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North American Energy Management Services - Investment Analysis
Frost & Sullivan, Nov 2008
Frost & Sullivan's Financial Benchmarking and Analysis (FBA) service presents a financial outlook of the North American market for energy management services, highlighting major market and financial trends in select growth segments. The FBA focuses on three segments of the North American biofuels market namely energy efficiency, demand response and services. This study presents a holistic view of the attractiveness of the North American energy management services market to the investment community by identifying the broad market growth and identifies the fundamentals behind the growth.
Influential Legislation Paves the Way for Energy Management Services
Investments in energy management services are bouncing back from the economic downturn-related slump on the back of the politicization of the energy crisis. Institutional investors are showing renewed interest in energy efficiency, as energy management has emerged as an immediately scaleable option to counter the energy crisis. This situation has increased investment opportunities exponentially, especially for venture capitalists, in energy service companies (ESCOs). 'The incorporation of the ‘Go-Green’ factor in every corporate and socio-political agenda has also generated immense interest in energy management services,' says the analyst of this research. 'Adoption levels in the earlier conservative commercial and industrial (C&I) segment is increasing rapidly.'
Both the federal and state governments are wooing energy management investors through rollouts of financial incentives in the form of tax credits and rebates. Most of the of supporting regulations are in the high energy consuming states of California, New York, Massachusetts, and Texas. Although these efforts have gone a long way in nurturing investments in energy management services, the long payback period of eight to even twenty years deter potential investors. Moreover, the lack of quantifiable benefits of employing energy conservation measures discourages significant investment in energy management.
To make the energy savings contracts more appealing to investors, the market adopted the performance contracting model, which has played a pivotal role in increasing the adoption levels of energy management. As there is no upfront investment from the customer and repayment can be made from the savings generated, the long payback period will cease to be a burden on end users of the service. 'Energy savings performance contracts (ESPCs) went through a rough phase in 2003, when the federal energy savings performance contract legislation of the Energy Policy Act disallowed the federal government to use private financing for energy efficiency measures,' notes the analyst. 'ESPCs resurfaced when the mandate was reauthorized a year later and regained its popularity.' ESPCs, as a mode of financing energy management projects, have encouraged venture capital and private equity investment as they resort to the third parties (financial institutions) to finance the contracts. The popularity of ESPCs is testified by its large-scale adoption - particularly in the federal, institutional, and C&I segments.
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