US Energy Service Company Industry: 

History and Business Models

Don Gilligan

President, NAESCO 

May 6, 2011
Overview of Presentation

• US ESCO industry evolution: Five phases

• Business models in each phase

• Financing models in each phase

• Factors that forced change to next phase

• Lessons learned
US ESCO Industry: Five 

Phases 

• Pre-1985: The Beginning of Large-scale 

Energy Efficiency (EE)

• 1985-1995: Early ESCo experience

• 1995-2000: Consolidation and Growth

• 2000-2004: Setbacks

• 2004 – present: Growth and new services
Beginning of EE: pre-1985

• Federal government mandates utilities to 

provide energy conservation 

• Business model: ESCOs provide services

– Energy audits, arranging contracting, etc.

• Finance model: fee for service

– Utilities pay ESCOs for services

– Negotiated fee per audit 

• M&V model

– Services delivered, not energy savings
Early ESCo Experience:

1985-1995

Industry Size ≅ $1 Billion in 1995

• Utility regulators make conservation part of longterm utility resource plans

• Utilities solicit bids for power plants and “energy 

efficiency power plants”

• ESCOs target industrial customers 

– Large savings per customer

• Utilities pay 80-100% of project costs

– Cheaper than new power plants

• M&V Model

– Emulate utility metering (≥ 15% of project cost)
Early ESCO Experience: 

1985-1995 (cont’d)

• ESCOs also sell projects to public sector

– Schools, hospitals, military bases

• Customers afraid of new technologies

• Business model

– Entrepreneurs develop service packages

• Finance model

– Shared savings – ESCOs provide capital

• M&V Model

– ESCO-proprietary spreadsheets
Shared Savings Financing

• ESCO finances project & 

assumes debt obligation on 

balance sheet

• ESCO assumes project 

performance risk and credit risk

• Lender assumes credit risk, but 

so does the ESCO, because they 

rely on the customer passing on 

savings to repay the loan 

customer

ESCO

financier

shared savings 

contract

lease 

agreement
Causes of Industry Change

• Specialized financiers making money

– Other financiers wanted to enter business

• Customers more comfortable with technologies

– Saw less need for high cost of shared savings

• Utilities wanted to enter business

– Wanted to provide full service (energy + efficiency)

• Project development costs escalated

– Federal projects: $250,000 for 30 months

• ESCOs could not expand financing

– Entrepreneurs needed balance sheets
Industry Changes

• New Business Model

– Entrepreneurs purchased by large companies

– Did not want long-term liabilities

• New Finance Model

– Guaranteed savings replaces shared savings

– Banks and specialized finance companies

• New M&V Model

– NAESCO, ASHRAE, US DOE created IPMVP
• Customer finances project & 

assumes debt obligation on 

balance sheet 

• ESCO assumes project 

performance risk & 

guarantees that savings will 

be sufficient to cover 

customer’s annual debt 

obligation

• Lender assumes credit risk

Guaranteed Savings 

Financing

customer

financier ESCO

guaranteed 

savings 

contract

lease 

agreement
Consolidation and Growth:

1995-2000

Industry Size ≅ $2 Billion in 2000

• Federal government implements ESPC

– Savings mandates and facilities needs

• State governments authorize Performance 

Contracting

– Facilities needs in state and local government

• ESCO industry continues to consolidate

• Finance industry matures for ESPC

• IPMVP protocol works for all parties
0 %

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private (n=514) Public/Institutional

(n=2,751)

Share of ESCO Projects

Non-Performance-Based Contracts

Shared Savings

Other Performance-Based Contracts

Guaranteed Savings

Design/Build

“Guaranteed Savings” Contracts 

Dominate

 Third party financier is more qualified in credit assessment than ESCOs;

 Guaranteed savings keeps ESCO balance sheet clear of project debt;

 Customer has incentive to resolve ongoing project issues, because they bear 

ongoing debt service obligations

12
Setbacks, 2000-2004

Industry Size ≅ $2 Billion in 2004

• Utilities decide they don’t like ESCOs

• Enron collapse poisons market for large 

industrial customers

– One financing vehicle discredited

• Federal ESPC legislation expires

• Federal government downgrades energy 

efficiency – not a policy but a “moral 

virtue”
Growth and New Services

Industry Size ≅ $5 Billion in 2011

• ESCOs focus on public buildings

– Energy savings mandates

– Pay for capital improvements with energy savings

– Long payback horizons

• ESCOs add new services

– Distributed generation + Renewable energy

– Build/own operate generation facilities

– Street lighting, water meters, etc.

• Utility spending on efficiency continues to grow

≅ Cheaper than new generation plants
Growth and New Services 

(cont’d)

• Resistance from government customers

≅ 75% of market remains

–Turnover of managers in key positions

–Continuous education required

• Finance industry changes affect ESCOs

• Pending financial regulations

–Accounting treatment of leases

–Financial industry reforms
Lessons Learned in US

• ESCO industry is complex and difficult

• ESCO financing limits growth

• Standard EM&V required for financiers

• Government mandates necessary but not 

sufficient to insure success

• Business-driven innovation is necessary

• US public sector focus may not translate 

to Chinese situation 
Thank you

Donald Gilligan

President

NAESCO

dgilligan@naesco.org

978-740-8821