Energy Services

Discussion

It's not energy itself but the services that energy provides that make a difference to our lives. How can we get energy services such as comfort, cleanliness, illumination, food storage, and access to the benefits of other places, but using far less energy than currently needed to provide those services?

What are energy services?

"Energy services" such as hot water, thermal comfort, lighting, cooking, food cool-storage, and mobility, are often provided by means of appliances such as hot water heaters, space heaters, air conditioners, light globes, stoves, refrigerators, and motor vehicles, which in turn consume energy in the form of electricity, methane and motor fuel.

Energy Services and Energy Conservation

How to get equivalent energy services but using less energy.

Energy services are interesting from the point of view of energy conservation, in that a similar level of service may be delivered but with varying energy consumption, depending on the energy efficiency of the appliances involved and their situation. For example:

Energy Service Providers

Rather than purchasing appliances and energy directly, customers could purchase energy services from energy service providers, who in turn would purchasing the appliances and energy as needed to provide the service.

Energy service providers would have an incentive to develop less energy intensive solutions for the provision of energy services - to minimise their own costs. For example, a customer could rent thermal comfort from a provider, who could then install insulation in the customer's house, as part of that service provision. This would reduce the amount and cost of the electricity required to provide the thermal comfort.

Whereas energy retailers may provide advice (eg glossy brochures) about energy efficient appliances, then leave it to the customer to act on that advice, energy service providers would install the energy efficiency measures themselves. They would develop and install lighting, mobility, thermal comfort (etc) solutions tailored to the circumstances of the customer, thus adding value to the appliances used and the energy consumed.

Energy service providers could supply the appliances used to provide the energy services, maintaining, upgrading or replacing the appliances as needed. For example, a customer could rent a food cooling service from a provider who might then install a refrigerator, retrofit the building to give the fridge a cool location, buy the electricity to run the refrigerator, and keep the fridge in good working order, and upgrading it with improved energy efficiency features every fews.

Energy service providers would be in a better position to work with appliance manufacturers to develop more energy efficient (and user friendly) appliances, than either customers in isolation, or appliance retailers whose main business is to sell a product - the appliance - rather than provide a service by means of the appliance.

Energy service providers would be customer-focused rather than appliance-focused. They would be free to look at a range of solutions to customer needs. A passenger transport solution might involve walking, cycling, public transport, car sharing, and telecommuting, without the need to provide a car for the customer's exclusive use.

Energy Service Companies

In Australia there is an "energy service industry" composed of companies that provide consultation and assistance to households and businesses wanting to make their buildings, appliances, industrial processes, etc more energy efficient.

Whether such companies will become energy and appliance purchasers on behalf of their customers remains to be seen.

Having the same company handle all one's energy service needs allows for more holistic solutions than different companies supplying different services, eg one company providing food-cooling and another company providing thermal comfort.

To the extent that appliance manufacturers evolve into energy service providers (for example refrigerator manufacturers becoming food cool-storage providers), a range of more specialised energy service providers might arise. But there may still be a need for companies providing more generalised solutions, who, commissioned by customers, would in turn commission the more specialised providers. That would allow the generalist providers to focus more attention on overall lifestyle or business-wide solutions, while letting the specialist providers focus on more appliance-specific issues such as energy efficiency and (implementing) user-friendly design features.

Readings

Energy Services

Source: Energy Update - Some surprising developments in power supply and demand. Amory B. Lovins and Robert Gilman. In Context. 1986.Autumn.

We're seeing the emergence of a highly competitive energy service marketplace. What I mean by energy service is the tasks that people want energy for: comfort, light, mobility, baking bread, making steel, running sewing machines. All ways to provide those services are now having to compete with each other so that power plants must compete, not just with each other or with natural gas, but also with greenhouses and weatherstripping.

Need for Energy Services

Source: The Provision of Energy Services to Homes in SA. Conservation Council of South Australia, May 1999

The present energy suppliers promote and supply...energy, but there are no comparable providers for...energy conservation. This places...energy conservation at a severe disadvantage.

This bias in the provision of energy services can be illustrated by considering responses to increased electricity demand. One response is to build additional power stations and to extend and reinforce the electricity distribution system. This work could be undertaken by an existing electricity utility and the cost of the work would be recovered from consumers over periods of tens of years.

Alternatively, one could take measures to reduce the demand for electricity...through energy conservation measures including insulation, and energy efficient lights and appliances. As things stand at the moment, these responses must be funded up-front by the consumer who also must organise the entire process including finance, supply, installation and maintenance.

A new type of energy service provider is required to address the bias against energy conservation and renewable energy. This energy service provider would arrange the supply and maintenance of the following:

Such energy service providers may emerge from the current reforms in the energy market.

