Navigant Research Blog

Newcomers Flock to the Energy Efficiency Services Market

— April 18, 2012

In the 1980s and 1990s, vendors of HVAC equipment, oil and gas, and others entered the energy service company (ESCO) market, using end-to-end energy efficiency solutions as a platform to sell “stuff.”  In the early 2000s, many of these service providers divested their service lines to re-focus on their core businesses, leaving integration up to others.

In recent years, however, a range of new players are entering – or re-entering – the energy efficiency services market.  In our report, Energy Efficient Buildings: Global Outlook, Pike Research forecasts that the market for energy efficiency technology and services will grow to $103 billion by 2017, up from $68 billion in 2011.  As the market for energy efficiency services grows, many players are finding that to compete for energy efficiency business – whether through procurement procedures in the public sector or outsourced energy efficiency services for commercial property owners and managers – they need to move further down the value chain and not only sell products, but also integrate those products into a complete solution.

One way to make the transition from manufacturing to integration is through acquisition.  Eaton Corporation, for example, made its move into the energy efficiency services space with its 2010 acquisition of EMC Engineers.  That paved the way for Eaton to achieve a certification as a Qualified ESCO by the U.S. Department of Energy in 2011, allowing it to access the federal energy efficiency services market as well.

Meanwhile, a number of other firms that don’t necessarily fit the traditional HVAC or property services profile have also been building on their product lines with new energy efficiency service businesses.   In February, Hess, the Woodbridge, NJ-based oil and gas giant that’s better known for selling gallons of gasoline, announced the launch of Hess Energy Solutions.

The motivations for getting into energy efficiency services relate mostly to the opportunity to expand further down the energy efficiency value chain and to bring in higher-margin work.  When sales of stuff plateau, or gaining market share becomes increasingly difficult, some firms see services as the logical extension of existing product lines.  The global economic downturn encouraged the development of service lines as many manufacturing firms have had difficulty maintaining product sales levels at pre-recession levels.  In addition, many services offer higher margins than product sales do, so folding a service business into a business’ broader portfolio can yield a higher average profit margin for the business as a whole.


Is ‘Strategic Intelligence’ an Oxymoron?

— April 11, 2012

An essay on by Eric Garland, a former strategy analyst and author of Future Inc: How Businesses Anticipate and Profit from What’s Next and How to Predict the Future…and WIN!, recounts Garland’s growing disenchantment with the field in which he’s made a living for 15 years: strategic intelligence.

I don’t particularly trust anyone who writes books with titles like that (particularly ones with totally ungrammatical subtitles), but Garland’s indictment is stinging and persuasive. “The market for intelligence is now largely about providing information that makes decision makers feel better, rather than bringing true insights about risk and opportunity. … Our future is now being planned by people who seem to put their emotional comfort ahead of making decisions based on real — and often uncomfortable — information.”

Garland is mostly talking about strategic intelligence at the corporate and nation-state level, but his definition of “strategic intelligence” (“researching trends, analyzing their potential impact, and reporting the possibilities to decision-makers”) could certainly apply to the field of clean technology research and analysis that we inhabit at Pike Research, as well.  He identifies three trends that are making it harder for empirical evidence and clear-eyed analysis to overcome institutional biases, internal politics, and short-term thinking.  First, “the explosion of cheap capital from Wall Street has led major industries to consolidate,” leaving a smaller pool of firms, many of which operate in markets distorted by politics, protectionism, and government handouts.  Second, this concentration of capital and economic clout has created giant bureaucracies in which “conventional thinking and risk avoidance become paramount.”  When you’re part of a large bureaucracy far removed from the real-world consequences of individual decisions and actions, it’s harder, and less rewarding, to base your thinking on strategic intelligence.

Finally, the influence of policy-makers is stronger than ever before.  This may seem counter-intuitive at a time when the United States can’t even craft a national energy policy, but Garland makes the case that national governments are now in the business of shielding large corporations – GM, Verizon, big banks – from the turbulent forces of globalized capitalism.

“How can you use classical competitive analysis to examine the future of markets when the relationships between firms and government agencies are so incestuous and the choices of consumers so severely limited by industrial consolidation?”

Watch Out for the Elephants

I have a couple of responses to this lament. One is that, although many cleantech sectors (electric vehicles and solar power, to name two) are certainly influenced by – many would say “distorted by” – government policy and government handouts, I have not found it the case that that limits the usefulness of evidence-based analysis and quantitative market sizing and forecasting.  Quite the opposite: the companies we talk to every day need independent intelligence more than ever, in large part because the actions of governments can be so unpredictable and so market-changing.  When you’re trying to run through an elephant herd it helps to know which way the trunks are swinging, as it were.

