Navigant Research Blog

Monetizing Energy Efficiency: Creating Additional Value Streams for Your Customers

— December 8, 2017

Much is transforming the global energy landscape these days. Building technologies are progressing from single point solutions to system and platform-based solutions utilizing the latest in smart digital technologies and the Internet of Things. Utilities are reshaping entire business models and strategies to integrate and enable a swiftly growing and diverse stock of distributed energy resources. These are just two of the more visible market evolutions. But as with most industry transformations, change does not happen all at once.

Large groups of buildings (of all sizes) lie along the continuum of advancement with regard to building technologies. Most organizations realize the potential benefits of energy efficiency; however, there are still hurdles that could prevent these types of projects from moving forward. According to a recent Navigant Research report, Energy Efficient Buildings Global Outlook, these hurdles include confusion about which technologies to adopt, what internal resources would be required to manage an advanced building, and how to best understand and calculate payback and ROI to get a project approved.

On the supply side, utilities are also realizing the benefits of making the buildings in their service territories more efficient. Utilities must be concerned with their conglomeration of generation assets to ensure a reliable future energy supply. Energy efficiency and demand-side management (DSM) are two ways that utilities manage this critical task. In fact, at less than 3 cents/kWh, energy efficiency is the most cost-effective source of energy compared to all other sources of generation.

For decades, utilities have had success reaching large commercial and industrial and even residential customers with incentive-based DSM programs like energy efficiency and demand response. PJM is an example of a regional transmission organization (RTO) that understands and actively pursues energy efficiency initiatives to include in its regional capacity planning. Over time, PJM has encouraged over a gigawatt of annual energy efficiency projects in its current and future capacity markets.

The one hurdle faced by utilities and RTOs is awareness of these programs. Small- to medium-sized businesses, energy service companies (ESCOs), and even larger commercial customers may not be fully aware of the availability of these programs. Incentives can go a long way toward clearing energy efficiency project hurdles. For example, utility and RTO incentives may be the final project piece that enables payback and ROI calculations to meet internal financial requirements. Organizations can benefit from working with outside specialists in this area to help understand what is available and how best to assess and include incentives in efficiency and sustainability initiatives.

Join the Conversation

Navigant Research is hosting a free webinar, Monetizing Energy Efficiency: Creating Additional Value Streams for Your Customers, on December 12 at 2 p.m. EST. I will be joined by Meg Kelly, Senior Director of Energy Efficiency, and Russ Newbold, Director of Sales Operations at CPower. Learn the benefits of utilizing PJM capacity credits as a value to you and your customers.

The webinar will help end-use customers—and ESCOs that serve customers—learn what capacity credits are, how to attain them, and how to make them a part of the value chain to earn more energy efficiency project business. This webinar will outline how to benefit from these credits and, for ESCOs, how to add value to proposals all the way through receiving the payments.

 

When Competitors Help You Succeed

— November 14, 2017

Today’s energy efficient buildings solutions can involve complex interactions between technologies and vendors. As building components become deeply integrated with intelligent building technologies, it is increasingly rare for one vendor to supply the entirety of the technology. Large global vendors may have the resources to acquire or build diverse sets of technologies, but it is difficult for one company to claim market leadership or even significant competence in all technological areas. In some instances, this strategy can even amount to brand dilution or lack of focus.

Models for Success

Business models are playing into this quickly emerging market dynamic. In the past, the prevalent model was for companies to offer a single product or unit for sale. Sales were mostly a one-time transaction with a marketing follow-up when the product became outdated or reached the end of its useful life. Customer retention was difficult with this model, and revenue streams were uneven and influenced by the economy, market trends, and a host of other drivers or hurdles. As a service business models, such as software as a service or platform as a service, alleviated some of the risks and downfalls of single product or license-based sales. For vendors, this meant a more recurrent revenue stream, more consistent interaction with customers, and an opportunity to upsell additional products and services as part of the ongoing relationship. However, these as a service models are still somewhat limited, as they may only solve one aspect of a customer’s problem. In an increasingly integrated world, as a service offerings can be seen as being similar to single product offerings when viewed from the perspective of a customer’s problem set.

Selling solutions or projects has evolved as a business model with market advantages. This model looks at a customer’s priorities and a specific problem or problem set, and combines technologies and services to solve that problem. Notice that competitive advantage was not used to describe it. The reason? Assembling the best solution set may involve working closely with direct market competitors, or coopetition, as the term has been coined.

Coopetition

Energy service companies (ESCOs), for example, are familiar with coopetition. ESCOs utilize a financial structure called an energy savings performance contract (ESPC) where, in simple terms, the efficiency upgrades are financed and paid for out of the energy savings. ESCO projects can be designed to deliver specific equipment upgrades, but typical projects encompass a bundle of improvements across technology types. This approach improves the economics of the entire project by blending the returns of high cost, longer payback pieces of equipment (e.g., HVAC systems) with lower cost, faster payback items (e.g., LED lighting). As described in a recent Navigant Research report, ESCO Market Overview, the necessity of bundling technologies and services to make the ESPC work from a financial perspective has caused ESCOs to embrace coopetition with a solution or a project-oriented business model.

