Recession? Big Energy Efficiency Service Companies Skipped It

Energy efficiency’s largest players grew, even as the economy lagged in recent years. And they show no signs of slowing down, says a new report distributed by the National Association of Energy Service Companies.

Revenue growth averaged nine percent annually from 2009 to 2011 for large energy efficiency service companies, or ESCOs, according to the report, prepared by the Department of Energy’s Lawrence Berkeley National Laboratory.

After significantly outpacing US GDP, the companies are poised to double their revenues by 2020.

“Based on historical trends, it is possible that the industry could grow 8 to 12 percent annually depending on a number of scenarios ? potentially achieving revenues of more than $15 billion in 2020,” said report co-author Peter Larsen, an LBNL economist.

The report gathered information from 78 percent of the nation’s largest ESCOs, about 35 companies.

Revenue from the companies was $5.3 billion in 2011 and is expected to be $6.4 billion for 2013.

Why did ESCOs do so well during the economic slump? The report speculates that it might be their business model. ESCOs use performance-based contracts, which spare customers from making large upfront outlays for energy efficiency retrofits. Payment to the ESCOs comes from the energy savings they achieve for a facility.

ESCOs made most of their revenue – 84 percent – working on public buildings and institutions in 2011. This is in keeping with the sector’s history. The MUSH market (municipal-university-schools-hospitals) continued to drive the industry – minus the hospitals. (Click on chart below.)

The companies generated revenue largely from efficiency services, operation and maintenance contracts, commissioning, and utility programs.

One odd trend – ESCOs saw their play in renewable energy fall, even as that market burgeoned. Installation of onsite renewables accounted for only six percent of ESCO revenue in 2011, compared with 15 percent in 2008. This represented a revenue drop from $560 million to $250 million.

A combination of factors likely caused the drop in renewable energy projects, the report said. For one, the competition escalated. ESCOs found themselves vying against a proliferation of companies that specialize solely in solar with tailored services and financial packages. In addition, some of these solar installers also manufacture solar panels, which may give them an edge, since ESCOs are not in the manufacturing business. And last, the solar renewable energy credit market (SREC) fell, which might have discouraged some ESCOs from offering solar, said the report.

The report also found that the commercial building market continues to elude ESCOs. Since 2003, only nine percent of eligible buildings have undergone retrofits. Yet, this is the area with the largest future potential, with an untapped market of $14 to $44 billion. Commercial building owners often balk at pursuing energy efficiency because they consider the payback too long.

“If ESCOs were able to retrofit the remaining floor space, the investment potential in facilities typically addressed by the ESCO industry ranges from about $71 to $133 billion,” said co-author Charles Goldman, an LBNL department head. “The private commercial sector, K-12 schools and healthcare facilities are the markets with the largest remaining investment potential.” (Click on chart below.)

“Current Size and Remaining Market Potential of the U.S. Energy Service Company Industry” by LBNL

“There is still a significant market for ESCOs working in the government and university market segments,” said report co-author Donald Gilligan, NAESCO president. “ESCOs have a strong track record working in these markets – federal, state and local – and we expect clean energy policies to continue to drive demand for the broad range of services that ESCOs offer these customers.”

The full report, “Current Size and Remaining Market Potential of the U.S. Energy Service Company Industry” is available for download here. The work was funded by the Department of Energy’s Office of Weatherization and Intergovernmental Programs within the Office of Energy Efficiency and Renewable Energy.

The DOE maintains a list of its qualified ESCOs here.

Want to keep up with the energy efficiency industry’s latest news? Subscribe to the free Energy Efficiency Markets Newsletter here.

About Elisa Wood

Elisa Wood is an editor at EnergyEfficiencyMarkets.com. She has been writing about energy for more than two decades for top industry publications. Her work has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.