Marketing and Energy Service of ESCO Company - Essay Example

LITERATURE REVIEW OF ENERGY SERVICE COMPANY (ESCO) AND MARKETING Introduction ESCO's are a company whose aim is to reduce a client's energy costs, often by capitalizing the sincere expenditures and sharing the resulting future cost savings with the client. This is usually accomplished through the use of an energy-performance contract (EPC) or a shared-savings agreement. It may offer any of the following services: financing, design & installation, project management, education services, equipment leasing, maintenance, and verification and auditing. Also known as energy efficiency service providers, ESCOs are important to sustainability in that they enable companies that normally could not afford the upfront investment costs, to become more efficient, more profitable, and reduce their environmental footprint. A true win-win-win if successfully implemented. As far as marketing is concerned it is a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and values with others. It is an integrated process through which companies create value for customers and build strong relationships with them in order to capture value from customers in return. Thus for effective functioning of ESCO it has implemented various tools and strategies of marketing. ENERGY SAVING COMPANIES Energy services According to European Union energy services, energy services are those activities which are taken up by the companies and market actors, and which result in demonstrable and sustainable savings of supplied/delivered energy in the customer's household and which includes the option of initial investment by other than the household or property owner [1]. ESCO The energy service company (ESCO) is in the business of providing broad range of comprehensive energy solutions including the designing and implementation of energy saving projects, energy conservation, energy infrastructure outsourcing, power generation, energy supply and risk management. Sixteen companies have been grouped together in the industry structure that provides projects based on ESCO structure [2, 3, and 4]. Ameresco is the only pure-play ESCO left in the market [5]. The others are Carrier, Honeywell Building Solutions SES, Johnson Controls Government Systems, L.L.C., Siemens Government Services, Inc., TAC Americas, Inc., Trane U.S., Inc., ConEdison, Constellation, FPL Energy Services, Pepco Energy Services, The Benham Companies, LLC (SAIC Acquired), Clark Realty Builders, LLC, McKinstry, Lockheed Martin and Chevron Energy [6, 7 ,8]. The ESCO customers include [9] Working of ESCO ESCO has its own way of working it starts with analyzing the part, then designs the energy efficient solution and installs the required elements, finally maintaining the system to ensure that the energy is saved during the payback period. The savings in energy costs is often used to pay back the capital investment of the project over a five- to twenty-year period, or reinvested into the building to allow for capital raise that may otherwise be impractical. If the project does not provide returns on the investment, then ESCO is often responsible to pay the difference [10]. ESCOs structure is as follows Contract Services Customer ESCO Payment Financing payment Contract Bank (ESCO feasibility report. 2007) Initially ESCO installs the energy conservation measures (ECM's) and measure the energy saved resulting from the projects and presents the data to the customer. A common way to calculate energy savings is to measure the flows of energy associated with the ECM, and to apply spreadsheet calculations to determine savings. They have formed a standardized table as follows; Description Typical application A Savings are determined by partial field measurement of energy use of systems to which an ECM was applied. Some but not all the parameters should be stipulated Lightning retrofit where pre and post retrofit fixture wattages are measured, operating hours of light are typically agreed upon. B Savings are determined by field measurements of the energy use of the system to which the ECM was applied. Variable speed drive on a pump, Electricity use is measured by the KWh meter installed on the electrical supply to pump motor. C Savings are determined by measuring energy use at the utility meter level. Bills may be corrected for weather Several ECM's affecting many systems in building utility bills is used. (Avina, 2007) Options A and B are most often the best approaches to measure energy savings however some ESCO's prefer using option C. in case of lighting contractor option A has to be used, for the ESCO that offers variety of retrofits it is necessary to have a look at all the options, control retrofits excellent for use of option C [11, 12]. Performance contracting Bsdglobal.com has defined performance contracting as the mean of raising money for investment in energy efficiency that is based on future savings. It enables money that will be saved as a result of the introduction of a new energy-efficient technology to be used to offset the cost of financing, installing, operating and operating that technology. Performance guarantees are given by the ESCO in terms of the level of energy services, or the level of cost and/or energy savings. The savings are then split between the ESCO and the client who could potentially reinvest this into more improvements. Performance contracting is also known as third party financing or contract energy measurement. The initiative behind the development of energy saving project is to generate energy saving and cut cost. This is an ESCO task whose men approach the potential client with the proposal of an energy saving project and a performance contract. Their responsibility is to make the client aware of energy saving projects. Once he/ she agree then their next step is to define their project more clearly and make client aware of cost effective measures to obtain the highest potentials of energy savings. After the development and approval of the project by the client then construction and implementation phase