According to the U.S. Department of Energy, the U.S. consumes more energy than any other country in the world. The U.S. is primarily dependent on traditional fossil fuels to supply energy for end uses including transportation, heating & cooling, and electricity. Energy costs continue to rise due to a variety of factors, including the market concern over a limited supply of fuel to meet increasing global demand.
The value of energy efficiency as a resource is affirmed by the increasing emphasis placed on it in regulation, legislation and appropriations. The American Council for an Energy-Efficient Economy estimates that annual investment in energy efficiency may grow from $300 billion in 2004 to $700 billion by 2030, in conjunction with the goal of reducing energy use by 20%. Total investment in energy efficiency from 2008 to 2030 could reach nearly $7 trillion. These investments in energy efficiency solutions will have a significant impact on both the demand for, and the cost of, electricity while improving the overall sustainability of global energy markets.
The pursuit of energy efficiency, demand response and sustainability objectives has become a top U.S. strategic priority as a result of large fluctuations in global energy prices, the ongoing worldwide economic recession and the growing global awareness of the need to aggressively confront the causes of climate change. Many of the strategies to overcome these unprecedented challenges involve the use of alternate sources of energy, like solar power, wind power, and bio-fuels, which are long-term strategies that most likely will not be economically viable for years to come.
In contrast, there are currently available and affordable solutions that offer meaningful and sustainable opportunities to optimize the efficiency and the operating performance of existing buildings, which annually in the U.S. represent more than 40% of total energy consumption and are the source of 38% of total greenhouse gas emissions. Existing buildings are therefore a primary focus of many current energy efficiency initia- tives.
Overall, there are approximately 5 million commercial and government buildings in the U.S. of which it is estimated that over 3 million are candidates for energy efficiency programs. It is also estimated that over 2.2 million of the nation’s pre-1980 commercial buildings have been using the same lighting systems for over three decades, and would benefit significantly from energy efficient lighting retrofits.
There are multiple factors that will drive the continuing focus on improving the energy efficiency of commercial buildings including the following:
Government Legislation. Substantial government legislation has been enacted promoting and funding various energy efficiency initiatives.
LEED Certification. The LEED-EB program has established a framework for imple- menting measurable green building solutions.
Utility Funded Efficiency Programs. There has been a proliferation of programs that mandate utilities implement energy efficiency programs for commercial buildings.
Energy Service Companies (“ESCOs”). The emergence of ESCOs has enabled building owners to deploy energy efficiency initiatives without significant capital outlay.
Demand Response. With the advancement of demand response solutions, building owners can participate in attractive utility-funded energy efficiency programs.
Energy & Building Codes. Various energy and building codes allow tenants to com- pare buildings based on their overall energy efficiency.
Each of these factors is discussed in more detail below.
Federal regulators are leading efforts to restrain the growth of energy consumption by placing increased emphasis on energy efficiency. Various recent legislative Acts and their general objectives are as follows:
The Energy Policy Act of 2005 (“EPACT”). EPACT provided tax credits for energy effi- ciency in buildings, homes and products, providing a tax deduction of $1.80 per square foot to building owners who reduce energy and power costs by 50% or more through energy efficiency improvements. EPACT also mandated that all of the approximately 500,000 federal buildings reduce energy consumption by 30% by 2012.
The Energy Independence Act of 2007. Established targets for investing in education and research in energy efficiency and renewable energy and also funded energy effi- ciency training.
The Emergency Economic Stabilization Act of 2008. This Act extended the 2005 energy efficiency tax credits from EPACT through 2013.
The American Recovery and Reinvestment Act of 2009 (“ARRA”). AARA included provisions encouraging investment in energy efficiency improvements in buildings and allocated $26 to $30 billion to fund such improvements. ARRA also calls for the hiring and training of state regulators to accelerate the review and approval of investments by utilities in energy efficiency, the Smart Grid, demand response and other electricity - related projects.
The most significant of these Acts was ARRA, which could provide up to $50 billion to fund energy-related projects.
The following chart shows the breakdown of funds allocated to energy efficiency pro- jects through ARRA.
To date, only a small amount of the $4 billion dedicated to retrofitting federal buildings in the ARRA Act has been deployed. Industry experts expect ARRA-funded business to increase significantly in 2011 and 2012, as the bulk of the appropriated funds begin to be deployed.
