Feature Articles

The study by the U.S. Energy Department’s Lawrence Livermore laboratory in Berkeley, California, has been conducted five times over the last two decades, each several years apart. The smaller firms had 40% to 50% of market share in prior surveys dating back to 2008.

The study’s authors concluded that revenue in 2024 was $7.52 billion for the large companies, $1.61 billion for the medium-sized ESCOs and $1.56 billion for the small firms.

The study defined ESCOs as firms that provide energy efficiency-related services for which performance contracting makes up a core part of the business. Savings are guaranteed in these contracts, and compensation is linked to performance.

Excluded from the study were heating, ventilation and air conditioning firms, those providing on-site generation without efficiency measures and subcontractors.

Performance-based contracting was the bulk of ESCO business between 2008 and 2024. More than three-quarters of this work included measurement and verification contracts.

A total of 69 companies were in the study sample. Forty-two firms responded to a survey out of 134, capturing 80% of total market revenue. Revenues were estimated for 27 non-respondents.

The compound annual growth rate of the industry from 2018 to 2024 was 10% nominally and 6% adjusted for inflation.

The study projected that industry annual revenue will rise to $15 billion in 2027, after concluding that revenue was $6 billion in 2018.

When adjusting for inflation for the 2024 study, industry revenue growth was 56% since 2014 and 45% since 2018.

The total revenue of the eight ESCOs with the most market share grew by 78% since 2018 and by 114% since 2006. But as they grew, peer firms got big slices of the business as well.

The study also said that the share of total market revenue captured by the top eight ESCOs declined by 22% between 2006 and 2024.

The study’s authors concluded that the business has been undergoing both consolidation and growth.

ESCOs with more than $300 million in annual revenue expanded their revenue by over 14% in the 2018-2024 period compared to the previous study period of 2014-2017. Small-sized ESCOs lost nearly 12% in the most recent six-year study, and medium-sized ESCOs lost around 2% of market share.

Small Firms Do Well in Some Regions

Large ESCOs dominate in every region of the country, the study found.

Small companies have more business than medium companies in the west north central, east north central and west south central states, as well as in the south Atlantic and New England states.

The largest share of ESCO revenue, $1.54 billion, in 2024 came from the Pacific states when normalized for populated density. The smallest share of revenue, $498 million, was in the west north central region.

Adjusting revenue for population density for ESCOs in each region, the Mid-Atlantic and New England regions had the highest revenue at $36 and $35 per capita, respectively, while the South Atlantic region had the smallest share at $15 per capita.

Large ESCOs took market share from 2018 to 2024 from medium- or small-sized companies in the west south central, west north central, New England, east south central, and south Atlantic regions.

Meeting Specific Customer Needs

Public and institutional customers comprised 78% of ESCO revenue in 2024, the study said.

The largest shares came from state and local governments, at $1.8 billion, and K-12 schools, at $3.2 billion, consistent with previous studies.

Performance-based contracting continued to be a major source of projects for ESCOs from all levels of government, educational institutions and the healthcare market.

In contrast, design-build projects comprised more than two-thirds of ESCO revenue from the commercial and industrial market.

Examining all sources, K-12 schools were 30% of revenue, state and local governments were 17%, federal contracts were 15%, colleges and universities were 6%, commercial and industrial were 6% and healthcare was 3%.

The study said that a category called public housing and other comprised 8% of ESCO revenues in 2024, and unknown sources amounted to 16%.

The main goals of customers issuing energy savings performance contracts were the avoided costs of capital investments and operations and maintenance, according to the findings. Utilization of tradable credits was declining as a driver across several market segments.

One of the biggest challenges for ESCOs in the government, educational and health care sector was leadership turnover during the approval process.  Supply chain disruptions were also a major challenge.

Among federal government clients, 82% of ESCOs reported that complex project scopes were the most common source of project delays.

Among state and local governments, educational institutions and health care, an average of 37% of customers cancelled their measurement and verification contracts before the term is completed.

The study suggested that the cancellations may be due to satisfaction within the first years of a project, and customers may not want to pay for measurement and verification over the long term if guarantees are met.

ESCOs reported a high share of repeat customers between 2022 and 2024, with more than 50% of projects in K-12 schools and higher education segments renewing services.

Nearly three-quarters of ESCOs reported that project development timelines were increasing between 2022 and 2024.

The average timeline in 2024 for projects in the state and local government, health care and educational sectors was 10.4 months, while for federal government projects it was 20.3 months.