Energy as a Service: A Strategic Challenge and Key Opportunity for ESCOsPosted to Guidehouse in the Utility Management Group
- Mar 12, 2020 1:33 pm GMT
Energy as a service (EaaS) project case studies of all sizes have been filling news feeds for the past 2 years. ENGIE’s large contracts with Ohio State University and the University of Iowa have made headlines. Smaller projects continue to accelerate as well. For example, Metrus Energy has announced two new projects in 2020: one with a Fortune 500 medical technology company and one with Masonic Homes Kentucky, together totaling $5.1 million.
EaaS is also making headway in federal facilities. The U.S. Air Force is pursuing two EaaS pilots to establish the viability of a framework for scalable applications across the entire enterprise. The first pilot at the Altus Air Force Base in Oklahoma is already underway. The second pilot at Hanscom Air Force Base in Massachusetts is in the competitive solicitation stage.
The rationale behind the pilots is similar for any EaaS customer. EaaS can enable clients to focus on their core business or mission rather than auxiliary functions, such as energy management. The need for outsourcing is more acute in buildings and organizations that have limited facilities staff and want to use innovative building technologies that often require specialized expertise to maintain and control.
Challenge to ESPC Growth
EaaS solutions now touch every major segment traditional to energy savings performance contracting (ESPC). As a result, energy service companies (ESCOs) that primarily focus on ESPC are challenged to compete with turnkey energy offerings provided by competitors. The competition comes from different angles, including ESCOs that have successfully expanded into EaaS, energy providers that have expanded into energy efficiency and building optimization via EaaS, and smaller startup companies that provide EaaS solutions.
Traditional ESPC contracts are not expected to go away any time soon. A Navigant Research, a Guidehouse company, report forecasts ESCO ESPC revenue growth at a compound annual growth rate of 4.5% between 2020 and 2029, reaching $28.7 billion in 2029. However, market share and growth will be harder to maintain for market players that do not evolve to meet new customer expectations and market trends.
Customer need for more comprehensive solution offerings and EaaS financing mechanisms requires ESCOs to diversify their project development efforts and develop new technology-agnostic capabilities and financing options outside of ESPC structures. Vendors that recognize their core competencies and create partnerships and strategies to amplify solution offering capabilities are expected to become market leaders.
Broadening the value of engagements within the ESPC framework and beyond ESPC models will be key to growth. Renewables and other onsite generation, building analytics, energy storage, and other technologies are already becoming a staple of ESPC contracts. For example, Ameresco just announced a $58 million project with the U.S. Navy to provide onsite generation, battery storage, and microgrid controls. The trend is expected to continue as onsite and emergency power supply systems such as microgrids, backup generators, and combined heat and power grow in demand—especially in the wake of the rising incidence of severe weather and hurricanes.
The next step for many ESCOs is to integrate and scale non-ESPC contracting models, including equipment leases and loans, energy services agreements, asset monetization, and as a service contracts. These solutions can often offer shorter and less complex financing options to the customer. Long-term contracts and contract complexity have long been key barriers to ESPC market growth. New business models centered around EaaS can help ESCOs engage customers not well served by traditional ESPC contracts, such as commercial clients, and broaden options for existing clients seeking customizable solutions to address their energy needs.
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