and upgrading battery banks, rather than progressing to full hybrid renewables.
ESCOs hold the key to unlocking the capital investment in renewable energy solutions that can address the MNOs’ challenges, and fill a gap in the market left by towercos.
Orange pioneers the ESCO model
Orange has activated ten year ESCO contracts in six countries (DRC, Niger, Guinea Conakry, Cote d’Ivoire, Liberia and Burkina Faso), with live RFPs for ESCOs in three more countries (Cameroon, Central African Republic and Mali).
Since partnering with ESCOs, Orange reports network uptime ratio improvements of 30-40% in Burkina Faso and Niger. Even when sites go down, mean time to repair (MTTR) has been significantly improved.
“It’s a partnership, not a supplier relationship,” explained Orange Deputy CTIO Jocelyn Karakula at the ESCO round table at the 7th Annual TowerXchange Meetup Africa.
“We’re structuring deals such that ESCOs should be profitable from day one,” added Karakula, before concluding: “at this relatively early stage, our ESCO partnerships have been a success from an economics perspective, in some cases surpassing what was expected in the business plan.”
The cherry on the cake: multi-tenant ESCO sites
MNOs, Orange in particular, would like to see the ESCOs’ perimeter expanded to include maintenance of both passive and active equipment, site security and, ultimately, co-location of sites to multiple tenants, enabling the mutualisation of power systems and a full range of services to multiple MNOs. We are already seeing ESCOs building new sites for MNOs, deploying networks deeper into rural areas and accelerating digital inclusion.
Another goal is for every operator in a given country to partner with an ESCO. Imagine the efficiencies ESCOs could enable if they were able to consolidate the primary or backup power systems on every site in a country, and share those resources with every MNO! We could see dramatic reductions in both capex and opex, as site visits would be dramatically reduced. And the impact in terms of carbon emissions reduction could be tremendous!
MTN has 13,000 potential ESCO sites
MTN retains around 40,000 towers outside their partnerships with towercos. The power systems at around 13,000 MTN sites could be handed over to ESCOs in the medium term. At the TowerXchange Meetup Africa 2019 Energy Working Group, MTN revealed that they have issued a non-binding proof of concept (PoC) for an ESCO to assume an initial 100 of their 2,000 sites in Sudan. Diesel prices have recently trebled in Sudan, driving up opex in a market where 90-95% of cell sites run on diesel gensets 24/7. Under the Sudanese ESCO PoC, MTN is not proposing to sell their existing power assets, but is looking for a partner to replace those assets with renewable energy solutions. MTN are open to solar, wind, LPG – any alternative to diesel.
Another ESCO PoC is in the pipeline for MTN Congo Brazzaville, with an RFP expected in Q120.
MTN sees ESCO partnerships as a logical next step for their smaller opcos, including the aforementioned Sudan and Congo Brazzaville, plus Liberia, Guinea, South Sudan, Yemen, Syria and Afghanistan. MTN is less keen to partner with ESCOs where they already have a towerco partner: in Nigeria, Cote d’Ivoire, Cameroon, Ghana and Uganda. Sites in MTN’s relatively good grid markets of Iran (~15,000 sites) and South Africa (~12,000 sites) are also unlikely to be handed over to ESCOs. MTN explained that their principle energy challenge in South Africa was not so much one of grid availability, which remained high, but more one of battery theft, which affected ~3,000 sites per year. MTN has not deployed much lithium-ion yet, and where it has, has not seen much dampening of theft.
MTN currently sources most of their hybrid energy solutions from the big four OEMs: Huawei, ZTE, Nokia and Ericsson. Asked about their appetite for green energy going forward, MTN said they were acutely aware of their carbon emission reduction targets and taxes, and suggested they foresee using ESCOs as the primary vehicle to extend their rollout of green energy solutions.
The requirements of Africa’s two largest ESCOs: Aktivco
Aktivco is Camusat’s ESCO play, managing 2,000 sites in Chad, Burkina Faso, Cote d’Ivoire and Niger. Aktivco expect to build 250-280 additional sites per year across these countries. They anticipate closing two more ESCO contracts in new countries imminently, adding a further 1,000 sites.
Around 40% of Aktivco’s sites are on grid, albeit those grid connections are of variable quality. For example, grid uptime is ~98% in Cote d’Ivoire, but still suffers short outages; the grid is also quite reliable in Burkina Faso, but connections are expensive; while in Chad, grid availability is closer to 60%, and there is an energy crisis in Niger.
Aktivco deploys their own powercube, ePower, but they aggregate best-of-breed components.
New technologies must be certified by Aktivco, which undertakes proof of concept tests in Romania.
The requirements of Africa’s two largest ESCOs: IPT PowerTech
IPT PowerTech is also an ESCO, operating 10,000 sites in SSA. Half are in Nigeria, where they operate the “guaranteed savings model” under which their client, IHS Towers, deploys the capital, but IPT takes the risk (and reward) from diesel savings. IPT operates a conventional ESCO model for Alfa and touch, the two MNOs in Lebanon, representing around 30% of IPT’s ESCO sites. The balance of IPT’s ESCO sites are in Guinea in a partnership with Orange. IPT is adding around 500 sites per year.
