Energy Service Companies: Alive and Well.

ESCOs remind energy users that while commodity costs may fluctuate, energy efficiency gains are a constant

Today's corporate world is one of continuing downsizing in which more and more is asked of individuals in managing their jobs. This is rapidly becoming a test of not how well an individual can do a job, but rather how capable a manager he or she is. Today's manager must recognize that he frequently must rely on others for assistance in order to fulfill his or her job. In managing one's energy resources, one valuable source of assistance is an energy service company (ESCO).

In the late 1980s, the state of New Jersey joined other states by adopting demand-side management (DSM) programs. At that time, several ESCOs signed contracts with a number of utilities to provide energy projects that would reduce electrical consumption. The ESCOs committed resources in the form of money and engineering talent to develop energy projects at numerous customer locations, mainly industrial, large commercial, institutional, and educational facilities. These projects would reduce electrical demand (thus, demand-side management), which would assist utilities in reducing their power-supply requirements to all of their customers and thus reduce the need to build new power plants.

DEFINING THE NEW ESCO

ESCOs would build these energy projects and commit the savings from reduced energy use to the utilities under long-term contracts, typically for a period of 10 to 15 years. In turn, the utilities would provide a financial incentive to the ESCO for these savings under such terms as one-time payments for each kilowatt (kW) reduced or periodic payments over the contract period based on kilowatt-hours (kWh) saved. The ESCO typically financed these projects using the incentive monies to offset the capital costs of the project. Many of these arrangements were for lighting projects; however, there were some mechanical system and process improvements installed as well.

While early DSM programs looked like a "win-win-win" situation for the user, the utility, and the ESCO, utility-financed DSM programs have virtually disappeared in recent years, mainly due to the uncertainty of deregulation. Utilities, for good reason, could not support long-term financial payouts for DSM …