us-esco industry.pdf
TRANSCRIPT
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Overview of U.S. ESCO Industry:Overview of U.S. ESCO Industry:Recent Trends and HistoricRecent Trends and Historic
PerformancePerformanceCharles Goldman
E. O. Lawrence Berkeley National [email protected]
International Workshop on EnergyEfficiency Services Industries
Shanghai, China
September 8, 2003
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Overview of PresentationOverview of Presentation
U.S. ESCO Industry Overview
- Definition & History- Performance Contracting- U.S. ESCO Market: Size,Target Markets, and Major Industry
Players
Historic Performance of U.S. ESCOs- Results from NAESCO/LBNL Database Project:
typical costs & installed measures
energy savings & economics Enabling Policies
- Utility DSM programs, State and Federal Legislation
Lessons Learned
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Definition of U.S. ESCODefinition of U.S. ESCO
Project developer in business of improving end-
use energy efficiency :- Combine engineering expertise with financial services
to extract untapped potential for energy efficiency atcustomers facility
- Integrates broad range of services: projectidentification, engineering & design, financing,construction, M&V of savings, maintenance, and billing
Performance contracting: ESCO's compensationis tied to project's performance (e.g., amount ofenergy and $$ saved in customers facility)
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ESCO Industry RootsESCO Industry Roots Early 1980s - Firms attempt to establish energy
performance contracting as viable, self-sustaining business activity
ESCOs evolved from several sources:
- Engineering services companies (Design/Build firms,Efficiency consultants)
- Manufacturers of building controls/equipment
- Growth in utility DSM rebate and bidding programs(1988-1994)
Start-up ESCO ventures
Utility subsidiaries
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U.S. ESCO Industry HistoryU.S. ESCO Industry History
Pre-1985: The beginning of UtilityDemand-side Management
1985-1993: Emergence of the ESCOs
1994-1999: Success and Consolidation 2000 - Present: Adapting to Electric
Restructuring and Increased Competition
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19851985 -- 1993: Emergence of1993: Emergence of ESCOsESCOs
Utility DSM programs grow in size andscope; linked to Integrated ResourcePlanning
ESCOs develop functional capabilities insales, engineering (comprehensive auditand design), finance and construction
Control equipment manufacturers startESCO business units- Target institutional (and industrial) customers
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19941994 --1999: Success and Consolidation1999: Success and Consolidation
Number of ESCOs (control companies)build large businesses
Federal legislation and regulations boostenergy efficiency
Utilities buy or start their own ESCOs todevelop comprehensive service offerings
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2000 to Present: Adapting to Electric2000 to Present: Adapting to ElectricRestructuring and CompetitionRestructuring and Competition
Electricity sector restructuring- States experiment with retail competition
- FERC changing wholesale markets and regulation- No clear national policy: much confusion
ESCOs now compete with new entrants
(companies) to sell:- Energy efficiency technologies- Small-scale, onsite, electric generation- Load management
- Electric and gas Commodity- End use services (Chilled water, steam)- Other services (e.g., building maintenance and
operations)
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Performance Contract: Guaranteed SavingsPerformance Contract: Guaranteed Savings
Lender/ Financier
Customer
ESCO
Fixed RepaymentSchedule
Savings Guarantee
Loan ContractEPC Contract (Guaranteed Savings)
Customer finances project & assumes debt obligation on balancesheet
ESCO assumes project performance risk & guarantees that savingswill be sufficient to cover customers annual debt obligation
Lender assumes credit risk
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Performance Contract: Shared SavingsPerformance Contract: Shared Savings
Customer
ESCO
Loan ContractEPC Contract (Shared Savings)
Lender/Financier 100% funding
ESCOproject services &
savings guarantee
ESCO assumes performance and credit risk
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Costs Associated with ESCO ProjectsCosts Associated with ESCO Projects
Source: Easton Consultants
Transaction Costs
20 to 40%
Project Costs
60 to 80%
Prospecting/Proposal Generation
Closing Fees (Legal)
Measurement & VerificationFunding Premium (Third Party)
Design
Capital Equipment & Installation
Project Identification
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ESCO Industry has experiencedESCO Industry has experiencedstrong growthstrong growth
ESCO Market for energy-efficiency related services is ~$1.8-$2.1B in2000; 24% annual growth rate (1990-2000)
Performance contract revenues: $0.9-$1.0B in 2000
0
500
1000
1500
2000
2500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
E S C O
R e v e n u e s
( $ M )
Revenue from other services (low estimate)Revenue from other services (high estimate)
Performance-contracting revenues (low estimate)Performance-contracting revenues (high estimate)
Total Market Estimate(1990-2000):
$16.5-20B
$1.8B
$2.1B
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15%
44%6%
35%Building Equipment Mnfctrs
Engineering Services Companies
Other Energy Companies
Utility Affiliates
ESCO Industry Ownership StructureESCO Industry Ownership Structure
Quickly changing industry -- mergers and acquisitions very common;
Expect significant consolidation: fallout from CA, Enron and stalled retailmarket
About 12 companies consistently comprise ~70% of industry revenues
29%
9%
28%
34%
based on revenues based on number ofcompanies
Industry Ownership in 2000...
