The Energy Efficiency Opportunity

The Energy Efficiency Opportunity

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The Energy Efficiency Opportunity

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    Particularly Attractive Opportunities Will Emerge in the Commercial Sector

    While we expect attractive growth across sectors, the biggest opportunities for EE companies will reside in the commercial space. (See Exhibit 1.) This sector offers a wealth of prospective customers that have the potential to achieve sizable gains in EE: some could reduce their energy consumption by as much as 40 percent. Additionally, unlike many industrial companies, which have invested heavily over the past two decades to enhance their EE profile, most commercial companies have yet to focus on the challenge.


    Projects in the commercial sector are also typically large enough to justify EE companies’ oftentimes high cost of sales. (EE projects in the residential sector, in contrast, are typically relatively small because they are focused on single-family homes.) Commercial-sector projects also attract relatively little competition from specialized local artisans due to the projects’ size and broader technological requirements.

    Prospects and needs vary by segment. The commercial space includes a wide range of businesses, from food retailers to commercial airports. Each has its own energy consumption profile and distinct project needs. (See Exhibit 2.) Players will generally do best, we believe, to target large businesses that have high potential for EE improvement, comprehensive service needs, and the willingness to invest to lower their energy bills. Particularly attractive opportunities will be found in health care, hospitality, the public sector, education, and retailing, though the degrees of attractiveness will vary by country. Private offices could also become a strong growth driver, but only if regulatory pressure on building owners grows.


    Two general trends in place throughout most of the commercial sector will benefit EE companies. First, nonstandard financing and contracting structures are growing quickly as the industry evolves. Second, customers are increasingly demanding end-to-end projects, which include the provision of different technologies and related services, such as an energy audit, performed by a single provider. (See “An Example of an End-to-End Energy-Efficiency Project.”)


    The energy efficiency (EE) initiative described below illustrates the scope of work that EE projects can entail—and the potential return on investment (ROI) for an EE company.

    The client was a large (just under 100,000 square feet) U.S. department store. The EE company implemented a wide range of measures at the store, including the following:

    • Upgrading the lighting with light-emitting diodes (LEDs) in the store’s interior, on its signage, and in the parking lot
    • Installing a new rooftop heating, ventilation, and air conditioning (HVAC) unit with variable-frequency drive and new supply fan motors
    • Installing an energy recovery ventilator; lower-dimensioned, higher-efficiency chillers; and occupancy sensors in offices and restrooms to reduce lighting demands
    • Optimizing the store’s HVAC controls and standard thermostat settings

    Collectively, these measures reduced the store’s energy consumption—including both power and heat—from approximately 2.0 megawatt-hours per year to about 1.1.

    Investment for the project totaled about $600,000, which was fully paid for by the EE company. The project generated annual savings of roughly $80,000, equivalent to about 45 percent of the store’s yearly energy and related costs prior to the project. The savings will pay for the project over a contract period of ten years, providing the EE company with an annual ROI of approximately 15 percent and the department store with immediate annual energy savings at no cost up front.

    There is a need for a focused strategy. Although there are vast opportunities across the commercial sector, its various segments can differ substantially in terms of the products they require and the types of services they seek. Hotels, hospitals, and universities, for example, are usually interested in large, heterogeneous projects that may require retrofits for lighting, heating, ventilation, and cooling equipment. Many of these businesses and institutions lack the financial capacity to shoulder large investments, however, and therefore will need contracting solutions.

    Food retailers, in contrast, often have both financial muscle and internal procurement know-how, allowing them to make necessary equipment upgrades on their own. For these businesses, ESCOs’ value proposition could include the provision of heating contracting or combined heat and power plants and other self-generation technologies, such as rooftop solar panels combined with energy storage (in countries where this is financially attractive).

    For companies trying to enter the commercial sector, this specificity by segment has several ramifications. First, companies should not try to target the entire sector at once. Rather, they should develop a clear segment focus and corresponding product and service strategies. They should decide, for example, whether they want to focus on large, end-to-end projects or smaller ones, and determine which technologies to emphasize. Second, companies should develop a deep understanding of their customers’ common needs and processes and differentiate their go-to-market strategies accordingly. This is, in fact, much more critical than a differentiated product and service delivery. Third, companies must develop the required skills across all relevant applications as well as the ability to integrate technologies into a single, coherent offer and provide comprehensive systems-management solutions. Fourth, companies must be able to offer contracting solutions at attractive financing terms. This will require stable partnerships with investors—or a very strong balance sheet and skillful risk management.