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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.

 

ESCOs See Opportunity Growing Across Europe

— February 19, 2013

Source: ESCO EuropeEnergy service companies (ESCOs), which offer performance guarantees and financial assistance to building owners making energy efficiency retrofits, employ a compelling model for reducing energy consumption with minimal capital costs for end-users, known as energy performance contracting (EPC).  Despite the theoretical appeal of low-capital energy cost reduction, the market for energy efficiency remains largely untapped in Europe.  Assessing the state of the current European ESCO market was the focus of discussion at ESCO Europe 2013, the annual conference that gathers leaders and experts in the ESCO market, including service providers, government officials, and financiers.

In the past, access to financing instruments was often described as a barrier to broader adoption of energy efficiency services.  Today, however, it seems that financiers are eager to invest in energy efficiency opportunities in Europe.  Firms such as Sustainable Development Capital LLP and ENVESTCO are creating financing instruments with risk and return expectations specifically suited to ESCOs and energy performance contracting and are “greasing the skids” for a wider range of customers to engage in deep energy efficiency retrofits using third-party financing resources.

Europe benefits not only from the presence of these new financiers, but also from a range of funds and mechanisms for efficiency at the EU level.  For example, the European Investment Bank, the world’s largest international public lending institution, is currently lending €1 billion ($1.4 billion) per year to energy efficiency projects.  In addition, the European Energy Efficiency Fund (EEE-F), established in 2011, is a €265 million ($358 million) fund, managed by Deutsche Bank, which invests in small-scale, €5 million to €25 million ($7 million to $34 million), clean energy and energy efficiency projects for local governments across Europe.

Raising Awareness

So if financial resources aren’t the issue, then what are the barriers to wider adoption in Europe?  One persistent issue facing energy performance contracting in Europe is the low level of awareness among local governments and building owners regarding the availability of ESCO services and their benefits.  At first glance, many potential municipal customers see energy performance contracting as an unattractive type of off-balance sheet municipal debt.  In some cases, they assume it’s not allowed due to tender law (which is sometimes but often not the case).  In others, they shy away from ESCOs because they doubt that promised energy efficiency gains will be delivered.  Groups such as the European Association of Energy Service Companies are actively trying to change tender laws to allow for energy performance contracting and assuage concerns about the model among government officials.

Still, most of the ESCOs I spoke with in Copenhagen reported that business has been good over the last few years, despite the gloomy economic conditions in Europe overall.  In fact, some ESCOs said that concerns about operating budgets among governments and industrial firms have in fact boosted their businesses.  As awareness of energy performance contracting grows, the financial markets for energy efficiency mature, and policies such as the EU Energy Efficiency Directive transform decision-making on energy efficiency, I expect that ESCOs will continue to tap more of the latent potential that exists in this market.

To learn more about innovative energy efficiency financing instruments, you can view the replay of our Pike Research webinar on “Financing Energy Efficiency.”

 

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