Evaluating the Market for Industrial Energy Service Outsourcing

Blog Post | March 19, 2014 - 9:34 am
By Christopher H. Russell, Visiting Fellow, Industry

Energy service outsourcing is a business relationship that relieves a large facility from the potential distractions imposed by the ongoing management of one or more energy functions, such as steam, compressed air, water treatment, lighting, or other activities. In essence, a facility would transfer these functional duties to a vendor per a contractual agreement, subject to periodic renewal. The facilities that choose this route anticipate that their energy functions will be performed in a more reliable and cost-effective way by the vendor. Surprisingly, although these services have existed in the market for many years, many in the industrial sector are unaware of them or unsure how to take advantage.

The industrial energy efficiency program sector is also largely unaware of these market-based solutions. This is unfortunate, because U.S.-based manufacturers in 2006 acquired $156 billion dollars’ worth of energy to transform raw and intermediate materials into finished products. Of that total value, $80 billion was lost through inefficient conversion and use—thus providing a first-cut estimate of the market for energy service outsourcing. Forward-thinking program administrators are now looking to outsourcing as a method to effectively boost customer investments in energy efficiency while improving system reliability.

One approach is for these administrators to influence and support the existing market. Another method is to incorporate outsourcing into program offerings. A new report by ACEEE finds that both of these methods are viable options for assisting the industrial base in improving its use of energy. Outsourcing can address all the classic impediments to industrial energy efficiency by providing some combination of capital and expertise to perform common energy functions. The report does find, though, that the devil is in the details. A literature review and interviews with 41 experts (both energy users and solution suppliers) revealed that early identification of risks and associated contract terms are important to successful outsourcing experiences.

Outsourcing can leverage existing market solutions and expertise to reduce energy use, which can create jobs, reduce pollution and save companies money. Incorporating outsourcing into efficiency programs will require imagination and customer education in order to be successful, but if done properly, it presents a new method for programs to achieve energy savings targets. The report describes various business models and considerations for both providing and consuming outsourced energy services and provides a roadmap for evaluating if, and when, to explore such options. With proper preparation and education, outsourcing can be a cost effective method for programs to save energy and manufacturers to reduce energy costs. The awareness of risks and preparation for contingencies, however, will be key to the success of any such engagement.