begins, continued with maintenance and verification. [13] Shared savings are when the ESCO takes on the performance risk of the project and risk associated with the customer's credit rating. The cost savings are divided between the ESCO and customer at a prearranged percentage for an agreed length of time. The percentage division is influenced by the cost of project, length of contract and risk accountability. The percentage of the savings paid to the ESCO is higher than that in guaranteed savings contracts. Shared saving contracts are beneficial when the customer does not have borrowing capacity. Guaranteed savings are when the customer finances the design and installation of the project by borrowing finances from a third party such as a bank or through leasing the equipment. It has no contractual arrangement with the bank but does assume the project risk and guarantees the energy savings made. If the savings do not reach agreed minimums the ESCO covers the difference; if they are exceeded then the customer agrees to share the savings with the ESCO. Thus, the ESCO is providing a guarantee of performance to the customer. The customer is willing to assume the debt, or lease payment, because of the guarantee that the savings will exceed the debt payments. The advantage of the guaranteed savings approach is that a third party financier assesses and bears the customer's credit risk. [11] Evaluation criteria The ESCO develops a comprehensive energy audit and identifies improvements that will save energy and reduce utility bills. It guarantees that energy improvements will result in a specified level of annual cost savings to the regional customer, and that these savings will be sufficient to pay the ESCO for its work over the term of the contract. Agencies use a portion of guaranteed energy cost savings to pay for building improvements over the life of the contract. After the contract ends, all additional cost savings add up to the agency. Contract terms can be up to 25 years, depending on the scope of the project. Federal agencies are required to announce energy saving performance contract (ESPC) solicitations in the Commerce Business Daily (CBD). The CBD announcements provide contact information and instructions for obtaining solicitations. Any firm may request an ESPC solicitation and respond with a proposal, but must become qualified before contract award. The period of eligibility of the firm's qualification runs from February 1 through January 31 of a given year. [11] The Qualification Review Board selects firms based on the following criteria: The firm has provided ESPC services or services that saved energy or reduced utility costs for not less that two clients, and the firm possesses the appropriate project experience to successfully implement the technologies that it proposes to provide. Previous project clients provide ratings of "fair" or better. The firm or any principal of the firm has neither been insolvent nor declared bankruptcy within the last 5 years. The firm or any principal of the firm has not been disqualified from working with the Federal government. There is no adverse information which demands the conclusion that the firm is not qualified to perform energy savings performance contracting. Conclusion The energy service company ESCO is in the business of providing energy solutions by designing, manufacturing and implementing energy saving projects. ESCO acts as a project developer for a wide range of task and takes upon the technical and performance risk associated with the project. What sets ESCOs apart from other firms that offer energy efficiency improvements is the concept of performance-based contracting. When an ESCO undertakes a project, the company's compensation is directly linked to the amount of energy that is actually saved. The comprehensive energy efficiency retrofits inbuilt in ESCO projects require a large initial capital investment and may offer a relatively long reimbursement period. The customer's debt payments are tied to the energy savings offered under the project so that the customer pays for the capital improvement with the money that comes out of the difference between pre-installation and post-installation energy use and other related costs. MARKETING Marketing and its value "Marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and values with others" (Kotler, 2008). It is an integrated process through which companies create value for customer and build strong customer relationship in order to capture value from customers in return [14]. Concepts of marketing can be summed up as follows; marketing analysis 5 C's Marketing mix Customer acquisition Customer retention (Kotler, 2008) Marketing at ESCO is an important element for its success, thus it has established few principles; protect Customers participating in the deregulated energy market; build and maintain Customer confidence in the retail energy industry; promote the effective transition to full retail energy competition; enhance efficient retail market operation by clarifying standards and promoting reliable service; facilitate ongoing cooperation between the retail energy industry, regulators and Customers; raise awareness of and promoting observance with the requirements applicable to the marketing of retail energy in the uniform business practice; and ESCOs remain flexible and responsive to changing patterns of Customer behavior and the changing nature of the energy industry. Thus its marketing representatives have good knowledge of customers and product and services to deliver.