Developed by the U.S. Green Building Council, LEED (“Leadership in Energy and Envi- ronmental Design”) provides building owners and operators a concise framework for identifying and implementing practical and measurable green building solutions. LEED is an internationally recognized green building certification, providing third-party verification that a building meets certain performance metrics associated with energy savings, emissions reductions, water efficiency and indoor air quality.
The initial LEED program was established in 2002 and was principally focused on new construction. The LEED-EB program for existing buildings was established in 2004 and approximately 4,300 buildings had received LEED-EB certification as of 2009. This represents less than 2% of all existing commercial and government buildings. Looking ahead, Pike Research expects LEED certification of existing buildings to grow from less than 3 billion square feet in 2010 to more than 20 billion square feet by 2020.
The chart below shows the growth in LEED-EB certifications since 2004.
For the first several years after the introduction of LEED-EB, most certification efforts were focused on government or “owner occupied” facilities where the owner would receive a direct benefit from energy efficiency improvements. Most “investor owned” buildings did not pursue certification due to the mismatch between who pays for and who benefits from building improvements as private building owners typically pass through energy costs to their tenants. Many factors have served to change this pattern including increasing tenant demand for green buildings, tenants’ willingness to pay higher rent for a green building and the demonstrated increase in market value of green buildings. As a result, the “investor owned” share of LEED-EB certifications has grown eight-fold since 2002.
The chart below shows the breakdown of LEED certified buildings by ownership type.
Utility Funded Efficiency Programs
The next decade should bring a significant and sustained increase in ratepayer-funded energy efficiency programs implemented by U.S. utility companies, according to a new comprehensive study from the U.S. Lawrence Berkeley National Laboratory (“LBNL”). Spending by utilities on energy efficiency programs is expected increase from $3.1 billion in 2008 to $7.5 billion by 2020, using “medium case” growth assumptions, representing a doubling of current spending levels.
As utility-run energy efficiency programs ramp up, energy savings are expected to increase significantly. Total electricity savings achieved from ratepayer-funded energy efficiency programs implemented between 2010 and 2020 are expected to reduce U.S. electricity consumption in 2020 anywhere from 4.7% (low case) to 8.6% (high case).
The chart below shows the projected funding for utility energy efficiency programs.
ESCOs enter into performance contracts to fund capital improvement projects for building owners, and in return, the ESCO gets a portion of the cost savings that its customers realize. The performance contracts provide financial incentives that have spurred growth in the market for retrofit projects. Although ESCOs provide other types of services, energy efficiency projects represent the vast majority of their revenues.
The chart below depicts the breakdown of revenue in the ESCO industry by technology and project type.
ESCOs will continue to benefit from growth in ARRA-funded projects as well as the U.S. Department of Housing and Urban Development’s recent commitment to partner with ESCOs on public housing projects.
The chart below shows the forecast for ESCO revenues in the U.S.
Initially, the ESCO industry was primarily focused on providing services to the public sector and that is still the case today. Approximately 60% of ESCO revenues are derived from the municipal, school, university and healthcare sectors. It has been difficult for the ESCO model to catch on in the private sector as payback periods are often unacceptable and because of the issue discussed earlier in that many privately-owned building owners pass through energy costs to their tenants, and thus are not as motivated to implement efficiency improvements. As with LEED-EB certification, this situation is beginning to change due to many of the same reasons as well as due to the emergence of demand response and other technologies which provide potentially significant savings and a means for accurately measuring and documenting such savings.
Demand response solutions balance facility energy usage with utility capacity constraints. When utilities encounter peak load conditions, demand response signals are sent to participating facilities, prompting energy saving actions like adjusting HVAC schedules, dimming non-essential lighting and engaging backup generators. These signals and responses can occur automatically or with varying levels of human involvement. Demand response programs can shave 7% to 12% from a facility’s peak energy usage and generate savings and incentives that can reach $30,ooo to $50,000 per year per building.
FERC Chairman John Wellinghoff considers demand response to be the “killer application for the smart grid”. The FERC recently projected that demand response will be controlling 82 – 188 GW (gigawatts) of electricity demand (or “load”) by 2019, whereas the EPRI projects that demand response will be controlling 79 – 147 GW by 2020. In either case it appears there will be a very large amount of energy capacity controlled by demand response over the next decade.
