Navigant Research Blog

Energy Systems Group Acquires Chevron’s Federal ESCO Unit

— April 8, 2014

On April 1, Energy Systems Group (ESG), a major U.S. energy service company (ESCO) based in Newburgh, Indiana and a subsidiary of utility holding company Vectren Corp., announced that it had acquired the federal sector energy services unit of Chevron Energy Solutions, a subsidiary of Chevron USA. The unit, which consists of 48 employees, will not only expand ESG’s projects and footprint but, more importantly, will also allow ESG to play in the U.S. federal government’s indefinite-delivery, indefinite-quantity (IDIQ) ESCO market.

That market was created in February 2009 when the U.S. Department of Energy (DOE) awarded 16 ESCOs with DOE energy savings performance contracts (ESPCs).  These 16 contracts allow the selected ESCOs to provide federal agencies with up to $5 billion of performance contracts each.  The program effectively prequalified the 16 ESCOs to perform energy efficiency services for many of the federal government’s largest facilities.

Narrowing the Competitive Field

Although ESG had been an active player in the federal ESCO market through other avenues prior to the acquisition, such as utility energy services contracts (UESCs – a twist on the traditional ESPC in which federal agencies procure performance contracts through their local utilities), the acquisition allows it to narrow the competitive field for large contracts offered only to ESCOs.  Given that the federal market represents one of the most promising segments in the challenging ESCO market, as Navigant Research wrote in its report, The U.S. Energy Service Company Market, the acquisition positions ESG to benefit from the full scale of the federal ESCO market. “The federal sector is one of our primary targets for growth in the coming years,” said Greg Collins, President of ESG, when I spoke with him.  “This acquisition strengthens our position in delivering on a wider range of federal opportunities.”

Note that other ESCOs have entered the federal market through acquisition.  For example, in 2007, SAIC (now Leidos) acquired BENHAM Companies to gain access to a broader swath of federal building customers (though, this was before the establishment of the IDIQ market).

The federal sector has been a key focus for ESCOs in the United States over the last few years.  While the municipalities, universities, schools, and hospitals (MUSH) market remains a challenge due to the winding down of stimulus funding for municipal performance contracts and concerns about municipal debt, ESCOs have patiently awaited the boost to the market that was initiated by the Better Buildings Initiative, the $2 billion federal performance contracting program announced by President Obama in December 2011.

So far, the program has fallen short of its goal of achieving the $2 billion in contracts by the end of 2013. However, initial signs in 2014 are promising.  Many of the ESCOs I work with are reporting a strong flow of federal requests for proposals (RFPs) and, in the first quarter of 2014, over $230 million of federal IDIQ ESPCs had been awarded. By contrast, in all of 2013, only $362 million was awarded.  In addition, the CEO of Ameresco, George Sakellaris, announced in his company’s 2013 fourth quarter earnings call in early March that federal government ESCO activity was high.  Therefore, 2014 is looking strong for the ESCO market and ESG will be in a much better position to address it in the wake of this acquisition.

 

EnerNOC Drives Demand Response in Europe

— February 25, 2014

EnerNOC, one of the largest demand response (DR) integrators and service providers in the world, made two big acquisitions last week that deepen its strategy for expansion into new markets.  The first was the acquisition of Entelios, the main DR integrator in the nascent DR market in Germany.  The second was the purchase of Activation Energy, the leading provider of DR software and services in Ireland.  Although financial terms were not disclosed, EnerNOC CEO Tim Healy stated on the company’s most recent earnings call that the company spent $30 million on business development-related activities.  With these additions, EnerNOC establishes itself as the main player in these respective country markets, thereby dramatically altering the competitive landscape for DR in Europe.

The European market for DR lags far behind the United States in terms of capacity and revenue.  The main reason is a regulatory landscape that lacks the scope and diversity of the market in the United States, where independent system operators (ISOs) have created robust DR markets.  However, the need for new resources to help manage the grid are just as pressing as countries like Germany continue to add renewable energy and the intermittency created by solar and wind creates more demand for balancing resources.  As a result, there remains significant untapped potential, which EnerNOC and other players in Europe are working to unlock.

Barriers Broken

However, the European electricity grid contrasts dramatically with that of the United States, making it difficult to export some practices and technologies across the pond.  Whereas much of the DR market in the United States is focused on reducing summer peaks created by air conditioning demand, one of the drivers for demand response in Europe – particularly the large markets in Northern Europe, where air conditioning capacity is limited – is winter peaks due to high heating demand.  And, long-term projects such as the European supergrid would further open up a diversity of opportunities for flexible assets to provide benefits to the electricity system overall.  These differences make it all the more critical for a player like EnerNOC to enter the market via acquisition of players that have sifted through the technological and regulatory barriers to create viable DR markets, rather than trying to build a business from scratch.

EnerNOC already maintained a presence in the European DR sector, primarily in the United Kingdom, Europe’s most advanced DR market.  Other firms, such as London-based KiWi Power, are already active in that market, whereas other country markets are still in the more tumultuous early stages, allowing outside players such as EnerNOC to enter.  As DR becomes a higher-demand grid service in Europe, we expect to see the competitive landscape heat up with further merger and acquisition activity.

