The Evolving Role of Energy Service Companies

August 9, 2000
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To survive in the current economy, ESCOs must pay more attention to meeting customer needs. Offering new services can get results.
Energy service companies (ESCOs) are evolving into a dramatically different type of business today, playing a much different role than the one they played over the past 20 years. A number of factors have contributed to the change, including:

  • A strong economy and increased business competition

  • Greater concern about reliability of power and energy supplies

  • Government regulations concerning pollution and the environment

  • Continued deregulation of the utility industry

  • Greater customer participation and knowledge

  • High-tech solutions and outsourcing models

  • The Internet and e-commerce

In response to these forces, leading ESCOs have updated and continue to modify their business strategies. New strategies include:

  • Developing one-to-one relationships and closer partnerships with customers

  • Providing customized solutions based on the customer's unique requirements

  • Adding competitive value to their customers' businesses by offering a wide range of expertise and providing distinct solutions-not just the standard solutions characteristic of the past-in response to certain business trends

  • Staying abreast of government regulation and ensuring customer compliance

  • Offering completely outsourced energy management capabilities assuming complete responsibility for facility management and energy-related requirements

  • Providing more utility-related services, such as evaluating suppliers for energy users and including commodity supplies at reasonable cost in the overall solution.

  • Delivering innovative solutions incorporating the latest technology-for example, offering more customer and supplier services through the Internet

Over the past two years, these factors have gradually been reshaping ESCOs and providing energy users with improved traditional services as well as a wide-range of new services. However, with the strong overall economy and the ever-increasing acceptance of the Internet, the pace to incorporate Internet-based solutions and e-commerce will accelerate additional changes at a much faster rate.

Electronic tools can help determine performance baselines useful for documenting savings and justifying new projects.

Closer Partnerships

To become more competitive in a strong economy with increased competition and to provide increasingly knowledgeable customers with better service, ESCOs have developed more one-to-one relationships with customers. Traditionally, ESCO services included innovative financing arrangements, operating and maintaining as well as installing energy-efficient equipment, brokering power, obtaining utility rebates and government grants, and metering and monitoring. Today, as they continue to gain greater knowledge of customer requirements through better partnership relationships, ESCOs are offering more comprehensive traditional services and customized solutions.

Some ESCOs even have begun offering non-energy-related value-added services. One example: installing fiber optic cable that will serve an organization's entire communications network while installing the cables and equipment necessary for metering and monitoring. In effect, the customer's energy management system (EMS) can then be monitored and managed from the same backbone communications network serving the rest of the company or campus.

One factor enabling ESCOs to provide such services is the closer partnerships that ESCOs are continuing to develop with their suppliers. A related trend is continuing consolidation within the energy industry, as ESCOs acquire companies that enable them to offer more services and products.

According to Terry E. Singer, executive director for the National Association of Energy Service Companies (NAESCO), "In the Industry Items section of our publication for members (the quarterly Energy Efficiency Journal), there is certainly an increasing number of acquisitions and mergers reported.

"In the past four issues, there were 13 such announcements, and many of them explicitly mentioned the addition or expansion of services to be offered by the new venture," Singer says. "In addition to mergers, there were three announcements of formal agreements between members and other companies to provide additional services as a complement to existing business channels."

ESCO personnel often find themselves managing an end user's facilities.

Customized Solutions

As ESCOs have gained greater depth of knowledge about a wider range of each customer's corporate goals, they have better tailored their services with more advanced equipment and customized services that address multiple goals and often go beyond meeting traditional energy-cost savings objectives.

For example, two corporate goals that ESCOs might help to address-at least, indirectly-are productivity and employee retention. In response to customer requirements in today's tight job market, there is a greater focus on ergonomically engineered internal environments. In addition to more efficient and less costly lighting, more companies want better quality lighting. They want to ensure more consistently comfortable and custom-controlled workspaces to help make their employees more productive and satisfied with their work environment at the same time that the company maintains energy efficiency.

Knowing their customers better also helps ESCOs structure customized financial agreements that enable their clients to use energy-cost savings to reach non-energy-related goals. One example: shared-savings agreements that enable schools to buy computers, other equipment, or even textbooks with the money they receive.

In one case a few years ago, NORESCO presented the Webster, NY, Central School District with a check for $250,000 at the beginning of its energy conservation project. Under a 10-year energy savings performance contract (ESPC), this accelerated shared-savings payment enabled the school district to fund computer and technology project initiatives. Providing flexible financing such as this is one more way that ESCOs are increasingly tailoring their services to better address customers' differing requirements.

Keeping abreast of new technologies can distract a customer from core competencies.