Energy and Building Codes
Historically, building owners were not concerned about efficiency, as most costs passed through to tenants; however, tenants are becoming increasingly aware of the overall “green building” movement and are attracted to more energy efficient buildings. With mandatory disclosure rules and ratings such as ENERGY STAR, it has become easier for tenants to choose efficient office space. As of January 2009, all states were required to have established energy efficiency building codes. States have adopted various versions of the 2004 ASHRAE 90.1 efficiency standard and it is up to the local governments to enforce the codes. State and local authorities are more actively enforcing building codes and disclosure requirements to promote investment in energy efficiency.
In addition to facility level codes, standards are also being set for appliances, lighting, and equipment which comprise over 90% of a buildings’ energy consumption. These codes force manufacturers to develop and incorporate energy-saving technologies into products. New codes and regulations are continuously evolving that both raise the standards of the existing codes and incorporate new products into the requirements. As new lighting and equipment becomes more efficient, the ROI of retrofit projects becomes more compelling which drives increased spending on these energy efficiency projects.
The industry in characterized by a diverse group of companies that provide a broad range of specialized services including energy engineering and consulting firms, energy efficiency solutions providers, energy service companies and providers of demand response solutions and technologies. These companies range from large multi-nationals to small regional companies, with many providing a broad and comprehensive suite of related services.
The following chart lays out some of the larger companies providing various services within the building efficiency industry.
Many industry participants are aggressively pursuing the development or acquisition of additional energy efficiency services and solutions in order to provide a “full-service” offering to building owners and managers. This trend is likely to continue as service providers seek to further leverage their current customer relationships.
Due to the trend mentioned above, merger and acquisition activity in the industry is likely to be strong going forward as we expect to see continued strategic consolidation as well as increased interest in the sector from the private equity community.
There have been several recently announced strategic M&A transactions which reinforce this thesis including acquisitions meant to broaden service capabilities, expand customer relationships and to grow into additional end-use markets. Some examples of recent transactions are as follows:
AMB Industries’ acquisition of The Linc Group (December 2010)
AMB Industries (“AMB”) provides facility services, including engineering, janitorial, security and parking services, for commercial, industrial, institutional and retail facilities. The Linc Group provides technical building services to optimize overall building performance and reduce energy consumption. This acquisition will expand the capabilities and customer relationships of AMB.
EnerNOC ‘s acquisition of Global Energy Partners (December 2010)
EnerNoc provides demand response solutions to its utility partners and its commercial and industrial (“C&I”) customer base. Global Energy Partners designs and implements energy efficiency programs for utilities targeted at C&I customers. Through this acquisition, EnerNOC will expand its addressable market and deliver a broader portfolio of services to its C&I customers.
Prenova’s acquisition of Cyrus Technologies (January 2011)
Prenova provides energy strategy services to its customers that allows them to reduce and control their energy spend. Cyrus Technologies provides energy management and building control systems and services including engineering, installation, commissioning and maintenance. This acquisition enables Prenova to both extend its offerings to current customers and to expand into vertical markets.
In addition to the expected increase in strategic M&A activity in the sector, more private equity firms are beginning to focus on the industry. In the past six months Clear Result Consulting (February 2011) and Franklin Energy Services (October 2010) were acquired by private equity firms General Catalyst Partners and Cortec Group, respectively. Each of these companies work with utilities to design and implement energy efficiency campaigns.
With so many factors spurring demand for increased energy efficiency in existing buildings, expectations are high regarding the growth of green building retrofit activity. According to a McGraw Hill Construction SmartMarket Report, green building retrofit spending is expected to increase by over 30% per year through 2014.
This expected growth, along with the “tailwind” created by the various federal regulations and initiatives, makes the building efficiency industry an attractive sector for investment over the next several years.
This document is for information purposes only and has been compiled from publicly available information. VRA Partners, LLC makes no guarantees regarding the accuracy and completeness of the information or opinions expressed herein. No data or statement contained is, or should be construed as, the recommendation for the purchase, sale or retention of the securities of the companies mentioned.