Paradise Lost or Found?

Feb. 1, 2008
Energy-service companies (ESCOs) may be tough to compete against in some segments of the green market, but electrical distributors can win on their home field.

Some sandboxes in the green market are pretty much off-limits for traditional electrical wholesalers and independent manufacturers' reps. The undisputed kings of large state, school/university and federal projects are energy-service companies (ESCOs) and if distributors and reps venture into these market segments in search of green dollars, an ESCO will very likely kick some sand in their face. The green market is not an undiscovered paradise for ESCOs, and in fact one of the reasons that they became kings in this sandbox is because electrical distributors and other suppliers of energy-efficient products for it weren't properly servicing customers' demand.

According to the National Association of Energy-Service Companies (NAESCO), Washington, D.C., ESCOs develop, install, and arrange financing for projects designed to improve the energy efficiency and maintenance costs for facilities over a seven- to 20-year time period. They generally act as project developers for a wide range of tasks and assume the technical and performance risks associated with the project. NAESCO says ESCOs typically develop, design, and finance energy-efficiency projects; install and maintain the energy-efficient equipment involved; measure, monitor and verify the project's energy savings; and assume the risk that the project will save the amount of energy guaranteed.

These services are bundled into the project's cost and are repaid through the dollar savings generated in what ESCOs call performance contracts. Electrical products are an important part of these contracts and the package of products and services ESCOs sell, but these energy specialists also focus on energy-efficient heating and air conditioning (HVAC) products, engines/turbines, windows, showerheads, renewable energy systems, including wind and photovoltaics, and other building products or systems that can help their customers slash their overall energy usage, not just their electricity bills.

ESCOs are indisputably the players to beat in the “MUSH markets” — municipal and state governments, universities and colleges, K-12 schools and hospitals, as well as the federal market segment. According to “A Survey of the U.S. ESCO Industry: Market Growth and Development from 2000 to 2006,” published by the Lawrence Berkeley National Laboratories, Berkeley, Calif., the MUSH market segments account for approximately $2 billion in annual sales and 58 percent of total sales through ESCOs, and the federal market accounts for an additional 22 percent of industry revenues ($760 million).

Those are some impressive sales numbers, when you consider how few ESCOs exist. The 46 ESCOs surveyed for this study account for the bulk of the $3.6 billion in total 2006 sales through ESCOs. What some green market observers call the “Tier One” ESCOs are the largest companies, and include divisions of product manufacturers such as Honeywell, Johnson Controls and Siemens Building Technologies. Other top-tier players include the ESCO subsidiaries of electric utilities and ESCOs that were once owned by utilities and now operate independently.

Interestingly, the report said the three markets that account for the vast majority of total product sales through electrical distributors account for relatively small percentages of ESCO sales. In 2006, the commercial, industrial and residential markets accounted for 9 percent, 6 percent and the 3 percent of sales, respectively.

ESCOs don't focus on commercial/industrial customers because it's tough to rationalize the cost of the services they provide for accounts of this size, which are often smaller companies. Also, these customers don't always have the long-term investment mind-set that ESCOs' performance contracts require.

Therein lies the business opportunity for distributors and reps. Most of them may not ever be major players in the business for the “MUSH market” and federal buildings. But they can take an ESCO-like approach and provide commercial and industrial accounts with a package of building audits, system design, supply project staging and logistics and possibly even financing. They can definitely learn from the green masters and apply the lessons locally.