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30%
14%
9%6%
12%
3%2%
5%
5%
3%1%
7%1%2% K-12 Schools
State/local governmentUniversity/college
Federal governmentHealth/hospitalPublic HousingHotel/hospitalityOffice, commercial - leased
Office, commercial - owner-occupiedRetail - single siteRetail - multi-siteIndustrialResidentialOther
ESCO Target Markets: Historic ActivityESCO Target Markets: Historic Activity
Results from NAESCO Database project: 1473 projectsrepresenting $2.3 Billion in investment
Institutional sector (schools, government, health/hospital)
represent ~74% of market activity
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ESCO Industry: Key PlayersESCO Industry: Key Players
Equipment & controls manufacturers with ESCO
operations Utility-owned ESCOs Independent ESCOs - small to mid-size
performance contractors Retail energy suppliers
- Potential competitors to traditional ESCOs for someproducts (e.g, onsite generation, central energyplants for chilled water or steam)
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Equipment & Controls ManufacturersEquipment & Controls Manufacturers
with ESCO Operationswith ESCO Operations Business strategy involves broadening market for
equipment and services of core business Major new entrants (e.g., Siemens) but some existing
companies shifting focus (e.g., Honeywell) Strategic alliances with Retail Energy Service
Companies were not very successful Renewed focus on energy & facility management
services- facility management- Onsite energy manager - Act as customers energy advisor strategic energy
planning, rate negotiation, energy information services
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UtilityUtility
--ownedowned
ESCOsESCOs
Many utilities bought or started ESCOs as part of strategicresponse to Electricity Restructuring (~1995-1999)
- offer energy efficiency, onsite generation,- Some ESCOs also provide electricity commodity and risk
management services- targeted customers in local service territory and/or Federal
market with limited success (brand recognition)
Current situation- Retail competition stalled in U.S.- Some utility-owned ESCOs have grown, but many smaller
ESCOs have gone out of business or been sold- Some utilities selling off ESCOs because of financial troubles
because of losses in trading operations and/or merchantgeneration
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Historic Performance of U.S.Historic Performance of U.S. ESCOsESCOs ::
Results from NAESCO Database ProjectResults from NAESCO Database Project
Typical Project Costs, Installed Measures,Savings, and Payback Times
Trends in Contracting Approaches
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Cost of U.S. ESCO Projects:Cost of U.S. ESCO Projects:
Investment TrendsInvestment Trends
$2.55B of work completed by 51 companies
Significant activity in four states (44% in NY, NJ, CA, TX)
Median and average project costs: $0.7M and $1.8M, respectively
0
50
100
150
200
250
300
350
20M
Project Cost ($)
N u m
b e r o
f P r o
j e c t N=1426
Average = $1.8 M
Median = $0.7 M
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Project Cost by Market SegmentProject Cost by Market Segment
Median project costs are higher in public/institutional marketscompared to private sector ($0.9M vs. $0.3M)
Typical projects are larger in Universities ($1.5M) and PublicHousing ($1.8M)
No. of Market Segment Projects
(N=1410)25 th
percentilemedian 75
th
percentileK-12 Schools 406 0.5 1.2 2.4State/local government 194 0.2 0.7 1.7University/college 132 0.5 1.5 2.9Federal government 83 0.5 0.9 1.8
Health/hospital 172 0.2 0.5 1.1Public Housing 39 1.0 1.8 6.0Private Sector 384 0.1 0.3 0.8
Project Cost ($M)
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Project Investment Trends by MarketProject Investment Trends by Market
SegmentSegment
Median project investment levels are 1.8 times greater in institutionalthan private sector projects ($2.50 vs. $1.40/ft 2)
0
1
2
3
4
5
6
7
K-12 Schools(n=219)
State/localgov't (n=107)
Univ./College(n=66)
Federal gov't(n=56)
Health/hospital(n=65)
PublicHousing (n=8)
Private Sector (n=156)
Market Segment
P r o
j e c t I n v e s
t m e n t
( $ / f t 2 )
75th percentilemedian25th percentile N=678
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Typical ESCO project consists of multiple measures and strategies
High-efficiency lighting installed in over 80% of projects
HVAC equipment (boilers, chillers, cooling towers, air handling units),energy management systems, or controls installed in 68% of projects
Frequency of Installed MeasuresFrequency of Installed Measures
0
200
400
600
800
1000
1200
Lighting ComfortConditioning
Motors/drives Water heaters Non-energyimprovements
Power supply Industrialprocess
improvements
Plumbing
Measure Category
N
o .