Capacity shortages mean even in Lagos, the grid is online for only around five hours per day, so all of IPT’s Nigerian sites are effectively off-grid. IPT is the largest of what was originally dubbed IHS’s “Big Five” partners, of which Biswal and M-P Infrastructure also remain active. Around 60% of IHS Nigeria’s sites have been hybridised, including the majority of those operated by IPT, although around 6,000 IHS Nigeria sites still run primarily on diesel. IPT has some sites on good grid connections outside Nigeria.
IPT are open to exploring innovative energy solutions, which they test in their facilities in Lebanon.
Ten frequently asked questions about ESCOs
ESCOs already own or operate the power systems on more than 25% of SSA’s cell sites on unreliable grid connections or off-grid, and TowerXchange foresee that proportion approaching 50% in the next two years. As such, it is important to understand a few fundamentals about the ESCOs.
What kind of energy equipment do ESCOs buy?
While there are a couple of ‘technology agnostic’ ESCOs, Africa’s largest ESCOs deploy their own hybrid energy solutions. As such, manufacturers of containerised, plug and play hybrid energy systems will find it difficult to sell to ESCOs – so they may need to compete to win ESCO contracts directly. However, most ESCOs are aggregators of third party components, of which they ESCOs emerging as the fastest growing, and soon the largest, category of buyers in SSA.
ESCOs standardise where possible, and are inclined to use proven solutions with which their field maintenance teams are familiar.
Some ESCO partnerships include explicit targets to increase utilisation of renewables: “our green energy ratio was 3% – modernisation driven by ESCOs should drive this over 50%,” said one MNO.
Most ESCOs continue to primarily use lead-acid batteries – “we’re open to lithium-ion,” said one ESCO “but not convinced”.
All equipment must integrate with the ESCO’s monitoring and management platform.
Most ESCOs are at a relatively early stage in their evolution, such that vendor financing can be attractive to them, although operational delivery and the ability to achieve SLAs will always be their greatest priorities.
ESCOs consider total cost of ownership (TCO), not just the capital cost of solutions, and with ten year contracts, ESCOs’ TCO horizon may be longer than an MNO’s or even a towerco’s.
How long does it take an ESCO to modernise its sites?
It can take up to a year to negotiate the SLAs and KPIs, and to finalise an ESCO contract, but the process can be expedited when subsequent contracts are iterations of an initial agreement.
Even when a contract is signed, ESCOs don’t start upgrading sites right away – they start with a comprehensive audit of sites to determine the ideal solutions. While ESCOs typically modernise the energy equipment at 2-4% of their portfolio per month, one their biggest challenges is the lag between the order and installation of equipment, which typically takes two to three months.
ESCOs aim to upgrade the energy equipment at the majority of their sites, typically over a 24 month period. Most ESCOs are prepared to run down any remaining lifecycle of legacy power systems before modernising sites.
Towercos’ appetite to partner with ESCOs
Many emerging market towercos are rightly proud of their achievements in developing and providing power-as-a-service. Many of those towercos have invested substantial financial and human capital to develop the operational excellence necessary to achieve and surpass challenging uptime SLAs. “I like spending capex to reduce opex,” summarised the CEO of one African towerco.
It will be a challenge to convince towercos with mature, accomplished energy services teams to relinquish that responsibility to ESCOs.
But towercos entering a virgin market, such as Ethiopia, or towercos making their first forays into managed power services, would be well advised to seriously consider partnering with ESCOs.
What savings are MNOs looking for when working with ESCOs? And how profitable are ESCOs?
For Orange, targeted savings are based on a total cost of ownership (TCO) analysis, against a baseline based on the cost of passive infrastructure, energy opex and security.
“As many of the MNO’s costs are transferred to the ESCO, and Camusat was already providing managed services for many of these sites, we already know how much fuel goes into the existing sites, so we know inherited fuel and security costs,” said Orange’s partner ESCO Aktivco. “This is why the strongest ESCOs are already operational companies – we have a good understanding of the cost of a maintenance site visit. Sometimes we also absorb the MNO’s operational team, so we need to know the overhead costs too. We prefer the MNO to be as transparent as possible about their existing costs, otherwise we’d have to inflate our quote to be safe.”
Of course ESCOs deploy substantial capex into site modernisation, the effect of which on opex is not always clear at the outset of the agreement. So it may be a couple of years before the full TCO can be compared before and after the portfolio has been fully modernised. Only then will we be able to make a final judgement about how profitable ESOs are.
Orange proudly proclaim that their ESCO projects enable their partners to be profitable from year one, a suggestion not disputed by their biggest partners. With the ESCO’s fees fixed from the outset of the contract, achieving profitability is contingent upon reducing energy opex, which first means reducing diesel consumption. This in turn is dependent on operational performance and site modernisation. So just because an ESCO can be profitable in year one, doesn’t mean to say it will be.
