they fit into a restructured industry?
Put 45 energy service companies (ESCos) into a $1-billion market, and they easily average over $20 million each. That's almost four dozen companies exploiting a niche an eighth the size of the microprocessor industry.
So it's easy to understand why new ESCos, half with utility roots, enter the fray weekly. Four years ago, when the National Association of Energy Service Companies (NAESCO) first studied the ESCo market under its strict definition criteria, member companies took in $500 million in annual revenues.
Much has changed since 1983, when NAESCO was founded by a lawyer toying with the concept of shared customer energy-savings plans. The growing industry is winning more multimillion dollar projects, and some predict that ESCos will garner the retail services business under electric deregulation. But to get there, ESCos may need help from regulators. Even at senior levels within the electric industry, ESCos still fight the perception that the work they do is an afterthought, an add-on to the "real" work of energy planning. To survive the transition to deregulation, ESCos may need something like a user charge.
What Do They Do?
Broadly defined, ESCos offer customers pricing options and contracts; information services; efficient lighting, heating, cooling, and drive power; maintenance; and financing for energy equipment investments.
NAESCO, however, which claims 90 percent of the market, manages a much narrower set of enterprises. (Its picture of the revenue pie, therefore, includes only those dollars invested for its brand of ESCos. Industry sources that use other criteria project a market as high as $4 billion.)
NAESCO defines an ESCo as a project developer, similar to a real estate developer, that takes risks to win returns. NAESCO members only get paid if their energy-efficiency measures deliver the targeted economies. The key lies in verified cost reduction or energy efficiency. If efficiencies are met, typical paybacks run about 25 percent over four years. Lighting installations could return savings in 18 months. On the other hand, an $18-million chiller could take seven years to return the investment.
Investments average $500,000 to $2.5 million. But that, too, is changing, says Terry E. Singer, NAESCO executive director: "Where they used to do a building, now they're doing entire school districts, entire universities, military bases. The number is going up slowly."
CES/Way, for example, under contract to Utah Power & Light Co., is boosting energy performance in a $19-million project for Hill Air Force Base, Utah's largest employer. The 20-year project covers 1,400 buildings on 13.4 million square feet; cost reductions form part of a larger goal of preserving jobs.
A good part of ESCo business is being won by the larger, better-known companies (em namely Honeywell, Inc.; Johnson Controls, Inc.; Landis & Gyr Powers, Inc.; and EUA Cogenex Corp. All four are offshoots of parent companies. They lead the industry perhaps because of the wide geography of their offices, their expertise in a niche, or their comprehensive service offerings.
ESCos, by NAESCO's definition, must offer a range of services. Companies are 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 utility commissions. That effort spawned others. Most recently, NAESCO and other industry groups worked with DOE on the latest national protocol, which is about to be published.
"A lot of people are very excited about that because they think that's the next generation," Singer says.
Where Are They Going?
Protocols and measurements aside, NAESCO turns much attention to the federal government procurement process and weightier issues of deregulation. Federal procurement of energy services by third parties doesn't fit neatly with other federal procurement procedures, so a solution has been a long time coming. The government, meanwhile, is under an executive order signed by President Clinton to reduce energy consumption by 20 percent.
"It's such a tremendous opportunity because the federal
[government's] budget for utility [services] is $4 billion a year, and our industry estimates that it can save about 25 percent, which means $1 billion in energy savings," Singer explains.
That effort, however, will seem small compared to the next great market opportunity: restructuring. NAESCO plans to make sure regulators and legislators understand what energy efficiency can do for them. Generally they have no idea, Singer admits: "Conservation is always viewed as an add-along, as opposed to being central. I think that's what they're doing now in California."
Some of the confusion involves unanswered questions: "I think there's a feeling that the energy service company will always have and has always had the fundamental relationship with the customer, the end user," Singer says. "But how the energy service company is going to fit in the hierarchy of deregulated entities is still an open question."
Another hotbed of restructuring opportunity for ESCos, NAESCO believes, lies in the industrial
sector. Many industrials have long-term energy service contracts. But in New York, for example, industrials recently fought to get rid of DSM (em not because it couldn't provide economic benefit, but because they felt they were paying for little in the way of real service.
"In several states [NY, CA, MA], I think they got hosed," Singer explains. "And they rebelled. But it was almost an inappropriate response because they never really recognized what it could do for them. I think that's changing and only for the better."
Singer emphasizes that getting regulators and others to recognize what ESCos can do, and where they should fit in overall energy planning, is only the first step. Regulators must be made to support an interim user charge to fund efficiency programs. What makes these "nonbypassable" charges necessary, Singer explains, "is that ... certain entities in the market enjoy the benefits of the historical franchise, whereas others don't."
And what about users' reaction to the charges? "If overall you're paying less, there should be no reaction," she says
Singer adds: "In principle, my membership believes they have a first-class product. And that they can, in an unfettered environment, compete head to head with any provider. And prevail. The issue is getting to that unfettered environment." t
Joseph F. Schuler, Jr. is associate editor of PUBLIC UTILITIES FORTNIGHTLY. Email: Schuler @ pur.com
An ESCo Sampler
. CES/Way International, Inc. (Houston)
. Co-Energy Group (San Diego)
. Energy Masters Corp. (Overland Park, KS)
. Energy Performance Service, Inc. (King of Prussia, PA)
. Enova Energy Management, Inc. (San Diego)
. EUA Cogenex Corp. (Lowell, MA)
. FPL Energy Services, Inc. (Margate, FL)
. HEC, Inc. (Natick, MA)
. Viron Energy Services (Kansas City, MO)
. SYCOM Enterprises (South Plainfield, NJ)
. REEP, Inc. (Princeton, NJ)
. Public Service Conservation Resources Corp. (Parsippany, NJ)
. Power System Solutions (Overland Park, KS)
. Onsite Energy Corp. (Carlsbad, CA)
. Northeast Energy Services, Inc. (Framingham, MA)
. Landis & Gyr Powers, Inc. (Buffalo Grove, IL)
. Johnson Controls, Inc. (Milwaukee)
. International Energy Services Co. (Bala Cynwyd, PA)
. Honeywell, Inc. (Minneapolis)
. NorAm Energy Management (Houston)
. Stone & Webster Energy Services Co. (Cherry Hill, NJ)
. Duke/Louis Dreyfus Energy Services (New England)
. LLC (Wilton, CT)
. Peoples Energy Services Corp. (Chicago)
. Vital Resource Management (Indianapolis)
Sources: National Association of Energy Service Companies; corporate announcements
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