Energy Performance Contracting

Source: What is Energy Performance Contracting? Energy Services Coalition (US)

Here’s how it works:

You enter into an agreement with a private energy service company (ESCO). The ESCO will identify and evaluate energy-saving opportunities and then recommend a package of improvements to be paid for through savings. The ESCO will guarantee that savings meet or exceed annual payments to cover all project costs—usually over a contract term of seven to 10 years. If savings don’t materialize, the ESCO pays the difference, not you. To ensure savings, the ESCO offers staff training and long-term maintenance services.

Many types of building improvements can be funded through your existing budgets— new lighting technologies, boilers and chillers, energy management controls and swimming pool covers, to name a few.

A qualified ESCO can help you put the pieces together:

Better Buildings

By updating or replacing equipment that is old and obsolete with newer, more efficient technologies, you will have higher-quality systems, fewer breakdowns and reduced maintenance. When building occupants experience improved lighting, better air quality and more comfortable room temperatures, they are likely to be happier and more productive.

A Wise Investment

Energy performance contracting allows you to divert funds that would be spent on energy bills into investments in your buildings. For governments, this means limited budgets can stretch further, putting taxpayers' money where it really counts. For all building owners, more modern, efficient energy systems can increase your property value and improve marketability of your buildings.

Improvements Without Sacrifice

Energy performance contracting allows you to tackle energy efficiency projects now even if no funds are available. This means you can still afford improvements when faced with budget cuts or competing priorities. And, with energy performance contracting, you can take a comprehensive approach that will optimize your benefits.

Cost Savings

New systems and equipment can lower your energy costs. Many building owners see energy savings of 15 to 35 percent and also reduce their long-term maintenance costs. You keep all the savings once the equipment is paid off, plus any excess savings during the contract term.

Proven Technology and Expertise

Since the late 1970s, performance contracting has become a widely accepted and reliable way to make energy improvements. Today's ESCOs use industry-standard practices and proven energy-saving technologies and have excellent track records for satisfying their customers. ESCOs have a financial incentive to make sure savings are achieved throughout the contract term.

One-Stop Shopping

Performance contracting offers a streamlined approach to making facility improvements because, with a single contract, you can tackle multiple energy-efficient projects throughout your facility, rather then doing one project at a time. Your ESCO can provide a full range of services and continue working with you once the projects are complete to ensure that you get optimal long-term energy performance.

Frequently Asked Questions

How do I find those energy savings?

By working in partnership with a professional energy service company (ESCO), you can tap its expertise to determine what building improvements make the most sense for improved comfort, easier maintenance and your budget. An ESCO's recommendations might include replacing lighting equipment, modifying or replacing boilers and chillers, installing modern energy management control systems, replacing motors or even installing pool covers or more efficient kitchen equipment.

Can't I do this myself?

Sure, if you have the time, money and expertise. But an ESCO can work with you to put together a complete package of services that meets your needs and saves you time and money. An ESCO can identify and evaluate energy-saving opportunities, provide engineering services, order and install equipment, and manage all phases of construction. To complete the package, the ESCO can guarantee the savings and even arrange financing.

How risky is this for me?

ESCOs typically work under a performance guarantee that shifts the risk to the ESCO. Your guaranteed energy savings pay for the upgrades, so you have no up-front costs. If energy savings don't materialize, the ESCO pays the difference, not you.

Energy Services Industry

Source: The Private Cost Effectiveness of Improving Energy Efficiency. Productivity Commission, October 2005

Promoting the energy services industry

Governments could promote the energy services industry in order to achieve greater adoption of cost-effective energy efficiency improvements. Eg by running an accreditation scheme for energy service providers or playing a facilitating role in transactions between energy service providers and firms. (Australasian Energy Performance Contracting Association, sub. 47, pp. 21-22)

The energy services industry can provide market solutions to some of the barriers faced by firms in improving their energy efficiency. Expert energy consultants conduct energy-use audits and identify cost-effective efficiency improvements. This may be achieved at lower cost than if the firm conducted its own assessments, due to specialisation and consequent economies of scale. Further, consolidation of the responsibilities involved in completing an energy efficiency audit in the hands of one agent (the consultant) can also reduce the organisational transaction costs of the firm.

An Energy Service Company (ESCO) is a business that develops, installs, and manages projects designed to improve the energy efficiency and maintenance costs of facilities of a customer firm. Typically, ESCOs provide the following services:

A distinguishing feature of ESCO operation is the energy performance contract (EPC). An EPC is an agreement entered into by a firm and an ESCO where the ESCO undertakes to provide specific services and guarantees some level of energy savings for the firm. The ESCO’s compensation is usually paid from the savings generated by the EPC. Typical contract terms are between four and ten years. Source: AEPCA (2004).

