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The Science Of Selecting An Energy Service Company (ESCO)

By Darcy Immerman and John Upchurch, Alliant Energy Integrated Services

These companies develop, design, install, measure, and maintain energy efficiency projects and assume the risk through energy savings guarantees. Some ESCOs also provide more comprehensive services including energy audits and supply side services. Because all ESCOs are not created equal, it is important to evaluate the options carefully before making a selection.

Building A Plan

The first step for facility managers considering energy management outsourcing is to identify the issues their company faces internally. It is important to identify needs and rationale for outsourcing. This includes quantifying energy market activity, facility infrastructure status, budget issues, and the impact of those issues on operations.

Some questions to consider include:

• What is the current energy situation the company is facing?
• What changes have taken place in the energy marketplace and what effect are those changes having on the company?
• What does the facility manager hope to accomplish through outsourcing?

These issues could include, but are should not be limited to:

• Reducing costs;
• Improving facility infrastructure;
• Managing budgets;
• Improving energy reliability;
• Mitigating price risk;
• Downsizing operations;
• Responding to the increasing complexity/inability to keep up with rules and regulations in the electric industry; and
• Outsourcing non-core functions.

This needs assessment achieves several functions. First, it helps set goals to be accomplished. Potential ESCOs can make more specific and effective proposals once they know what the customer truly wants to accomplish.

Second, the needs assessment helps the facility manager identify the kind of company with which to partner. This assessment helps identify the scope of outsourcing. This can range from outsourcing a single project, to supply-side services, to demand-side projects, to overall corporate energy management.

While the needs assessment doesn't have to be completely comprehensive, it should be carefully considered and evaluated. The rationale for outsourcing helps define clear goals and objectives for upper management and the prospective ESCO, and it helps start the initiative off on the right foot.

Making The Selection

Once the needs and objectives are identified, the company can begin looking at the attributes of potential ESCOs. Expertise and experience are key factors. That experience should reflect a depth and breadth of activities that indicate the ESCO can handle the specific issues faced by the company.

1. Assess the company's track record and credibility; the degree of due diligence regarding potential ESCOs will be a function of the degree of outsourcing. The more functions that are outsourced, the more detailed the facility manager's investigation should be. Perhaps the most significant attribute is the ESCO's experience. Experience is more than just a list of past clients. It also should include a demonstration of technical expertise and effective results for clients.

Here are some important criteria to consider in the evaluation process:

• Is the ESCO accredited by the National Association of Energy Service Companies (NAESCO)? This is a good way to assess credibility and competence. NAESCO offers industry accreditation. To attain this status, an ESCO must apply to a committee of industry experts unaffiliated with any ESCO or lighting service company and undergo a rigorous examination of its core competencies and business practices.
• Does the ESCO have experience in executing a master energy services agreement (MESA) at a corporate level while managing individual projects that are site specific? Case studies and project references should help determine this qualification.
• Does the ESCO provide ongoing maintenance and remote, 24/7 monitoring of project performance for multiple sites? Many ESCOs provide this service, but not all do. This is a key component in ensuring the energy project investment is gaining the maximum cost savings and reliability.
• What type of measurement criteria is used to validate energy savings? This is an important question to ask because it sets up the structure that the project guarantees are based upon.
• Does the ESCO offer both supply and demand side energy services? ESCOs with expertise and offerings on both sides can develop a more comprehensive and customized energy plan.
• Does the company also offer environmental services and expertise? Energy and environmental issues are closely tied, and expertise in both areas can be an advantage when selecting an ESCO.
• How can the ESCO help implement the project if capital is not available? ESCOs may offer contracts that link financing of the projects to the energy savings generated. It is important to ask about choices and options in this area, as energy savings generated not only can be structured to pay for the project over a period of time, but they may also provide funding for other facility infrastructure improvements or mandated environmental projects.

2.Verify experience and performance beyond getting the potential ESCO's assessment; take the time to assess the ESCO's expertise. References should be provided and checked thoroughly.

3. Test for "fit," because the ESCO could potentially be a long-term strategic partner. The facility manager needs to ensure that the partner "fits" with his or her company-that includes agreement on operating issues and decision making processes. Experienced ESCOs understand the complex relationships within organizations and can help the facility manager navigate the challenging internal waters. Perhaps no attribute is more important in gauging "fit" than the ability of the partner to listen. A consultant who has the answer before the customer has a chance to ask the question is clearly not interested in meeting the customer's needs.

4. Help formulate how the project's success is measured. The primary condition for success is often energy savings, but other important conditions may include on-time completion, improved productivity, operational effectiveness, or enhanced energy efficiency without impacting capital costs.

In this time of energy market volatility and ever-changing regulatory issues, teaming with the right ESCO can be a valuable advantage to the operations of an organization. This involvement brings expertise into the company where it's needed while allowing facility managers and others to focus on core business issues.