Some aspiring ESCOs have questioned whether that near term profitability is achievable without the ESCO bundling passive and active maintenance, together with site security. What is clear is that all stakeholders agree that the ESCO business model is significantly enhanced when additional MNOs from the same country partner with the same ESCO.
How do MNOs evaluate respondents to an ESCO RFP – is price the primary factor?
Of course price is a significant factor, but the financial strength of the ESCO company is critical – it is important for the ESCO to demonstrate their capability in the long term.
There is also a growing feeling that it would be healthy to have more than the two to three ESCOs that are currently securing the majority of contracts in Africa, to mitigate counterparty risk.
“Some MNOs are less focused on site modernisation, they just have price and performance targets,” said one ESCO. “Other MNOs want to understand how you will reach those performance targets, for example in terms of the number of sites modernised per month, and the impact on their green energy ratio.”
How are ESCOs paid, in what currency, and is there indexation?
While there are variants on the model, most ESCOs agree a fixed fee per site per month. There are typically a number of different rates for different site typologies.
One ESCO revealed that they were paid in three parts:
– The fee related to energy is paid in whatever currency they buy the fuel in
– The O&M fee is typically paid in local currency
– Fees related to capex are typically paid in Euros or U.S. dollars so as to minimise FX risk
Indexation tends to be calibrated according to the energy mix. Where energy primarily comes from the grid, indexation is primarily linked to CPI. Where energy primarily comes from diesel, indexation is primarily linked to the price of diesel.
How do ESCO agreements accommodate changes in power load, as next generation networks are rolled out or as co-locations are added?
Orange explained that they undertake an audit of every site prior to opening an ESCO RFP, assessing the current and future configuration – so there’s visibility of site configuration changes anticipated, for example with 4G overlays increasing power requirements. Orange’s terms are described as “flexible enough to accommodate change over the ten year term of the ESCO contract.”
One of Orange’s partner ESCOs added “We are aligned to our MNO partners’ changing power load. We know that if a site starts with a 3kW load, it probably won’t stay at 3kW over the ten year term of the contract. The load, the site typology, even the location of the site may change. Flexibility is key, but yes our pricing changes based on load and as the site typology changes over the years.”
Do ESCOs acquire the existing power systems at cell sites when they assume control?
Some ESCO contracts transfer ownership of legacy power assets from MNO to ESCO, but more often, the ESCO receives an indefinite right of use for free. In either case, the ESCO will deploy its own capex to modernise, after which the ESCO will own the power equipment.
What happens at the end of the ESCO contract?
In the unlikely event that an ESCO contract is not extended, the MNO typically has a reversibility clause giving them the right to buy the power equipment.
What is the addressable market for ESCOs?
There are a range of opinions on this matter, but most commentators agree that cell sites in countries with a significant number of sites off-grid on unreliable electricity grid connections, where grid is usable on average for less than 16 hours per day, are the most obvious targets.
Where emerging market towercos remain reluctant to partner with ESCOs, towerco sites might be medium term rather than near term targets for ESCOs. ESCOs can still partner with MNOs alongside a towerco, as exemplified by Orange Cote d’Ivoire, which is working with both IHS Towers and Aktivco. We have already seen ESCOs take over 100% of the sites for MNOs in countries without towercos present – a fact which illustrates that the addressable market for ESCOs includes on-grid as well as bad grid and off-grid sites.
The near term pipeline of ESCO opportunities consists of ~3,000 Orange sites in Mali, Cameroon, the Central African Republic and Egypt, the opportunity in the latter country being subject to resolution of issues related to diesel subsidies. Orange has identified a total of 15,000 sites, in 13 countries, which could be transferred to ESCOs. A substantial ESCO RFP is in progress from Ethio Telecom, while another large ESCO opportunity is imminent in Kenya with Safaricom. MTN has 13,000 cell sites in bad grid markets, and is keen to explore ESCO partnerships – MTN has an ESCO proof of concept live in Sudan and another imminent in Congo Brazzavilla. Vodacom has long been considering partnering with an ESCO in DRC and, potentially, in South Africa.
Once an ESCO is active in a country, convincing the other MNOs to partner with the same ESCOs would unlock significant economies of scale, so this is also a priority.
The “TowerXchange ESCO Market Report 2018” identified a total addressable market for ESCOs of 125,280 cell sites in SSA and MENA, of which around 20,000 (16%) are already contracted.
How will the role of the ESCO expand in the future?
The scope of ESCOs is expanding all the time, from power-as-a-service to full passive and active infrastructure maintenance and security. ESCOs are already starting to expand beyond cell sites to manage the power systems at data centres, technical sites and MNOs’ retail outlets. ESCOs are also starting to explore community power and, potentially in the future, co-location sales and the mutualisation of power systems to all operators in a market.
We are already seeing ESCOs build several hundred new sites per year.
Special thanks to Jocelyn Karakula, Deputy CTIO of Orange, for moderating the ESCO round table, and to the energy equipment buyers who attended this year’s energy working group, including Aktivco, IPT PowerTech and MTN.
TowerXchange are partnering with Orange to host an “ESCO Roundtable” for the pioneers of this transformational model. Click here for more information.