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.
Defining an ESCO
TowerXchange uses a broad and inclusive definition of an ESCO. We define an energy services company (ESCO, sometimes known as a TESCO – Telecom Energy Services Company, or RESCO – Renewable Energy Services Company) as any company which deploys their own capital to acquire energy equipment for telecom cell sites, then selling energy back to the site owner (MNO or towerco), either charging a fixed monthly fee or charging 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 still take a risk in guaranteeing the performance of their systems.
Click here for more details on the ESCO Roundtable Borderless.
1. 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.
2. 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.
3. 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.
4. 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.”
5. 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.
6. 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.”
7. 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.
8. 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.
9. 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.
10. 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.