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 service 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.