[14,15] When the representative of ESCO meets the customer he/she produces identification which indicates the full name of the marketing representative, shows a photograph of the marketing representative, does not depict the utility name or logo, states the name of the ESCO represented by the marketing representative, includes the business address of the ESCO, provides the ESCO telephone number for inquiries, verification and complaints and leave the premises upon the request of the occupant or owner of the premises or any person with whom the negotiation is conducted. Therefore for ESCO customer is a very important element and they highly respect and honor the customer. [2, 4]. Porter's 5 forces, which is an important tool in marketing is as follows Supplier power Barriers to entry Rivalry Threat of substitutes Buyer power (Porter, 1979). [14, 16] Supplier power This includes supplier concentration in the market of energy services, importance of volume to the supplier of the energy supply products, differentiation of inputs, impact of inputs on cost or differentiation, switching cost of firms in the industry, presence of substitute inputs, threat of forward integration and cost relative to total purchase in the energy service industry. Barriers to entry The barriers to entry are absolute cost advantages, proprietary learning curve, access to inputs, government policies applying to ESCOs, economies of scale, capital requirements, brand identity, switching cost, and access to distribution, expected retaliation and proprietary products. Buyer's power The buyer's powers for ESCO are buyer volume, bargaining leverage, buyer information, brand identity, price sensitivity, threat of backward integration, product differentiation, buyer's concentration verses industry, substitutes available and buyer's incentives. Threat of substitutes The threat of substitutes is switching cost, buyer's inclination to substitutes and price performance trade-off of substitutes. Rivalry The degree of rivalry depends on exit barriers, industry concentration, fixed costs/ value added, industry growth, intermitted overcapacity, product differences, switching costs, brand identity, diversity of rivals and corporate stakes. The generic strategies formulated to counter these five forces are cost differentiation, differentiation and focus, these would create a competitive advantage and position the ESCO to leverage its strengths and defend against adverse effect of five forces. SWOT analysis is a strategic planning tool which evaluates the strengths, weaknesses, threats and opportunities of the company. It identifies the internal and external factors which help in achieving the firm's goals and objectives. Strengths and weaknesses are comprised of internal factors while opportunities and threats are related to the external environmental factors. ESCO use marketing tools for effective functioning, its SWOT is as follows; Most of the companies are financially strong, Contractors, end users understand the benefits of the ESCO services, Still more information-dissemination is needed, Most market players are not interested in the most efficient and the cheapest solution, It's not clear, if Public procurement is compulsory at municipality projects, Public procurement procedure is very difficult, Long term National strategy on energy policy is not adopted.[17,18] Competitive advantage The ESCO competitive advantage relies on the company's promise to be responsive and reliable in their product and services. It understands and meets customer expectations to the fullest of its power. ESCO is fiscally responsible and believe that a good partner in business is one that is stable and responsible. With its strong history of meeting obligations, it is able to provide its clients with the appropriate resources to get the job done. The ESCO has a center core the ERC (ESCO Resource Center). This is made up by administrative team, handling billing and invoicing, plus customer service and information to partnering clients via the internet. By staying on top of financial obligations, as well as billing process, they know how to serve their clients to highest professional levels. The ESCO prides itself as a self-sufficient company, offering full service for most projects. Vast resources within the group allow it to provide services for all project needs. Turn-key projects have been its specialty leading to strong partnership with loyal clients. From the plant floor to the corporate offices, it has provided responsive and reliable services. Whether the project calls for service upgrades or engineering and construction management, putting project in their capable hands bring quality services with little support from customers. [19] Strategic positioning Strategic positioning is to perform activities which are different from rivals or performing similar activities in different ways. ESCO's have attained excellence in engineering which has led ESCO to stand out in the market of Consumer Products/Manufacturing. ESCO also has an excellent team of workers who work in this industry, and their Safety Director is very involved in the safety training of those working with, or around, electricity. ESCO's vast resources make this an ideal market. [20] Promotion The promotions at ESCO were done to provide assistance in structuring several project agreements between ESCOs and end users. Active support for the ESCO (Energy Service Company) business has been provided since the late 1990s to cope with a sharp increase in energy consumption in the commercial and residential sectors. Various measures have been enacted and enhanced, including the provision of financial subsidies and preferential tax treatment, in the form of grants and low-interest loans for the ESCO. In addition, the government initiates activities to promote ESCOs, such as briefing sessions and PR campaigns. The volume of orders for ESCOs increased between 1998 and 2006, from JPY 1 billion to JPY 27.8 billion yen. The number of orders received increased to 206 cases. [21] Advertising and public relations Advertising and public relations are an important marketing area and good advertisement and positive public relations with the company build a good image for the company. ESCO's have a well established advertising department whose members are involved in thinking of new innovative ideas to advertise the product. The honesty and quality of ESCO products have given it a good public opinion and the company has loyal relationship with public. [21] Direct marketing and Internet marketing ESCOs are involved in both direct and internet market. Its team goes and meets personally with the client to sell its product and services and it has been effective in marketing through internet. [13, 15] Integrated marketing communications ESCO has developed its own online and offline marketing channels. . Online marketing channels include any e-marketing campaigns programs, pay-per-click, and affiliate, and email, banner to latest web related channels for webinar, blog, micro-blogging, RSS, pod cast, and Internet TV. Offline marketing channels are traditional print (newspaper, magazine), mail order, public relations, industry relations, billboard, radio, and television.