ESCOs: ANTICIPATING GROWTH IN THE
PUBLIC AND PRIVATE SECTORS
Two benefits that ESCOs (Energy Service Companies) can bring to the efficiency table are a turnkey solution for deep energy retrofits and performance contracts that guarantee reduced energy consumption. ESCOs that have met accreditation requirements by the National Association of Energy Service Companies (NAESCO) provide added confidence to building owners.
Performance contracts account for roughly 70% of ESCO revenue, followed by design/build contracting at 15% . According to Don Gilligan, president of NAESCO, guaranteed savings projects typically need to be at least $500,000 to $1 million in scope, a size that only the large ESCOs can accommodate, although smaller ESCOs can do such projects but without a long-term guarantee. Because performance contracts typically establish a historical baseline of energy consumption on which to build the guaranteed savings, they are used for existing buildings rather than new construction. Market penetration of performance contracting is highest in the K-12 school sector.
Some sources predict that the ESCO industry will grow its revenues dramatically over the next seven years by continuing to tap its traditional federal and MUSH (municipalities, universities, schools and hospitals) markets, which account for roughly 85% of revenue.
In recent years ESCO revenues have been concentrated even more heavily in the public sector, due in part to the impact of the economic crisis on commercial building owners. Government mandates to improve efficiency are one driver in the public sector; another is the performance contract’s ability to offer an alternative to the routine public procurement process for capital projects.
ESCOs AND COMMERCIAL BUILDINGS
Because ESCOs tend to deliver large comprehensive projects that have long paybacks of 10–20 years, they often are not a good match for commercial buildings whose owners look for a quick improvement to their net operating income. According to NAESCO data, the payback on school projects averages 12–14 years while on a commercial building it averages only 2.7 years. Another factor is the probability of changes in occupancy or use. The typical school is likely to remain a school but a commercial building might undergo changes in occupancy that complicate the future savings spelled out in a performance contract. The long-term creditworthiness of public entities is also more attractive to lenders.
Nevertheless, Gilligan believes that ESCOs will make new inroads into the commercial market if PACE and on-bill financing take hold and the debt is not accelerated when the building changes hands.
“Building owners are reluctant to encumber their property if it interferes with their ability to sell it,” Gilligan says. He also sees an imminent wave of commercial-building mortgage refinancing that will drive ESCO revenues. “As those buildings are refinanced and possibly repositioned in their markets, it’s a good opportunity for ESCOs to get in there and say, ‘If you’re refinancing, now is a good time to do efficiency improvements.’”