Coopetition allows vendors with complementary strengths to apply those strengths to a project and share in common gains. Additionally, vendors are realizing there is great opportunity in shifting from the single point solution or component manufacturing role to the platform play that will support deeper, ongoing customer engagements. Success in this realm means positioning solutions in terms of broader business impacts, with a desire to engage directly with the c-suite. There is no cookie cutter design for partnerships or coopetition in commercial terms. This is a nascent market where flexibility is a key parameter. In this landscape, creativity and openness will be rewarded, and unprepared vendors may face real market disruption as they realize that they are unprepared for competition from non-traditional sources.

 

A New Way to Evaluate Energy Efficiency

— May 9, 2016

HVAC RoofAt a high level, energy efficiency retrofits can be challenging to evaluate. Often, decision makers would like to see a rough estimate on simple payback; however, many case-by-case variables make common energy conservation measures either a quick payback for some projects or unrealistic for others. Some of these variables include baseline energy consumption, utility rate structures, facility hours of operation, climate, and implementation costs. For instance, a solar thermal water heating system would generate more energy savings for a facility that consumes more hot water and is located in a climate with high solar insolation.

It would be inaccurate for a facility manager to compare the simple payback from a different facility to their own without knowing how the operating conditions and potential install costs would vary. While payback is generally the most important factor in deciding on energy efficiency retrofits, the American Society of Heating and Refrigeration and Air-Conditioning Engineers (ASHRAE) recently published a report analyzing efficiency in a unique way.

Energy Efficiency without Cost Consideration

ASHRAE has provided a study analyzing the efficiency potential of commercial and multi-family buildings if cost is not a consideration. After examining 400 measures, the top 30 were chosen for additional analysis and modeling on prototype buildings in various climate profiles already consistent with ASHRAE 90.1-2013 standards. Sixteen buildings were profiled in 17 different climate zones, and the resulting national weighted energy consumption for the buildings was nearly half when compared to ASHRAE 90.1-2013 standards.

Additional study details and the 30 measures evaluated are also available. While cost is generally the most important factor in deciding on efficiency improvements, removing the cost from this analysis provides value in allowing facility designers to realize which systems could provide the most energy savings and helping them find ways to implement those designs at lower costs. Additionally, those developing standards can better determine which efficiency retrofits may provide the most savings independent of cost.

Non-Energy Benefits

Facility managers should also consider the additional benefits of energy efficiency improvements beyond just energy costs. Efficiency can boost residual facility value by improving staff productivity and retention, marketing potential, tenant satisfaction, competitive rent prices, sales, and academic performance. Building owners looking to simplify their energy management efforts may decide to partner with an energy services company that can provide feasibility studies to help scope energy savings opportunities.

 

New York Cracks Down on Energy Service Companies

— March 9, 2016

Gas turbineNew York is one of only 17 states that operate a deregulated energy market. Under this scheme, consumers have the option to choose their respective energy supplier rather than simply being locked into the local utility. While this idea of increased competition was initially embraced due to the prospect of lower costs and innovative new services, a review conducted by the New York State Public Service Commission (PSC) has found a variety of unfair business practices that could now threaten to shake up New York’s energy market once again.

In New York, energy service companies, or ESCOs, offer electricity and/or natural gas to customers but are separate from local utilities, which own and maintain the distribution and transmission infrastructure. The review conducted by the PSC found that multiple ESCOs were guilty of overcharging consumers and failing to meet promises on cost savings and clean energy. This prompted Governor Andrew Cuomo to introduce a comprehensive plan to tackle these corporate misdeeds.

Examples of Deception

These unethical business practices were not found to be small-scale, isolated incidents, but examples of a larger, statewide issue. One of New York’s largest ESCOs, Ambit Energy, has already shelled out nearly $1 million in refunds as a result of overcharging. In the Hudson Valley, four companies were found charging double the electricity rate of local utility Central Hudson Gas & Electric. A New York City company was found to be charging 3 times the rate of Consolidated Edison’s electricity, while several other ESCOs were found doubling the rates set by National Grid. Finally, a company in the Finger Lakes Region instituted a variable rate plan that was 8 times what Rochester Gas & Electric charged for electricity.

These deceptive practices are being increasingly felt by consumers, as the number of customer complaints regarding ESCOs to the PSC has doubled since 2013 and increased sixfold from 2010 to 2015. Per the U.S. Energy Information Administration, New York’s approximately 200 ESCOs account for around 20% of all New York customers, shedding a light on the sheer size of this lucrative and problematic market.

Solutions and Next Steps

As a result of these growing concerns, the PSC has enacted a series of changes that it hopes will remedy the current situation. This begins with an immediate audit of all of New York’s ESCOs and a prohibition on new residential and commercial ESCO contracts unless they can guarantee cost savings or prove that 30% of the electricity is derived from renewable resources. The commission will also strengthen the process for revoking ESCOs of their status should they fail to meet the state guidelines. Additionally, the PSC has introduced a “do not knock” policy similar to “do not call” provisions, which it hopes will deter unwanted intrusions and predatory marketing.

With 20% of New York residents currently enrolled with an ESCO, the industry maintains a significant portion of the state’s customer base. Since the industrywide audit is just underway, the overall level of malfeasance is still relatively unknown. The results of these company investigations will ultimately determine the severity of consumer reactions and the potential shift in industry market shares.

 

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