Energy performance contracting can reduce information and organisational barriers. Further, since the ESCO guarantees a certain level of savings, there is a redistribution of implementation risk away from the firm to the ESCO, which would arguably face a lower risk of project failure due to its technical expertise.

Problems with using the energy services industry

Energy consultants tend to focus on reducing one of the inputs to production and [not consider how] this may result in an increase in other business costs. [Many energy efficiency audit recommendations are not taken up by firms due to] costs to the firm in other areas of its operation which were not taken into account by the energy auditors. Firms reported costs like unacceptable operating and personnel changes, risk or inconvenience to personnel, costs of installing new equipment including production halts and changes in product quality. Auditors [often] failed to understand the way the firm operated.

Another major problem [is that] savings that arise as a result of the consultant’s advice will depend on many aspects of business operation. This makes verification of actual energy savings difficult for the consultant. The problem is exacerbated when the consultant’s remuneration is dependent on energy savings achieved, as in the case of EPCs. Greater upfront contract specification by the energy service provider could reduce the moral hazard problem. However, this would add to the transaction costs. (Origin Energy sub. 25, pp. 6–7)

Policies to promote the energy services industry

The perceived risk of engaging a consultant may be reduced [by] training, accreditation and standards program for energy service providers [run by the government or by an industry association such as the Australasian Energy Performance Contracting Association]. This would provide some independently-sourced information to firms about the reliability of the consultant. (AEPCA sub. 47, p. 10)

By acting as an intermediary between energy service providers and firms, governments could reduce the high transaction costs of selecting consultants and contract over-specification. Such involvement may provide an implicit guarantee to firms about the consultant, and hence might work in ways similar to a governmentrun accreditation scheme. However, such involvement is not costless and has some risks. The downside of being seen to endorse particular consultants is that governments implicitly take on the risks of those consultancies turning out less than satisfactory. It also encourages favouritism and lobbying by consultants to gain an advantage over their competitors. To be able to provide firms with even the most basic advice on the capabilities of consultants, there is a need for a degree of expertise within government and staff can be exposed to firm capture.

If third parties are involved in the accreditation of consultants, governments could take a more neutral intermediary role by simply referring interested firms to the accrediting party or to any published list of consultants. Other approaches to reducing transaction costs might be more productive. For example, AEPCA and the Australian Greenhouse Office have jointly developed a National Standard Energy Performance Contract which can be used as a template by ESCOs to cover most standard projects. The contract can also be used in combination with additional provisions to reflect the heterogeneity of clients and requirements.

Energy Services Industry

Link: Inquiry into the Energy Services Industry. Victoria Parliament.

Transcripts of Evidence

Services vs Goods

Source: Natural Capitalism - A lecture by Amory Lovins. ABC, January 2001

Schindler would rather not sell you any of its excellent lifts. Schindler believes that its lifts use less energy and less maintenance than many competing ones. So Schindler continues to own the lift, pay its operating costs which are lower, and then lease you a vertical transportation service, because all you wanted was not a chunk of metal, it was the service of moving up and down, and if the costs of doing that are lower, and Schindler can make more profit and you can have lower costs too, you both make more money because the system's more efficient.

Dow and Safety Clean would rather not sell you a solvent, they prefer to lease you a dissolving service. So they bring the solvent to your factory and it does its dissolving and you never own it. That's good, they take it away again and then they repurify it, and if it can go through 50 or 100 trips and not use much each time, obviously the cost of the dissolving service is very much lower than using the solvent once and then having to dispose of it somehow.

Carrier, the world's largest maker of air-conditioners, is starting to lease comfort services. So the more efficient and durable the air conditioners are, the more money you both make, rather than they're making one to wear out quickly so they can sell you another one.

Carrier's doing something interesting; they're teaming up with other kinds of companies that fix up other parts of the building, so that it can provide the same comfort with little or no air conditioning. Why should a maker, the world's largest maker of air conditioners, do that? Well because you don't want air conditioners, you want comfort, and if there is a better, cheaper way to provide comfort, even if it didn't use air conditioners, Carrier had better do that before its competitors do. You notice how thorough here is the alignment of interest between providers and customers.

This moves us to the sort of economy in which when you try to sell somebody a product whose use will give them the service they want, a smart customer will say 'Why are you trying to sell me this thing? If it had all the operational advantages you claim for it, you would want to get them yourself, by owning the thing and just leasing me the service, so why do you want to sell me this thing? There must be something wrong with it.'

2007.2.12