## 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 long term 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

# 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

## 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

### “ 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