The World of ESCOs

Aug. 1, 2010
Energy service companies (ESCOs) haven't felt the recession nearly as much as electrical distributors and there's good reason to believe they will grow even faster over the next few years.

Part of a series on the changing channels of distribution

With the 20-percent-plus sales decline over the past two years that many electrical distributors, reps and manufacturers have had to endure, it's somewhat startling to stumble across a market niche that grew in the high single digits even during the depths of the recession and may double or triple in size over the next 10 years.

Welcome to the world of energy-service companies (ESCOs). Relatively small in number with no more than a few dozen major players, these energy specialists develop, install and arrange financing for projects designed to improve the energy efficiency and maintenance costs for a facility over an extended period of time, according to the National Association of Energy Service Companies (NAESCO), Washington, D.C.

NAESCO says what sets ESCOs apart from others interested in energy-efficiency projects, such as consulting firms and equipment contractors, is the concept of performance-based contracting. When an ESCO undertakes a project, NAESCO says the company's compensation and often the project's financing are directly linked to the amount of energy that is actually saved.

ESCOs focus on slashing a customer's total energy bill by retrofitting building systems including electrical, HVAC, insulation, roof and windows. Some, like ConEd Solutions, Valhalla, N.Y., a division of New York mega-utility ConEdison, even provide customers with a source of electricity. Lighting retrofits are a comparatively small but very visible part of the services that ESCOs provide for their customers, which typically includes the MUSH market (municipal, state/local business, K-12 schools, universities and health-care facilities) federal projects and, to a lesser degree, large commercial and industrial projects.

NAESCO's ESCO members range from small, privately held companies to large entities like ConEd Solutions that are owned by electric utilities and do more than $1 million in annual revenues. Listed among NAESCO's members are some familiar names from the electrical world — Eaton Corp., Cleveland; the Siemens Energy and Environmental Solutions business unit based in Buffalo Grove, Ill.; and Schneider Electric, which all have growing interests in providing building owners with turnkey design and installation services.

Two industry insiders say ESCOs never really saw any drop in business during the recession. James Dixon, V.P. energy services, ConEd Solutions, said the ESCO market has grown 7% to 8% in recent years. Don Gilligan, NAESCO's president, says a study by Lawrence Berkeley National Laboratory projects that ESCOs may see their business double, triple or grow even more by 2020 “depending on what happens with the federal energy and climate legislation.” The popularity of utility rebates and states' financial incentive programs are also helping propel this growth. Gilligan says the total volume of rebates is growing 15% to 20%.

According to a press release announcing the release of the NAESCO/ Lawrence Berkeley Laboratories study, ESCOs expect a large infusion of funding from the American Recovery and Reinvestment Act (ARRA) to support state and local government energy efficiency programs, increased spending in ratepayer-funded energy efficiency programs, and increased customer interest in strategies that slash utility bills or address environmental concerns. The report says these federal programs and utility rebate programs and the growing customer interest in slashing utility bills and protecting the environment will help the ESCO market grow 26 percent annually in 2010 and 2011 and reach annual revenues of up to $7.3 billion in 2011.

David Weiss, NAESCO treasurer and president and COO of Energy Services at Pepco Energy Services, Arlington, Va., said in the press release announcing the study that, “Public facility managers and financial officers increasingly realize that performance contracting enables them to reach their energy and environmental goals by implementing projects entirely paid from savings. As we emerge from the recession, we expect that commercial building owners will also see that performance contracting can help them reach their goals.”

It's interesting to note that the NAESCO/Berkeley study said the commercial/ industrial retrofit market segment — the traditional stronghold of electrical distributors and their customers — only accounts for seven percent of the total ESCO market (down from 15 percent in 2006). The report said one of the reasons for this smaller market share was that the traditional ESCO business model based on long-term performance contracts has always been a tough sell to private-sector customers. In the private sector, most commercial building owners are looking for short-term increases in net operating income and are hesitant to invest in a retrofit that doesn't guarantee a short-term payback. In contrast, federal, state or municipal building occupants may have to meet a mandate to slash their energy usage.

In the industrial segment, the report said many customers are reluctant to enter into long-term contracts because they are not sure how long the manufacturing plants will remain open or at what operational level. Another factor in this segment, said the report, is that measurement and verification of energy savings can be more difficult in industrial environments because “the technologies are proprietary or commercially sensitive.”

Dixon and Gilligan say ESCOs are eager to work with electrical contractors and distributors who are willing to prepare themselves for this growth opportunity. “We see a real need to work more closely with the contractors and wholesalers,” says Gilligan. “Both of these groups have to keep up with the new developments in technology and have to understand the volume of business that is coming out of our industry.”

“They have to stay on top of the technology,” agrees Dixon. “The lighting contractors who can be a partner and identify new technologies and better ways of achieving energy efficiency through lighting are the real value-adds. Those are the ones you want to partner with and bring into jobs.

“Lighting is just the low-hanging fruit. You can buy a lot of project with a good lighting partner who can go in and really find some savings. It's not just a matter of changing lightbulbs. They must stay on top of the latest photometric analysis. Those are the ones that we continuously go back to when we are developing proposals and invite in as a partner.”

Gilligan says that while the lighting portion of a retrofit is certainly not the majority of the typical ESCO job, it's the part of the job that touches everybody. “Every room has lights,” he says. “The heating or cooling system may be in the basement or sub-basement and nobody ever sees it.”

He also says ESCOs are looking for electrical contractors who know how to get in and out of a job cleanly and simply and can make that process as efficient as possible. On the distributor side, ESCOs want deliveries streamlined, just-in-time and packaged to make the contractor's job more efficient so the whole job goes off more smoothly.