o f P r o
j e c
t s t h a t
I n s
t a l l e d
M e a s u r e
C a
t e g o r y
N=137982%
10%
2%6%3%8%
23%
68%
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Project Savings obtained from EnergyProject Savings obtained from Energy
Efficiency MeasuresEfficiency Measures
Lighting-Only projects saved 47% of equipment targeted electricity
Projects with Lighting & Non-lighting measures typically saved 23% ofelectric utility bill consumption
0
10
20
30
40
50
60
0-15% 16-30% 31-45% 46-60% 61-75%
Electr icity Savings (% of baseline)
N u m
b e r o
f P r o
j e c
t sLighting Only (N=63)
Lighting & Non-Lighting (N=94)
LO Median:47% of targeted
equipment baseline
LNL Median:23% of utilitybill baseline
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0%
5%
10%
15%
20%
25%
15
Simple Payback Time (years)
P e r c e n t o
f P r o
j e c
t s i n S
e c
t o r Private Sector (n=319)
Institutional Sector (n=788)
Economic Payback of ESCOEconomic Payback of ESCO
Projects to CustomersProjects to Customers
83% of Private Sector projects pay back in 6 years or less vs.44% of Institutional sector projects
Institutionalmedian: 7
years
Privatemedian: 3
years
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Performance Contracting is aPerformance Contracting is a
Decreasing Share of ESCO BusinessDecreasing Share of ESCO Business
Market share of performance contracting is decreasing amongNAESCO members (92% to 76%)
Design/Build & Fee-for Service approaches account for ~30% ofESCO projects in 1996-2000
0%
20%
40%
60%
80%
100%
pre 1996 (N=182) 1996-2000 (N=594)
P e r c e n
t o
f P r o j e c
t s Non Performance-basedContractsOther Performance-basedContractsShared Savings
Guaranteed Savings
Time Period
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Role of Enabling PoliciesRole of Enabling Policies
Utility DSM programs
State regulations for performancecontracting
Federal Energy Policy Act
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U.S. Electric Utilities have investedU.S. Electric Utilit ies have invested
in Energy Efficiencyin Energy Efficiency
Utilities offer Energy Efficiency (EE) programs that providefinancial incentives, technical assistance and information tocustomers
Programs paid by utility ratepayers or by public benefit funds
Source of Data: York, Dan and Marty Kushler (2002), State Scorecard on Utility andPublic Benefits Energy Efficiency Programs: An Update, ACEEE Report Number U023.
0.000.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
1992 1994 1996 1998 2000 2002
$ U S
B i l l i o n
PBFunds
IRPEra
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ESCO Reliance on DSM ProgramsESCO Reliance on DSM Programs
May Be DecliningMay Be Declining
38% of all projects participated in utility DSMprogram
Participation has decreased since 1995(50% vs. 34%)
yes50%
no32%
unknown18%
N = 438
yes34%
no51%
unknown
15%
N = 996
1996 - 2000pre 1996
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Many U.S. States encourageMany U.S. States encourage
Performance ContractingPerformance Contracting
States adopt laws/procurement guidelines that remove barriers toperformance contracting for K-12 schools, universities andstate/local governments
46 states have legislation for at least one of these sectors State energy offices also promote performance contracting;
educate customers on working with ESCOs
39 38
31
4
05
1015202530
354045
K-12 Schools State/ local gov't Univ./ colleges No legislation
Scope of Legislation
N o .
o f S t a t e s
w i t h
P e r f o r m a n c e -
c o n
t r a c
t i n g
L e g
i s l a t i o n
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U.S. Government promotes energyU.S. Government promotes energy
efficiency in Federal buildingsefficiency in Federal buildings Executive Orders (EO) signed by President
- Directs Federal Agencies to reduce building energy consumptionthrough installing cost-effective energy efficiency
- Goals: 30% reduction by 2005, 35% by 2010
Energy savings performance contracts (ESPCs)- Authorized in 1986 and 1992 as innovative contracting
mechanisms to finance and implement EE improvements- Indefinite-delivery, indefinite-quantity (IDIQ) contracts streamline
procurement
- ESCOs are pre-qualified for Federal agency programs
- $1.2 Billion in ESPC projects since 1988
Federal Energy Management Program (FEMP)- Champions energy efficiency among federal agencies
- Developed and implements DOE Super-ESPC program
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Lessons LearnedLessons Learned
U.S. ESCO industry has been very successful ininstitutional markets
- private (e.g., industrial) sector has been more difficult Government policy support and market
development programs were critical to success:- Getting energy prices right is not enough
- State and Federal legislation facilitating performancecontracting
- Modifying government procurement practices (best value vs.low bid)
- Public facilities energy efficiency program
- Utility DSM programs
- Customer education/information
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Lessons Learned (cont.)Lessons Learned (cont.)
Prerequisites for a successful ESCO industry- Well-established contract law
- Access to local financing: need reasonable interest rates andcontract terms
- Good relationships with customers
Bottom line each country is unique- different business, legal and financing practices and varying
technical opportunities mean the ESCO model will have to beadapted