[13,14] Ecological marketing Strategy ESCOs are in the process of selling products and services based on their environmental benefits. Their products and services are environmentally friendly produced and packaged in an environmentally friendly way. [22] Conclusion In today's world it is true that without effective marketing the company cannot stand so is true with ESCO's around the world. Recommendations and arguments ESCOs are the rising service companies whose demands are increasing in the market. Due to their effective performance and strong hands on marketing they have been able to capture much of client from all around the world. Being honest, compatible and loyal to its customers they hold good shares in the market. The recommendations for ESCO are that the ESCO should pay attention on its billing stricture and conduct analysis of its buildings; secondly the ESCO business concept can be used in combination with conversion of customers from oil to regional heating, standardized performance contract have to be developed by the company in order to attract a more diverse audience, and other recommendation are If resources and funds are available then customers will buy more projects thus budgeting of ESCO should be such creative as to provide equipment ownership alternatives to the customer. The infrastructure should be upgraded modernization and improvement of existing facilities should be made. Guidance and information should be provided to customer about implementation of the projects. Customers may be encouraged to implement projects that would limit its reliance on the utility grid. Customers will implement more projects with short paybacks, positive cash flows and projects that would reduce operating cost. It is also suggested that if the unit cost of energy were high, it would encourage more customers to implement projects. And finally the projects should be environment friendly. Table for literature summary ESCOs functioning around the globe Rodics (1996) Green energy limited Green energy Avina (2007) Winning method for ESCO Marketing defined and its strategies Porter (1979) Harward business review on marketing principles Competitive strategy Kotler (2008) Principles of marketing Work cited 1. Cary Bullock, George Caraghiaur, A guide to energy service companies, Fairmont press, 2001 2. Andy Frank, ESCOs and Utilities: Shaping the Future of the Energy Efficiency Business, 13th April 2008. 3. John M. Studebaker, ESCO: the energy services company handbook, Pennwell Corporation, 2001 4. Coolmaine Org, What is an ESCO National Association of Energy Service Provides (NAESCO), 10 March 2008 5. Mass Lowell, Business wire, AMERESCO Acquires Citizens Conservation Services, June 5, 2000 6. Ameresco, an independent energy solution company, http://www.ameresco.com 7. Northeast utilities system, Northeast Utilities sells energy services subsidiary to Ameresco: Ameresco continues expansion plans with acquisition of Select Energy Services, Framingham Mass. and BERLIN, Conn., May 10, 2006 http://nuwnotes1.nu.com/apps/corporatecommunications/empinfo.nsf/1655e8f1972fb0848525668000587994/15e389132ab7a1c285257203006f7893OpenDocument 8. News release, Honeywell Announces Agreement to Acquire Sempra Generation's Energy Services Group, March 2006 http://www.automatedbuildings.com/releases/mar06/060328024558honeywell.htm 9. Arnold Schwarzenegger, California energy commission: Summary of energy service companies, summary of responses, staff report, CEC-400-2005-001, January 2005. 10. Determining Energy Savings Using Utility Bills: A Winning Method for ESCOs" 3rd International Congress on Energy Efficiency and Renewable Energy Sources. 26 Apr. 2007. http://abraxasenergy.com/pdf/Determining-Energy-Savings-Using-Utility-Bills_A- Winning-Method-for-ESCOs.pdf 11. ESCO's feasibility study, Manchester knowledge capital, final report, July 2007. http://www.micropower.co.uk/publications/esco.pdf 12. John Avina, determining energy savings using utility bills: A winning method for ESCOs, 2007 13. Business and sustainable development: A global guide, performance contracting, International Institute for Sustainable Development, 2007 http://www.bsdglobal.com/tools/bt_pc.asp 14. Philip Kotler, Gary Armstrong, Veronica Wong, John Saunders, Marketing defined, Principles of marketing, 5th edition, 2008. 15. Don E. Schultz, Stanley I. Tannenbaum, Robert F. Lauterborn, Integrated marketing communication: pulling it together and making it work, Lincolnwood, Ill., USA: NTC Business Books, 1993. 16. Michael John Baker, The marketing book, 5th edition, Oxford: Butterworth-Heinemann, 2003 17. ESCO Europe 2009 conference, 3 & 4 November 2009, Berlin, Germany www.esco-europe.com 18. Shirley J. Hansen, Pierre Langlois, Paolo Bertoldi, and ESCO's around the world: lessons learned in 49 countries, CRC Press, 2009 19. M.E. Porter, Competitive strategy, Free press New York, 1980. 20. M.E. Porter, How competitive forces shape strategy, Harvard business review, March/ April 1979. 21. . Thomas A. Mahoney, Energy performance contracts in fed buildings offer rich rewards, Air Conditioning Heating & Refrigeration News, 6 December, 1995 22. Gergely Rodics, ESCOS in the Hungarian energy market, Green energy limited budapast, green energy, 1996. 23. Business wire, CES/Way wins department of defense contracts to increase energy efficiency at air force bases. May 18, 1998 http://www.allbusiness.com/government/government-bodies-offices/6921764-1.html Read More