Second, the lamentable state of strategic intelligence is not news.  Garland never refers to the invasion of Iraq nor the intelligence failures (or misuses) that led up to it, but his critique certainly springs from the dark days of 2002, when an entire generation of CIA intelligence gatherers and analysts saw their work distorted and repurposed to further a predetermined foreign policy objective: the invasion of Iraq.  In 2007 John Heidenrich wrote a long essay on the CIA’s official website called “The State of Strategic Intelligence,” which made the same complaint that Garland makes today:The architects of the National Security Act of 1947 would be greatly surprised by today’s neglect of strategic intelligence in the Intelligence Community.”

Last year former Fortune managing editor Walter Keichel III published an essay on the Harvard Business Review site in which he noted that the entire business model of corporate strategic analysis has shifted: “Behemoths such as McKinsey and BCG … have broadened what they do and moved down the food chain. McKinsey teams are beavering away in places like the United Arab Emirates and the ‘Stans — Turkmenistan, say, or Tajikistan — but they’re as likely to be doing operations projects as pure strategy work.”  These days the real money, Keichel notes, lies not in corporate strategy but in “semi-permanent, year-in, year-out relationships with companies rich enough to pay scores of millions annually for help and advice.”

That reminds me of the old Woody Allen joke: “I know therapy works – I’ve been doing it for 30 years!”  (To be sure, though, ongoing customized client relationships are often not only more lucrative to the consultant but more valuable to the client than one-off, high-level strategic studies.)

Garland’s overall point is inarguable.  “The study of the future used to be easier to sell, maybe because the analysis usually predicted the growth of the consumer economy or the next great gadget,” he writes.  “But the future is no longer nearly as palatable, and the customers are less interested.”

But the customers who aren’t interested in hard truths about an unpalatable future aren’t good customers, anyway, because they’re not going to be around for very long.


Better Buildings Challenge Boosts ESCOs

— January 12, 2012

In late 2011 President Obama announced the Better Buildings Challenge, a $4 billion program sponsored by the DOE with the support of a number of public and private sector partners.  The program aims to make American buildings 20% more energy efficient by 2020 by directing federal agencies to engage in performance contracts (driving efficiency with zero taxpayer funds) as well as mobilizing major companies to invest in efficiency upgrades to their own buildings and plants.

The list of partners in the Better Buildings Challenge is impressive, including major building service providers such as Schneider Electric and Transwestern, as well as industrials with large building portfolios such as Saint-Gobain and General Electric.  To date, 1.6 billion square feet of space have been committed to the program, and that figure will grow as more companies, government agencies, and other organizations get involved.

But is it enough to reach the 20% goal by 2020? Four billion dollars may sound like a lot, but some studies have indicated that reducing energy consumption in U.S. buildings will take much more than that.  A 2009 study from McKinsey found that a potential $1.2 trillion in gross energy savings sit latent in the U.S building stock – but it would take $520 billion in upfront investment to unlock those savings and reduce projected energy demand by 23%. The amount of capital directly engaged for the Better Buildings Challenge is less than 1% of the $520 billion McKinsey believes is needed.  So the 20% reduction by 2020 may be a stretch with these funds alone.

However, the announcement could have a ripple effect on the energy service company (ESCO) market and in energy efficiency investment more broadly.  In the federal sector alone, President Obama has ordered federal agencies to invest $2 billion in energy efficiency.  That money will likely be spread out over the next few years and will go to energy performance contracts with the 53 ESCOs qualified to do federal work.  That, in turn, will put ESCOs in a better cash position to build new capacity and reach more customers.

Other emerging trends in building efficiency policy might help the U.S. chip away at the funding gap.  Regulations such as PACE financing are starting to lower the bar for commercial building owners to engage in efficiency upgrades in cities from Los Angeles to Washington D.C.  And commercial benchmarking laws in cities like New York and San Francisco will soon make energy efficiency even more of a differentiator in commercial real estate markets.

The Better Buildings Challenge follows shortly after the announcement of a major zero energy building initiative by the General Services Administration, the federal government’s real estate manager.  GSA will launch zero energy retrofits of 30 federal buildings around the United States over the next few years.  The federal government has long adopted a “lead by example” approach to efficiency in commercial buildings, and these two major federal energy efficiency initiatives will help accelerate investment in efficiency not only in the public sector, but also in the private sector.


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