Energy service companies (ESCOs) have a long history of implementing comprehensive energy upgrades to improve a building’s overall energy performance and physical infrastructure with no upfront cost to customers, primarily in the public and institutional markets in the United States. The ESCO energy performance contract (EPC) model makes this no-cost implementation approach possible because of the terms of the engagement around guaranteed savings. This traditional model helps generate energy efficiency cost savings for customer that don’t have the internal expertise or sufficient capital for investment to deploy such comprehensive upgrades.
This classic business case for working with ESCOs centers on three specific benefits. First, ESCOs enable customers to integrate significant improvements in equipment and systems without upfront capital costs. Second, ESCOs bring the technical and engineering expertise to customers without the human capital to manage major energy efficiency improvements in-house. Finally, the comprehensive approach of ESCO projects generates long-term energy and operational improvements that enable customers to achieve policy goals and mandates.
The EPC is an iterative engagement defined by formality because of the financial implications of the guarantee of energy savings. Contract negotiations finalize terms around the audit process and costs, utility bill escalator for hedging energy cost volatility, and details of the measurement and verification (M&V) of savings.
Rise of a Market
These benefits have given rise to a mature and sizable market led by activity in the public sector. The U.S. ESCO market is expected to grow from $6.3 billion in 2015 to $11.5 billion in 2024. The solid 7.0% compound annual growth rate (CAGR) illustrates market recovery following the exhaustion of the American Recovery and Reinvestment Act (ARRA) stimulus funds that elevated the industry through the recession.
As companies look into long-term business planning, the question at hand is how to broaden market penetration into new customer segments to accelerate revenue growth. In the United States, Federal Energy Management Program (FEMP) and state energy savings performance contract (ESPC) programs have developed a variety of model documents and support options because the process of finalizing these ESPC/EPC details can be burdensome and costly. A new report from Navigant Research, Energy Service Company Market Overview, suggests that ESCOs may need to adopt ways to create flexibility in finalizing elements of these negotiations and project details in order to deepen relationships with existing customer segments and to open new opportunities in the private sector and international markets.
ESCO revenue in Europe is projected to grow from $2.7 billion in 2015 to $3.1 billion in 2024 at a 1.7% CAGR. ESCO market growth is expected to be driven by demand for capital to overcome the challenges of deferred maintenance, mounting regulatory and policy pressures, and growing interest in more comprehensive energy management strategies.
ESCO Revenue, United States and Europe: 2015-2024
Find the detailed analysis and market projection in the new Energy Service Company Market Outlook report.
Tags: Energy Efficiency, Intelligent Building Management, energy performance contract, energy service company
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