Key takeaways from industry-leading event discussing the outlook of the ESCO Federal Market
The federal market has always been a promising market for Energy Service Companies (ESCOs) yet it presents unique challenges. Lengthy sales cycles, complex contract procedures, funding limitations, and stringent technical standards are hurdles encountered when collaborating with the US federal government, which stands as the largest energy consumer.
Staying informed about agency activities is critical to identifying needs and opportunities. Recognizing this importance, the National Association of Energy Service Companies (NAESCO) established an annual workshop that convenes federal government officials, ESCOs, and suppliers to discuss market developments. This ensures that ESCOs are well-informed to effectively serve agencies and execute successful projects.
Energy Services Media attended the 2024 workshop to identify key considerations ESCOs should keep in mind when working with the federal market. We also followed up with NAESCO Executive Director Dr. Timothy Unruh to get his views on how ESCOs can better serve this market.
Here are five key considerations:
- Federal agencies are juggling their mission’s needs AND requirements to implement decarbonization and electrification leveraging deep energy retrofits.
Energy Conservation Measures (ECMs) need to be tied to resilience. When Energy Savings Performance Contracts (ESPCs) help agencies become resilient, it is much easier for agencies to gain stakeholder alignment and approval. Often, agencies execute deep energy retrofit projects to encompass a comprehensive list of ECMs to achieve resilience.
Douglas Tucker, Director of Installation Energy Policy & Programs for the Air Force, stated, “We want to pay for resilience. As we look at the challenges today: the electrification of our facilities, the electrification of our vehicles, and the modernization of infrastructure, we look to your (ESCOs) tool (Energy Savings Performance Contracting) to help us”. He also reinforced the importance of agencies and ESCOs communicating effectively so that ESCOs understand the needs of their mission. He posed the question, “How can we (Air Force) write our requirements so that they are more mission-driven so that you (ESCO) understand what we need and when we need it?”.
- Interest in performance contracting has increased due to legislation, federal funding, and supporting initiatives.
The list of drivers behind the interest in performance contracting discussed were:
- Legislation & Policy
- Federal Funding & Tax Incentives
- AFFECT Program: Assisting Federal Facilities with Energy Conservation Technologies Program provides grants to federal agencies so they can leverage private capital to make energy and water efficiency upgrades to federal buildings.
- BIL (Bipartisan Infrastructure Law)
- IRA (Inflation Reduction Act)
- ITC (Investment Tax Credit)
- Initiatives
Sharon Conger, Oak Ridge National Laboratory’s (ORNL) Executive Program Manager, shared, “Our (ORNL) report shows that there’s a 162% increase in the (ESPC) pipeline from December 2021 to December 2023. And there’s a 90% increase from last year…so as everybody’s indicating, it looks like we’re (in reference to the market) on the rebound.”
- More focus and effort need to be put on Measurement & Verification (M&V).
M&V came up as a common pain point agencies face. Lately, there has been a dip in M&V performance due to reporting inaccuracies and/or poor communication. Challenges with M&V were mentioned as impacting an agency’s decision to use performance contracting. Agencies asked ESCOs to be proactive in communications during the M&V phase.
- Federal Agencies see incorporating Energy Service Agreements (ESA) in ESPCs as an area of opportunity.
Energy Service Agreements (ESAs) were referenced several times throughout the workshop as an area of opportunity for agencies to implement on-site distributed energy ECMs. As projects become more comprehensive and include distributed energy, ESCOs should consider ESAs. An important note that was emphasized was that ESAs allow agencies to take advantage of tax credits under the ITC, which can amount to 30%—70% of project costs.
The GSA attributes using an ESA as a method to make an ESPC cash flow in an area that was perfect for solar but had low utility rates.
Anna Siefken, Deputy Director of the Federal Energy Management Program (FEMP), stated, “Agencies are using ESAs but not as many as we would like, so it’s always an area of opportunity. To date, there have been eight ESPC ESAs.”
- A survey conducted by FEMP showed that 41% of agencies were not familiar with AFFECT or its benefits.
There is a significant opportunity to educate agencies about the AFFECT grant. Through this survey, the DOE also noticed a pattern: several agencies showed nervousness about trying new things. For example, battery storage and geothermal heat pumps. In those situations, agencies would prefer to complete a feasibility study before moving to the next stage. Mary Sotos, Director of the Federal Energy Management Program (FEMP), provided a recommendation to ESCOs, “My take way to you, as ESCOs, is to continue to communicate upfront support and address questions that agencies might have. They have a lot of questions and concerns about what kind of ECMs are going to make sense”.
All-in-all the discussions at the workshop showed an uptick in activity in the federal market. There is a lot of traction being made. Currently, the market is experiencing unprecedented federal funding, which eliminates one of the largest barriers to executing ESPC and UESC projects – it is now time for ESCOs to increase partnerships with agencies through communication and collaboration.
Dr. Timothy Unruh, Executive Director of the National Association of Energy Service Companies, provides his views on the following;
- How ESCOs can help agencies overcome two headwinds: low-hanging fruit projects drying up and decarbonization energy conservation measures (ECMs) being too expensive
- Ways ESCOs can reduce frustrations during an ESPC or UESC
- How ESCOs can position performance contracting projects to meet agencies’ mission needs
- The overall outlook of the federal market
