Energy Efficiency Service Companies Missed The Memo

The folks who install insulated windows, efficient factory motors and energy saving lights apparently missed the memo about the economic meltdown.

As US gross domestic product slipped to under 1% in 2008, the $4.1 billion energy service industry grew 7%. Jealous? Just wait. That was nothing compared to the expansion predicted over the next couple of years, according to a new report by the Lawrence Berkeley National Laboratory.

Energy service companies, or ESCOs, will see 26% annual growth from 2009-2011 with revenue reaching $7.1 to $7.3 billion, the report estimates. ESCOs are private companies that typically offer energy savings improvements under long-term performance contracts.

How are they getting so much business in this depressed real estate market? A lot of it – nearly 70% — comes from what the industry fondly calls its MUSH market — municipal and state governments, universities, schools and hospitals. These institutions do not experience the boom and bust of private business, so were less hard hit by the economic downturn. Equally important, they have federal stimulus dollars to spend on energy efficiency.

Efficiency also has begun to catch the attention of the hard-to-persuade homeowner. The residential market in 2008 accounted for 6% of ESCO business, still small, but double what it was two years earlier. It helped that electric utilities increased their efficiency spending and subcontracted some of this work out to the private ESCOs.

State clean energy policies also aid the boom in ESCO activity. Massachusetts, Connecticut and Rhode Island, for example, have made energy efficiency a ‘first fuel,’ meaning utilities must secure all cost-effective energy savings before buying or building electric power. In addition, 18 states have created energy efficiency portfolio standards. They require that utilities achieve annual energy savings targets.

Not all of the news is good. Interest in energy efficiency ebbed among big businesses, not surprising given the economy. They accounted for 15% of market share in 2006, but only 7% in 2008. Uncertainty about the future makes them hesitant to commit to long-term performance contracts, according to the report.

“The traditional ESCO business model based on long-term performance contracts has always been a tough sell to private sector customers and the economic downturn further crimped its attractiveness,” the report said.

Where is the ESCO business heading? It appears the MUSH market will remain strong for quite some time. The report identified about $35 billion in potential business remaining from MUSH. The federal building market, which accounted for 15% of ESCO business in 2008, also continues to offer promise. The US Department of Energy invested $440 million in federal efficiency projects in 2009 and $498 million in 2010.

LNBL prepared the study with the help of the National Association of Energy Services Companies. The US Environmental Protection Agency provides an explanation of energy performance contracting here.

Elisa Wood is a long-time energy writer whose work appears in many of the industry’s top magazines and newsletters. She is publisher of the Energy Efficiency Markets podcast and newsletter.

photo: Meanest Indian