 

Data Analytics Drive Building Efficiency

— February 4, 2014

The energy efficiency sector has been catapulted into the digital age with the advent of new software platforms that harness and structure the digital data from building control and metering systems.  This shift began to take hold in 2008-2009, when carbon management software vendors, dismayed by the failure to instate a global carbon price at the Copenhagen Climate Summit in 2009, shifted gears to provide energy management software instead.  As competition in that market intensified, many vendors saw the need to differentiate based on the sophistication of their software algorithms.

At the most basic level, analytics go beyond the energy visualization dashboards that characterize most building energy management systems (BEMSs).  Basic energy-related data (from a range of sources, including BMS/BASs, utility meters, and energy bills) is compared with data from external sources such as weather and temperature data, average building performance data for specific facility types, and building occupancy and space utilization data.  Proprietary algorithms are used to turn streams of data into useful information that goes well beyond the basic visualization of energy and helps reduce energy costs and improve the operational efficiency of buildings.

Hands Off

So what’s the state-of-the-art in data analytics today?  While several dozen vendors offer solutions that enable building owners and managers to make changes based on real-time data, only a few have offerings that automatically make changes to the building’s HVAC, lighting, and control systems independently.  For example, San Mateo, California-based BuildingIQ’s platform tracks energy and temperature data in a building and communicates with a building’s BMS and air handling systems to make automatic changes in real-time that reduce energy costs and enable building owners to take advantage of demand response events without any manual involvement from the building manager.

Pacific Controls, an automation software company based in Dubai, uses M2M communications between control devices to enable integration between the various operational technology platforms in the building environment (such as asset management and CRM systems) and ensure seamless integration across interconnected platforms.  Although many building managers will continue to insist on manual control over building systems, systems that automatically turn analytics into action represent an important frontier in smart building data analytics.

Faster, Deeper

Looking ahead, data analytics will play a critical role in opening up new opportunities for integration between buildings and the smart grid.  As demand response markets evolve from today’s largely manual response protocols to automated demand response, demand for fast-paced connectivity with a building’s control systems will intensify.  As building technology gradually matures to enable participation in ancillary services and frequency regulation markets, software analytics that maximize available capacity for such programs while ensuring minimal disruption to building operations will become integral components of buildings’ control systems.

Along with Jim Schwartz, director of Strategic Marketing at Johnson Controls, and Peter Dickinson, chief technology officer at BuildingIQ, I’ll be discussing these and other innovations in the field of smart building data analytics on a webinar on February 11 entitled “Innovations in Smart Building Data Analytics.”  Click here to register.

 

ESCOs Start to Recover from the Recovery Act

— December 13, 2013

By many accounts, the American Recovery and Reinvestment Act (ARRA) was a boon for the American economy in the wake of the financial crisis of 2008.  The availability of $25 billion in federal funds for energy efficiency measures sent the building industry into action at a time when sluggishness in new construction was shifting attention to existing buildings, and concepts such as corporate sustainability and carbon regulation were in their infancy.  Leading energy service companies (ESCOs) such as Johnson Controls and Ameresco, which use a financing structure known as energy performance contracting (EPC) to guarantee energy savings for customers in long-term contracts, scaled up their energy efficiency capabilities to benefit from these generous incentives.

Briefly, it seemed that ARRA would be a net positive for the ESCO market.  From a base of $3.9 billion in annual revenues in 2008, the market peaked in 2011 with annual revenues of $5.6 billion.  Interestingly, ARRA actually had a negative impact in 2009, when many would-be ESCO customers deferred plans to hire ESCOs while awaiting the distribution of stimulus funds for 2010 and 2011.

And that was the first of several unforeseen consequences of ARRA for the ESCO market.  In 2012, the market underwent a painful contraction, with annual revenues shrinking to $4.8 billion – a 13% decline.  The causes of this decline were diverse, and include a range of factors such as the federal sequester and pervasive concerns among municipalities about ESCO-related debt (as EPCs typically show up on customer balance sheets as debt service obligations).  A more insidious cause of the decline was the fact that ARRA funds, which were largely exhausted by the end of 2011, created an expectation of low-interest financing and widespread rebates for energy efficiency measures among municipal customers, the core market for ESCOs.  As those financing facilities evaporated, so did many customers’ willingness to take on long-term EPCs characterized by pre-ARRA interest rates.  As a result, many municipalities now view the extended payback periods of EPCs (which are, in reality, consistent with the payback periods in the pre-ARRA period) as unacceptably long.

ESCO Revenue, United States: 2010-2020

 

(Source: Navigant Research)

Even in the post-ARRA era, though, EPCs represent a low-risk way for cash-strapped customers to reduce their long-term facility operating costs and finance other non-energy-related infrastructural improvements.  Changing the mindset in the municipal sector will be critical in resuscitating the ESCO market in the United States and placing it on a pathway for strong growth.

The good news for ESCOs is that the federal government has been aggressively promoting EPCs through the $2 billion Better Buildings Initiative and other policies, which will lead activity in that sector to grow considerably in 2014.  In our recent report, The U.S. Energy Service  Market, Navigant Research forecasted that the market will grow from $4.9 billion in 2013 to $8.2 billion by 2020.  The municipal sector will only recover to pre-ARRA levels of EPC activity, though, when municipal decision-makers recall the diverse cost reduction benefits afforded by ESCOs that they once enjoyed.

 

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