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Energy Service Companies: No More Mr. Niche Guy

Fortnightly Magazine - April 15 1996

broadening their offerings, says Singer. Edison Source, an unregulated subsidiary of Southern California Edison that started as a pilot, plans to go into waste and water conservation.

One project that shows what ESCos can do, by sheer numbers, is the Hunts Point Cooperative Market project in the Bronx. The Market, covering half a million square feet, decided in 1995 to examine its aging refrigeration systems, rising utility costs, and higher costs from the phase-out of CFC refrigerants. HEC, Inc., an ESCo was able to reduce the Market's energy consumption 30 percent below estimates and boost cashflow 200 percent, primarily through a $5.8-million CFC-free ammonia refrigeration plant. Annual estimated electric bill savings total $427,000. The Market also received a $530,000 industrial conservation credit from New York City for the next eight years. Annual project savings run to $1.13 million.

Where Do They

Come From?

Such projects must have been envisioned by lawyer Martin Klepper (em now a partner at Skadden, Arps, Slate, Meagher & Flom, NAESCO's office neighbor in Washington, DC. In 1980, Klepper, later to become NAESCO counsel, took advantage of a Department of Energy (DOE) grant to lay out model contracts and experiment with the idea of shared energy savings.

Today, companies may or may not finance projects for the

customer; financing may come from a third party or municipal bond authority. In the early days, the financial component gave energy service its appeal.

Other changes have come from the industry, through both organization and upheaval. Most of the companies that were nationally active during NAESCO's early days have vanished, some in dramatic fireballs. Changes within utility demand-side management (DSM) programs also shaped energy services.

"As we start out in 1996, the industry is exploding in a way that people said it was exploding a few years ago with the utility DSM program, but actually wasn't," Singer says. "I think what exploded at that point was the idea of the potential of it all and the magnitude. But it wasn't realized as much as is being realized now."

Contract particulars form another industry obstacle. "Because the company provides the financing and assumes technical risk, there are just a lot of elements that needed to be worked out in the marketplace, essentially," Singer says. "I think the second-generation companies that sort of popped up in '86-'87 had learned from what had gone before. .... There's a stability and maturity that we didn't see before."

During the early 1980s energy-efficiency programs enjoyed a host of tax advantages, but later lost many of them in the 1986 Tax Reform Act. Efficiency improvements must now sell themselves purely on economic grounds.

Singer says ESCos have grown more sophisticated in setting

baselines so that both customer and company are in sync on consumption patterns before projects start. Measurement and verification of the savings has become a lot more cost-effective too.

Since its founding NAESCO has continued to provide much of the organization the industry needs. For example, a measurement protocol that the association helped develop in New Jersey and California was later adopted by the public