Energy market intelligence and advisory firm Guidehouse Insights recently published a report on trends within energy service company (ESCO) markets. Typically, ESCOs develop, design, build, and arrange financing for projects that save energy, reduce energy costs, and decrease operations and maintenance costs at their customers’ facilities. Essentially, they act as project managers for energy conservation measures. Unlike conventional firms that offer energy-efficiency improvements and receive a fixed fee for their work, ESCOs are compensated based on performance: the amount they are paid is a function of the project’s actual energy cost savings, measured after the fact, as outlined in its energy savings performance contract (ESPC).
While ESPCs still dominate the ESCO market, Guidehouse reported significant changes taking place over the past two years, with other types of performance contracting such as energy as a service (EaaS) are becoming a larger part of the ESCO business. Energy as a service is a subscription-based power delivery model in which clients receive energy services from an ESCO in exchange for a recurring fee. Clients benefit from avoiding direct electricity payments and spending money on equipment, software, and device management. Services include supplying clients with electricity as well as offering energy advice, asset installation, financing and energy management solutions. EaaS was initially devised as a way to incentivize energy efficiency. Conventional utilities profit from electricity sales, discouraging them from promoting energy efficiency. Through contracts that reward energy efficiency, ESCOs are able to profit from helping clients reduce energy consumption, saving them money and reducing greenhouse gas emissions.
ESCO services are also moving beyond efficiency retrofits, incorporating sustainability and decarbonization advisory, off-site renewable energy procurement, and resilience through onsite distributed energy resources (DERs).
Guidehouse attributed these changes to the changing desires of ESCO customers, who are increasingly demanding more flexible and comprehensive energy and infrastructure solutions. Cited market drivers include increased demand for sustainability outcomes and increased need for resilience, as well as the maturation of DER technology and the EaaS model, which make this evolution possible.
Back in October, Guidehouse predicted that the EaaS market would boom in the coming decade. However, Guidehouse acknowledges certain barriers to growth, including contract complexity and length, a lack of customer awareness, and energy price volatility. Nonetheless, EaaS is expected to grow from $18.9 billion in 2021 to $43.2 billion in 2030 at a compound annual growth rate (CAGR) of 9.6%.
Guidehouse recommends that ESCOs recognize their core competencies and form partnerships to account for what they’re lacking. Unprepared ESCOS risk getting outcompeted by traditional and non-traditional vendors.