Industry could more than double in size from ~$6 billion in 2013 to $11-$15 billion by 2020

Aggregate revenue growth rates for U.S. energy service companies (ESCOs) significantly outpaced U.S. GDP growth during the three-year period 2009 to 2011, according to a new report by researchers at Lawrence Berkeley National Laboratory (Berkeley Lab).

ESCOs primarily use performance-based contracts to provide energy efficiency, renewable and other energy-related services while guaranteeing that installed equipment, controls and other measures will deliver a specified amount of cost and resource savings to the customer. Private and public sector ESCO customers have relied on performance-based projects for decades to reduce their operating costs and reap significant energy, water, and other savings, using little or no upfront cash. For context, this industry typically saves customers each year: (1) the equivalent amount of energy consumed by nearly 2 million households; (2) more than 20 million tons of greenhouse gas emissions; and (3) more than $4 billion in utility bills.

According to The President's 2013 Climate Action Plan, performance-based contracts "drive economic development, utilize private sector innovation, and increase efficiency at minimum costs to the taxpayer, while also providing long-term savings in energy costs." Performance contracting allows customers pay back the capital and financing costs of the efficiency improvements over time, out of the stream of dollar savings generated by performance-based projects, thus reducing the need to use tax dollars, or other appropriated funds to generate these savings. Federal, state, and local policies that remove existing barriers and encourage the future use of performance-based contracts will continue to be vital for industry growth into the future.

The research team analyzed the size of the U.S. ESCO industry by market segment, as well as growth projections and trends. Researchers collected information from thirty-five ESCOs, publicly-available data on ESCO financial performance, and industry experts.

"The ESCO industry has experienced fairly steady growth since the 1990s, and despite the recession, continued to grow about 9 percent per year from 2009 to 2011," said Elizabeth Stuart, a researcher in Berkeley Lab's Electricity Markets and Policy (EMP) Group in the Environmental Energy Technologies Division (EETD) and lead author of the report.

"We anticipate that U.S. ESCO industry revenues could double in size between today and 2020," said co-author Peter Larsen, an economist at Berkeley Lab. "Based on historical trends, it is possible that the industry could grow 8 to12 percent annually depending on a number of scenarios—potentially achieving revenues of more than $15 billion in 2020. There are a number of factors that could impact the industry's ability to achieve this expected growth, including clean energy and infrastructure modernization policies as well as expansion of ESCO services that take advantage of emerging opportunities."

ESCOs provided estimates of the total building floor area in each customer segment that had received performance-based energy efficiency retrofits since 2003. Market penetration was highest in the K-12 schools market (42 percent penetration) and lowest in the private commercial buildings sector, where about 9 percent of eligible building space was estimated to have received retrofits since 2003.

The research team also estimated the remaining market potential for ESCOs. "If ESCOs were able to retrofit the remaining floor space, the investment potential in facilities typically addressed by the ESCO industry ranges from about $71 to $133 billion," said co-author Charles Goldman, Department Head at Berkeley Lab. "The private commercial sector, K-12 schools and healthcare facilities are the markets with the largest remaining investment potential."

"There is still a significant market for ESCOs working in the government and universities market segments," said report co-author Donald Gilligan, President of the National Association of Energy Service Companies. "ESCOs have a strong track record working in these markets—federal, state and local—and we expect clean energy policies to continue to drive demand for the services that ESCOs offer these customers."

Other key findings from the report include:

• About 45 companies operating in the U.S. met our strict definition of an ESCO.
• Performance-based contracts made up about 70 percent of ESCOs' business in 2011, while 15 percent of revenue came from non-performance-based projects, 7 percent from administering energy efficiency programs for utilities, and just under four percent each for consulting and renewable power purchase agreements.
• Public and institutional markets (federal, state and local governments, K-12 schools, healthcare/hospital facilities, and colleges and universities), continue to be ESCOs' primary customers, accounting for about 84 percent of 2011 industry revenue. About 8 percent of 2011 revenues came from private commercial customers.
• ESCOs reported a significant decline in revenue from renewable generation projects since 2008, both in terms of percent of total revenues (from about 15 percent in 2008 to 6 percent in 2011) and absolute dollar amounts (from about $560 million in 2008 to $250 million in 2011).
• The U.S. ESCO industry is similar in size to industries in Germany and France (about $4 to $5 billion), and China (about $4 to $7 billion in 2012), though definitions of ESCOs and revenue reporting practices vary across countries.
• Small ESCOs reported that about 15% of their projects relied on funds from some type of federal program since 2009. Medium and large ESCOs reported that about 30% of their projects relied on federal programs.