February 2, 2012 -  While the energy service company (ESCO) industry has been active for approximately 30 years, it continues to evolve in response to business opportunities and economic trends. 

Today, newer service offerings, such as demand response and energy management software, enabled by intelligent metering and control systems that afford customers greater flexibility and control over their energy usage, are opening new opportunities for ESCOs. 

According to a new report from Pike Research, the ESCO market for energy efficiency project installations and services in the United States exceeded $5.1 billion in 2011.  Driven by public policies that encourage a greater emphasis on energy efficiency to reduce costs and improve operations, this market is expected to continue to grow faster than the domestic economy and reach at least $13 billion in sales by 2020. 

The ESCO market as defined in this report takes the form of direct contracting between providers of energy efficiency services and equipment and government agencies, public institutions, and commercial customers - typically via performance-based contracts wherein funding for individual projects is based on a promise of "guaranteed savings" to facility owners/managers. Energy conservation measures most often range from more efficient lighting upgrades and newer heating, ventilation and air conditioning (HVAC) components to the installation of sophisticated and intelligent energy management systems (EMS) that provide facility owners/managers greater control over energy use.

Under a more aggressive scenario, the ESCO market could reach $16 billion by 2020, the cleantech market intelligence firm forecasts.

"The full impact of recent federal stimulus funding has yet to be realized," says research analyst Brittany Gibson.  "But the American Recovery and Reinvestment Act of 2009 has directed billions of dollars into energy efficiency projects at all levels of government and in all geographic regions of the nation, driving increased investment and accelerating innovation among ESCOs."

The ESCO market predominantly takes the form of direct contracting between providers of energy efficiency services and equipment and government agencies, public institutions, and commercial customers - typically via performance-based contracts, wherein funding for individual projects is based on a promise of "guaranteed savings" to facility owners/managers. 

In particular, the federal sector's appetite for this energy service performance contract model is growing, helping give rise to a market structure dominated by a group of very large companies that specialize in these contracts.  At the same time, project sizes are increasing as clients look for more comprehensive technologies and designs to address their energy consumption. 

Of particular significance for ESCOs is President Obama's 2009 executive order, which mandates that all federal agencies must achieve a 30% reduction in energy use by 2015. 

Consolidation continues in this market as highly competitive players aim to increase market share. Additional catalysts for recent M&A activity include the incorporation of regional players into national business models, the desire to acquire specialized talent, and an interest in pursuing new services such as energy procurement that offer a new dimension to traditional ESCO products and services.

Moreover, newer service offerings, such as demand response and energy management software, enabled by intelligent metering and control systems that afford customers greater flexibility and control over their energy usage, are opening new opportunities for ESCOs. At the same time, companies from outside the ESCO space are looking to add energy efficiency as a service offering.

The majority of ESCO work is conducted for public entities at the state or local level. Municipalities, universities, schools and hospitals (along with other public entities) comprise the municipal, universities, schools, and hospitals (MUSH) market segment, which represents about 73% of all ESCO activity. Other sectors, such as commercial/ industrial companies and public housing, represent much smaller components of the market and have traditionally been resistant to the performance-contract model.

Pike Research's report, "The U.S. Energy Service Company Market", describes the continuing evolution of the ESCO market, detailing drivers and barriers to deeper penetration of energy efficiency in the U.S. economy. 

The study focuses on the role that performance contracting is playing as a vehicle for financing efficiency projects for public entities that face budget and credit limitations, as well as the convergence of new technologies and service offerings into traditional energy conservation projects.  Key industry players are profiled in depth and market forecasts extend through 2020. 

An Executive Summary of the report is available for free download on the firm's website.