Adding Value

A time-honored approach to helping customers meet energy challenges involves installing more efficient lighting and using the savings to purchase more energy-efficient HVAC equipment. While such basic measures continue as a staple of ESCO services, it is far from enough in today's world.

ESCOs continue to evolve in response to technology and energy trends affecting their customers' businesses. ESCOs capable of offering a wide range of expertise are providing distinct solutions that add value for their customers by enabling them to compete more effectively within today's business environment.

With today's greater dependence on computers, for example, power outages and poor quality electricity are much less tolerable than they were even five years ago. Computer downtime can halt traditional business processes and production as well as e-commerce, and cause millions of dollars of damage in lost time, inventory, and transactions.

Because the information economy has precipitated a move toward greater reliability, ESCOs today are more frequently installing gas- or oil-fired cogeneration systems and alternative energy sources, such as wind, solar, and advanced technology fuel cells. In addition to its capability to provide backup power to grid sources, the trend toward more distributed generation is driven by the capability of cogeneration to reduce pollution as well as provide substantial energy savings. Although technologies such as fuel cells are still not economically feasible for many, an increasing number of larger facilities are installing these systems. As such technologies become more commercially viable, more energy users will look to ESCOs for their expertise in providing these advanced solutions to fulfill their energy reduction requirements, as well as satisfy government regulations.

ESCOs need to retain expertise in traditional areas of expertise.

Government Influences

Government regulations and incentives for reduced pollution and reduced energy use continue to influence the services that ESCOS offer. To provide appropriate innovative solutions enabling their customers to remain in compliance with government regulations, ESCOs must ensure that their engineers, consultants, and staff stay abreast of new regulations and have the expertise to evaluate and incorporate the latest solutions and engineering technologies into their recommendations.

Recently posed mercury recycling regulations, for example, are leading to new fluorescent lamps and ballasts, a subject addressed at the recent NAESCO conference. In addition to using industry seminars to enhance their knowledge, more ESCOs are maintaining a one-to-one relationship, strategic alliance, or partnership with suppliers who offer innovative solutions and have leading-edge expertise.

Energy Management Services

There is a growing trend for energy users to outsource expertise-intensive functions such as management of energy facilities and other energy-related requirements. Some of the impetus for this trend comes from the need to acquire expertise to manage and maintain cogeneration plants. A number of ESCOs already have assumed this outsourced responsibility for major customers. NORESCO, for example, provides on-site facility services for such customers as Duquesne University, Providence Place Mall, Montclair State University, and Plymouth State College.

As deregulation continues, more energy users are requiring the expertise of those familiar with utilities and with power contract negotiation. ESCOs, particularly those spun off from utility companies, are providing more extensive utility-related services such as evaluating energy suppliers for their customers and/or acting as aggregators and resellers. ESCOs often include commodity energy at reasonable cost as a component of an energy service contract.

ESCOs are taking on a broader range of challenges to meet the growing demands of customers.

Dot-Com Energy Solutions

Leading ESCOs also have begun to offer more customer and supplier services through the Internet. Currently, these services are primarily information based, but are evolving to include some transactions such as the purchase of energy.

At the recent NAESCO conference, industry experts repeatedly noted that energy is one of the sectors likely to be most affected by e-business. In a seminar on "Utilities and E-Business," it was pointed out that Forrester, a Cambridge, MA, research firm that focuses on the impact of technology on business, estimates that by 2004, U.S. Internet business-to-business energy transactions for natural gas will reach $166 billion and for electricity, $100 billion.

"The energy dot-coms could impact the way energy is sold and purchased, and significantly affect the structure of the industry," says seminar presenter Dwight Allen of Deloitte Research, part of Deloitte Consulting. He is preparing a report defining scenarios for the energy sector of 2010 and expects that in the decade to come "the Internet will present ESCOs with new opportunities and challenges."

Provided with greater access to choice, web-savvy customers will become more self-reliant when purchasing power and energy-related equipment. In turn, ESCOs will enhance their offerings by selling ancillary services identified by the market demand. This may in time cross industries and include offerings such as telecom and insurance services.

More ESCOs are expanding into onsite facility services.

Conclusion

The evolving energy market place and the improved, more comprehensive services offered by ESCOs-and their new cyber-competition-provide energy users with even wider choices to evaluate and more room for negotiation. The energy cost savings resulting from a carefully structured, comprehensive program can even help energy managers contribute to company goals beyond the realm of their traditional functions. And over the next few years, the Internet will aid in transforming the energy sector, and, in effect, change the way ESCOs do business to provide greater support of the energy user.

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