In this study, LBNL analyzes the current size of the ESCO industry, industry growth projections to 2011, and market trends in order to provide policymakers with a more in-depth understanding of energy efficiency activity among private sector firms.
We draw heavily on information from interviews with ESCOs conducted from October 2009 to February 2010 and from our review of publicly available financial information regarding individual ESCOs.
The ESCO industry continues to grow with estimated revenues of $4.1 billion in 2008 despite a general downturn in the broader economy.
Despite the onset of a severe economic recession, the U.S. ESCO industry managed to grow at about 7 percent per year between 2006 and 2008. We estimate that ESCO industry revenues are about $4.1 billion in 2008.
While ESCO industry growth was slower than anticipated, the industry continued to deliver energy efficiency services to many market sectors even when facing higher financing costs.
The ESCO industry’s growth rate is expected to increase through 2011.
Based on individual ESCO projections of revenue growth rates, we estimate that the ESCO industry in aggregate will have annual revenues of $7.1–7.3 billion in 2011.
This represents an average annual growth rate of 26 percent per year between 2009 and 2011. Key drivers for ESCO market growth include the large infusion of funding from the American Recovery and Reinvestment Act to support state and local government energy efficiency programs, increased spending in ratepayer-funded energy efficiency programs, and increased customer interest in strategies that mitigate higher utility bills and/or address environmental concerns.
Actual revenues reported by ESCOs for 2008 (i.e. $4.1 billion) are lower than ESCO projections of 2008 industry revenues ($5.2-5.5 billion), based on a 2007 LBNL study.
In a previous LBNL study of the ESCO industry (Hopper et al 2007), ESCOs projected that their revenues would be about $5.2-5.5 billion in 2008. Actual revenues reported by ESCOs in 2008 in aggregate were about $4.1 billion.
Several factors may account for the gap between ESCO industry revenues in 2008 and the projections of 2008 revenues from our previous study.
First, the general and unexpected downturn in the economy has resulted in negative or flat economic growth among many market sectors targeted by ESCOs since the original projections were provided by ESCOs in the 2007 LBNL study.
Consequently, many public and private entities may have been deferring large capital investments since 2007 including retrofits of existing building space.
Second, there has been a temporary tightening of credit markets for customers looking to secure third-party financing; some financial institutions have also shortened the contract terms that they are willing to finance, which has the effect of reducing overall project investment size.
Third, the ESCO industry has undergone significant consolidation in recent years through buyouts and mergers, which may have temporarily affected prospects for industry growth as companies reconfigure their business strategies and absorb companies with different business models.
Public and institutional markets — federal, state and local governments, K-12 schools, universities and colleges — account for about 84 percent of ESCO industry revenues in 2008 ($3.4 billion).
The so-called “MUSH” markets — municipal and state governments, universities and colleges, K-12 schools, and hospitals — have historically hosted the largest share of U.S. ESCO projects.
The MUSH market’s share of total ESCO revenues accounts for about 69 percent of ESCO industry revenues, an increase of over 10 percent since 2006. It appears that “lead by example” programs established by state and local governments, the infusion of federal stimulus dollars, and the continued support for performance contracting programs will continue to support ESCO market growth in the public/institutional sector.
ESCO activity in the federal market appears to account for a somewhat lower share of total industry revenues in 2008 compared to 2006 (15 percent vs. 22 percent).
The commercial and industrial (C&I) sector accounted for about 7 percent of ESCO industry revenues in 2008, declining from a 15 percent market share in 2006. Compared to the U.S. market, ESCOs retain a stronger presence in industrial and commercial markets in Asian and European markets.
Several ESCOs have increased their activities in the residential market, mainly through managing and/or implementing utility residential energy efficiency programs, reflected in the 6 percent share of total ESCO revenues in 2008 (compared to 3 percent of revenues in 2006).
ESCOs reported that energy efficiency technologies represent a major share of industry activity, accounting for 75 percent of ESCO industry revenues or about $3.0 billion per year in 2008.
Energy efficiency measures account for about 75 percent of 2008 ESCO revenues, which is comparable to values reported by ESCOs in 2006 (i.e. 73 percent of total revenues). Onsite renewable generation accounts for 14 percent of ESCO industry revenues in 2008 ($570 million), compared to 10 percent of ESCO industry revenues in 2006 ($360 million).
Factors that may contribute to the increased deployment of renewable energy and onsite generation technologies are that ESCOs are leveraging publicly-funded incentives and government tax credits for renewable energy projects and are increasingly bundling renewable technologies with energy efficiency improvements to help customers meet various goals including energy independence and greenhouse gas emissions reductions.
Three-quarters of ESCO projects are performance based. Non-performance-based agreements, such as design/build and “engineering, procurement and construction services” (EPCS) projects, accounted for about 22 percent of reported 2008 industry revenues and 3 percent of ESCO revenues were attributed to consulting services.
ESCO projects are becoming more expensive due to increases in ESCO labor and material costs and customer’s demand for more comprehensive mixes of technologies.
A majority of ESCO respondents (54 percent) indicated that typical project installation costs have increased over the past decade even after accounting for inflation, due in part to increased labor and material costs.
Many ESCOs also noted an increased demand by customers for more comprehensive and thus more capital-intensive retrofit strategies.
These findings are consistent with a parallel analysis of the LBNL/NAESCO project database, which found that median project investment levels more than doubled in the last decade, even after accounting for the effects of inflation and floor area.
If these trends continue, ESCOs need to continue to demonstrate the economic case for comprehensive retrofits by delivering additional savings and value to customers through a combination of energy and O&M savings and other non-energy benefits.