The U.S. Environmental Protection Agency’s (EPA’s) plan to regulate carbon emissions is just the latest challenge facing the U.S. electric power system. Technological innovation is disrupting old ways of doing business and accelerating grid modernization. Earlier this year, AEE released Advanced Energy Technologies for Greenhouse Gas Reduction, a report detailing the use, application, and benefits of 40 specific advanced energy technologies and services. This post is one in a series drawn from the technology profiles within that report.
Energy Service Companies (ESCOs) are in the business of reducing customers’ energy use and costs by implementing comprehensive energy efficiency solutions. This typically involves retrofitting existing buildings with energy efficient equipment such as high-efficiency lighting, heating, air conditioning, and motors, as well as energy management and control systems. ESCOs can also provide equipment and services related to onsite power generation such as combined heat and power and rooftop solar power, and may also perform energy procurement. They usually handle all aspects of a project, including design, installation, maintenance, monitoring, and financing.
ESCO services are widely used today, and the industry is growing at a steady pace, with an estimated 2013 revenue of $630 million in the U.S. and an annual growth rate of 13%.[1] ESCOs mainly serve public and institutional markets, often called MUSH (municipalities, universities, schools, and hospitals). These entities can take a longer-term view and can utilize ESCO financing for large projects. Private sector commercial and industrial facilities only account for about 8% of ESCO industry revenue while 84% of the 2011 ESCO market came from the MUSH market.
ESCOs pioneered the use of a business model called energy savings performance contracting. This financing mechanism has been successful because it eliminates one of the key barriers to energy efficiency deployment – raising capital. With performance contracts, the energy cost savings are used to pay for the capital improvements of the project with the ESCO assuming the risk that the project will save money and energy as expected. For example, Johnson Controls has worked with the public school system in Wyandotte, Michigan, to deliver $6.9 million in energy cost savings to the district, through the implementation of new windows and HVAC as well as a building energy management system.
[1] Advanced Energy Now 2014 Market Report, http://info.aee.net/advanced-energy-now-2014-market-report