WHERE THE ESP INDUSTRY MEETS THE FUTURE

Creating a Robust ESP Industry The US Experience Donald Gilligan NAESCO

Phases of US ESP Market Development Pre-1985: US Energy Efficiency Industry, pre-1985 1985-1995: Early Performance Contracting 1995-2000: Evolution of the ESCO Model 2000-2005: Setbacks 2006-present: Growth and competition

US Energy Efficiency Industry, pre-1985 Federal government mandates utilities to provide energy conservation Business model: ESPs provide services Energy audits, arranging contracting, etc. Finance model: fee for service Utilities pay ESPs for services Negotiated fee per audit M&V model Services delivered, not energy savings

Growth of US ESCO Industry Source: Lawrence Berkeley National Laboratory

1985-95: Early Performance Contracting Utility regulators make EE into utility resource plans Utilities solicit bids for “energy efficiency power plants” Utilities pay 80-100% of project costs -- cheaper than power plants Utilities pay for kWh delivered -- emulate utility metering Business model -- ESPs become ESCOs Assemble turnkey service offerings 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 ESCO assumes credit risk, because it relies on the customer passing on savings to repay the loan Easy start, because of the high utility incentives

1985-95: Early Performance Contracting NAESCO established as a national organization Most ESCOs are small, entrepreneurial companies Several major controls companies have ESCO subsidiaries Honeywell Johnson Controls

1995-2000: Evolution of the ESCO Model ESCOs could not expand meet the market demand Federal government implemented large projects Utility companies purchased entrepreneurial ESCOs New Finance Model Guaranteed savings replaces shared savings Financiers and customers need transparent M&V Model NAESCO, ASHRAE, US DOE created IPMVP Industry threatened by bad actors – exaggerated savings NAESCO starts accreditation program

Guaranteed Savings Financing 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

2000-2005: Setbacks Utilities decide they don’t like ESCO business Enron collapse poisons market for large industrial customers Federal government downgrades energy efficiency to a “moral virtue” Federal performance contracting legislation expires NAESCO loses members NAESCO accreditation becomes well established More states and local governments accept credential

2006-present: Growth and Competition ESCOs focus on public buildings Driven by federal and state energy savings mandates Facilities pay for capital improvements with energy savings M&V less rigorous – increasing use of non energy benefits ESCOs add new services – distributed generation, renewables, etc. Utility spending on efficiency continues to grow Regulators see energy efficiency as the cheapest resource New ESCOs started -- NAESCO ESCO membership doubles Accreditation program streamlined Competition from contractors limits ESCO growth

Questions? Donald Gilligan dgilligan@naesco.org