The Energy Efficiency Opportunity

The Energy Efficiency Opportunity

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The Energy Efficiency Opportunity

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    Winning Tomorrow’s Position Game

    The EE industry will thus become a position game. Large, well-placed competitors will enjoy attractive, sustainable margins over the longer term. They will also have a degree of protection from outside entrants because of the scarcity of technical capabilities and experience, the length of time it takes to scale up the business around a network of installers and technology suppliers, and the up-front investment required to develop a project pipeline. Today’s players should therefore aim to develop a competitive edge before consolidation sets in. This entails defining a sustainable position today and starting to build scale.

    In addition to a handful of larger, dominant players, the industry will also be able to support a number of specialist roles, as noted. These include regional system providers, which combine a broad offering of applications with a clear geographical focus; technology specialists, which provide a single application across several market segments; and international system specialists, which focus on a narrow offering but offer it across countries. The existence of these roles also opens up market potential for orchestrators of “specialist ecosystems.”

    Companies considering a play in this business need to deal with different challenges and strategic choices. All face the imperative of acting soon.

    ESCOs. ESCOs start with clear strengths, including the most expertise in developing, fulfilling, and operating EE projects across technologies. To remain successful, they will need to adapt their business models nonetheless. To prepare for stronger cost-based competition, ESCOs should standardize project delivery and more clearly focus their growth efforts. To compete with new market entrants, they should broaden their service portfolios and invest in developing competitive system infrastructures for energy management. Potential services that they could introduce include decentralized generation, energy supply contracts, and facility and building management.

    ESCOs should also consider partnerships. A partnership with a local or regional utility, for example, could be advantageous for both parties: the ESCO would gain access to a new customer base and could focus on its core business, while the utility would gain the ability to offer its customers EE services without having to develop the necessary capabilities itself.

    OEMs. OEMs have technological, product-development, and design expertise that is hard for other players in this market to match. Most OEMs today are still largely focused on pure product sales, either to end customers directly or through one of their various channel partners. But this business is under pressure from two directions. First, stronger systems integration across technologies is shifting the channel structure toward providers of end-to-end solutions—pushing OEMs farther away from the end customer. Second, as such providers build scale, they are gaining growing leverage in procurement, tilting the competitive odds increasingly in their favor.

    To avoid the increasing commoditization of their equipment, OEMs must protect their access to end customers by developing proprietary channels in the EE market. If OEMs decide to establish an active market presence unilaterally, they will need to move beyond a pure contracting model and develop end-to-end customer service. Alternatively, OEMs could choose to work on developing compelling sales propositions aimed at EE contractors in an effort to become the industry’s supplier of choice. Or OEMs could form close partnerships with utilities to try to squeeze out intermediary contractors.

    Utilities. For utilities, the advantages of developing a presence in the EE space are potentially sizable. First, by offering EE services themselves, utilities could reduce the likelihood of other providers luring away their customer base. Second, utilities are in a strong position to benefit from coalescing energy services offerings, which will eventually include EE combined with self-generation of power and energy management. Finally (and, for many utilities, counterintuitively), the business case for EE can be very attractive, at least in countries with competitive retail markets and where utilities do not have a regulatory mandate to invest in EE. In markets with higher customer churn rates and high energy prices, in fact, utilities can potentially double customer lifetime value by providing EE services, even though doing so will reduce revenue from energy sales. (See Exhibit 5.) This is driven by the value difference between “saved” and “sold” energy, the higher profit margins of EE projects, and the potential for utilities to increase customer retention. By bundling EE services with energy supply, utilities can provide customers with more competitive offerings and lower energy bills without sacrificing margins. The extent of the potential financial benefit to utilities will differ by customer, requiring them to implement smart segmentation regimes.


    To successfully compete in the EE market, utilities first need to define how deeply into the value chain they want to integrate and then identify suitable partners to cover the rest. They must develop a transparent product offering and differentiated go-to-market approach, including a clear strategy for how to convert retail customers into EE customers and which to pursue. Utilities must also adapt their operational models, which should include a clear definition of roles within the business portfolio, sensible placement of the new business within the overall organization, and the optimization of key steering processes.

    Entrants from Other Segments. Facility managers, metering companies, and telecommunications companies all have very specific access to, and information about, customers. They can use this as a springboard to develop a lucrative presence in the EE industry. Doing so, however, will require a strong understanding of the overall market, the positioning of competitors, and longer-term success factors. To build up capabilities and scale, these players should consider partnerships that leverage their superior access and proximity to customers’ operations. Access to customers’ energy consumption patterns, for example, would prove a strong lure to an ESCO willing to extend its business into energy management and other data-enabled business models. IT companies are also well positioned to enter the market through partnerships, which could help them leverage their superior system capabilities for developing advanced applications in more data-driven energy-management business models.

    Energy efficiency markets offer highly attractive opportunities to companies that know how to unlock them. Understanding regional regulation, identifying attractive segments, tailoring appropriate go-to-market strategies, and setting up streamlined delivery processes are preconditions for success. Navigating the challenges requires deep market insight and clear strategic positioning. But companies that manage to get it right stand to be rewarded with a sustainable top-tier position in a fast-growing multibillion-dollar industry.

    In markets where utilities are required to invest in EE, as is the case in several states in the U.S., utilities are often subject to “pass through only” mechanisms that limit their ability to monetize their EE programs and thus their incentive to invest in excess of required quotas.