Navigant Research Blog

Can U.S. ESCOs Open New Doors in the Private Sector or Europe?

— June 3, 2015

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

Casey blog chart June 2(Source: Navigant Research)

Find the detailed analysis and market projection in the new Energy Service Company Market Outlook report.


What the Shaheen-Portman Bill Signals for Building Efficiency

— May 15, 2015

On April 21, the U.S. House of Representatives passed S.535, otherwise known as the Energy Efficiency Improvement Act of 2015, sponsored by the bipartisan Shaheen-Portman team. In light of the congressional standstill on climate change and comprehensive energy policy as my colleague Ben Freas has previously blogged about, does this action suggestion a sea change in energy policy? Likely not. This bill is primarily about studies and voluntary initiatives, with one important distinction: embedded in Title 3, there is an amendment to the 2007 Energy Independence and Security Act (EISA) that requires investment in energy efficiency building upgrades for all non-ENERGY STAR-rated federally leased spaces. This single element of the law holds the potential to incentivize energy efficiency investments in a large portion of the commercial building stock.

This amendment updates the High-Performance Federal Buildings section of EISA and establishes a lease contingency tied to energy efficiency. As the amendment states, “The space is renovated for all energy efficiency and conservation improvements that would be cost effective over the life of the lease, including improvements in lighting, windows, and heating, ventilation, and air conditioning systems.” In addition, the buildings must be benchmarked through the U.S. Environmental Protection Agency’s (EPA’s) ENERGY STAR Portfolio Manager.

Navigant Research published the report Energy Efficient Buildings: Global Outlook in late 2014 and presented the following snapshot on average payback periods for selected energy efficiency measures.

Payback Periods for Select Energy Efficiency Measures: 2014

Casey Blog Chart

 (Source: Navigant Research, Deutsche Bank)

Looking at that menu of retrofit options, this EISA amendment has the potential to drive substantial investment in the commercial building stock. According to the U.S. General Services Administration (GSA), the largest public real estate manager, of the 195,578,680 SF under lease in 2015, the average lease term is 11.5 years. This term suggests the efficiency retrofit clause can enable investment in a broad array of measures, including all of the examples in the figure above.

Window of Opportunity

Despite the contention of climate change and the congressional reluctance for private sector mandates, energy efficiency has proven to generate bipartisan support with the potential to influence the real estate industry. As building owners vie for federal leases, this amendment will force the issue of energy efficiency, and in the longer term, this may be an important policy driver for greater investment across the commercial building stock. If efficiency can become a competitive differentiator in real estate, there will be significant underlying climate change benefits without the hurdles that have faced congressional action.


Energy Efficiency: Overcoming Financing Hurdles

— March 4, 2015

With little hope for meaningful near-term legislative action to drive national shifts in energy and resource consumption to tackle climate change, energy efficiency offers an impactful avenue for climate mitigation. But the enabling technologies often require capital investment that are hard to justify in constrained corporate budgets. As a result, a growing number of major banking institutions are making new commitments to financing projects with direct climate impacts, including those that deliver results via energy efficiency.

A recent GreenBiz article highlighted Citi’s updated climate and sustainability commitment of $100 billion to “lending, investing and facilitating” conservation and efficiency projects. Expanding on its 2007 $50 billion commitment focused on alternative and clean energy technologies, Citi has recognized the need for transparency and guidelines alongside the funding to ensure that the investments result in the kind of sustainable and climate change benefits intended. Citi, Bank of America Merrill Lynch, Crédit Agricole Corporate and Investment Banking, and JPMorgan Chase made up the drafting committee for the Green Bond Principals, which were released in January 2013.

Quality Control

Anne Paugam, CEO of the French Development Agency (AFD) recently published an article discussing the importance of transparency and accountability in Green Bond issuance as a model for success. “These instruments have all the characteristics of conventional bonds, but they are backed by investments that contribute to sustainable development or the fight against climate change … In September, the AFD issued €1 billion ($1.2 billion) in climate bonds, with one goal being to contribute to the development of concrete quality standards.”

The World Bank is also on board, and looking to shape investments that fuel sustainability, tackle climate change, and generate strong financial returns. According to a recent article in Barrons, the World Bank has sold more than $7 billion green bonds since 2008, and now officials hope to create a market for green growth bonds, starting with clients in Hong Kong and Singapore.  The World Bank says it is aiming for $225 million in bond sales in the next 6 months.

Green bonds, if offered with transparency and accountability, represent an important source of financing to expand energy efficiency investments and generate large-scale improvements that will have direct and quantifiable climate change and sustainability impacts.


Funding Smart Buildings to Limit Climate Change

— March 3, 2015

The inefficiencies in commercial building operations have direct implications for the country’s carbon footprint. With climate change still a political stalemate, the Obama Administration has instead taken aim at energy waste in buildings, with voluntary programs led by the U.S. Department of Energy (DOE) that are making waves in the private sector. Energy efficiency challenges, showcases of business best practices, and now a call for private sector financial commitments to fund technology development are all targeting business transformation.

At this year’s ARPA-E Summit, the Obama Administration announced a $2 billion Clean Energy Investment Initiative as a challenge to the private sector to fuel investment in the kind of innovation needed to tackle the threat of climate change. Brian Deese, deputy director of the Office of Management and Budget explained, “Further clean energy innovation to improve the cost, performance, and scalability of low-carbon energy technologies will be critical to taking action against climate change. Foundations and institutional investors have the potential to play an important role in accelerating our transition to a low-carbon economy and cutting carbon pollution.”

Anteing Up

Wells Fargo stepped up to the plate with a $10 million Innovation Incubator (IN2) program to support early-stage energy efficiency technologies for commercial buildings. A collaboration with the National Renewable Energy Laboratory (NREL), the program offers startups grants, mentorship, research and testing support at NREL, and field testing in Wells Fargo buildings.  The effort will not only help startups develop commercial-ready business models, but also generate proof-of-concept demonstration for innovative technologies. In conjunction with the launch of the Clean Energy Investment Initiative, Wells Fargo also announced it will expand investment partnerships with other financial institutions to bring more money to the table in support of the $2 billion target.

New building technologies remain a bright spot for clean tech investment. In fact, according to statistics from Crunch Base, venture funding for building technology innovations characterized as Internet of Things (IoT) solutions has steadily risen, even as more general clean tech investing took a dive. A recent article on TechCrunch suggests that almost 40% of all clean energy rounds in 2014 went to IoT smart building startups.

Direct Impact

Recent research from Navigant Research echoes the optimism around growth in the market for building innovations. Building energy management systems (BEMSs), for example, leverage the IoT to deliver unprecedented visibility and insight into building and significant improvements in energy consumption and resource utilization. Our recent report, Building Energy Management Systems, shows that the business impacts facilitated by BEMSs have direct and quantifiable climate change impacts. A growing pool of funding sources for companies helping to evolve this maturing marketplace is just one example of the benefits that may come from the Clean Energy Investment Initiative.


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