Navigant Research Blog

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.

 

Ecova Buy Builds GDF Suez’s Demand-Side Business

— June 6, 2014

On May 30, French energy giant GDF Suez acquired energy management company Ecova for $335 million through its energy services unit, Cofely. Founded in 1995 as WWP Energy Solutions, Ecova started out as a utility bill management company that helped customers better understand their energy bills.  Over time, the company expanded into adjacent businesses such as energy procurement, waste management, and telecom.

As demand for energy management and sustainability tools grew in the late 2000s, the company acquired other specialist firms, such as Ecos Consulting, The Loyalton Group, and Prenova, a building energy management systems (BEMS) company.  This organic growth enabled Ecova to get an early lead in terms of acquiring Fortune 500 customers focused on energy management, such as Shell and Starwood Hotels.

GDF Suez, though perhaps known best as a power supplier with operations primarily in France, Belgium, and the Netherlands, has diversified its portfolio over time and, through its suite of subsidiaries, is now a major energy services provider.  Of its €17 billion ($23.2 billion) in total annual revenue, 6% – or €1.0 billion, is in energy services, including facility construction, operations & maintenance, and energy efficiency retrofit services.  The company is also more international today than in the past, with 25% of its revenue coming from outside Europe.

Blurred Lines

The Ecova acquisition propels GDF Suez forward in its pursuit of broad energy efficiency services.  In addition, Ecova’s intelligent, software-based platform complements Cofely’s more traditional approach to energy efficiency via HVAC, lighting, and building automation system (BAS) retrofits, allowing it to provide enterprise-level energy management for GDF Suez’s global customers.

From a geographical point of view, the acquisition provides GDF Suez a platform for engaging a broader set of energy service customers in North America while accomplishing largely the same for Ecova, as it aims to expand beyond North America.  It also brings GDF Suez in closer competition with French rivals such as Schneider Electric, which acquired a close Ecova competitor, Summit Energy, in 2011.

By bringing more intelligent building capabilities in-house, GDF Suez is positioning itself as a broad energy services provider for buildings, and this acquisition symbolizes the continuing blurring of the lines between the energy and buildings industries.

 

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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