Photo Credit: Shutterstock.com
Performance-based contracts have been a boon to the energy efficiency industry. Since 1990, U.S. energy services companies (ESCOs) have grown the market from less than $500 million to more than $5 billion in 2011.
And according to a new analysis of the market from the Lawrence Berkeley National Laboratory (PDF), revenues will double or even triple from $6.4 billion in 2013 to between $13.3 billion and $15.3 billion by the end of the decade.
But how will it reach its potential under a high penetration scenario?
ESCOs are a staple in the efficiency market within K-12 schools, universities and other public buildings. By providing energy savings performance contracts (ESPCs), these companies can help building owners with an appetite for longer payback periods finance efficiency projects through the energy savings over time, with very little upfront investment.
The market for these contracts is already very mature. Lawrence Berkeley researchers report that 42 percent of K-12 schools, 28 percent of federal buildings and 25 percent of colleges have taken advantage of ESPCs, mostly for energy efficiency. While there are still plenty of opportunities in these sectors, ESCOs will need to expand into new markets to continue double-digit growth and hit the high projections.
More than 80 percent of revenues for ESCOs come from public or institutional buildings investing in energy efficiency. If the market is going to continue growing, there are a few ways these companies can expand their services to stimulate more demand.
Break into the commercial market
ESPCs have been very popular in the public and institutional sectors where customers are more willing to accept longer payback periods. But in the commercial sector, where companies are looking for much shorter paybacks and where smaller energy service providers often lack financing, the model has not taken off. According to the Lawrence Berkeley report, only 8 percent of industry revenues came from the private sector in 2011. Getting deeper into commercial buildings will mean taking advantage of an emerging range of new structures.
Utilize new market mechanisms
The rise of approaches such as on-bill repayment, on-bill utility financing, property-assessed clean energy, and shared savings agreements is presenting new opportunities for ESCOs to get into the commercial sector. However, the sense of assurance (or lack thereof) that those savings will be delivered in a timely manner is still a major barrier with customers. In addition to those mechanisms, ESCOs may also consider demand response as a way to build efficiency services in the private sector.
Find new ways to bring in revenue
If ESCOs want to continue finding business in the public sector where they already have solid penetration, there are possibilities of expanding services to distributed energy, water conservation, security systems and infrastructure repairs. The Lawrence Berkeley report also points to new energy disclosure laws as enablers for more interest in efficiency and distributed generation in metropolitan areas.
The average market penetration for all sectors is only 25 percent, so there's plenty of share to grab. Although many ESCOs saw a recent surge due to stimulus funding -- money that has since dried up -- there are plenty of other mechanisms in the works that will likely keep the industry on an upward curve.