JANUARY 2020 - Harris Williams
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JANUARY 2020
Energy, Power & Infrastructure (“EPI”) group Vertical Focus Areas
Luke Semple
• 16 professionals based in Richmond, VA • Energy Management • Oilfield Services
Managing Director
• Renewables and • Engineering and
• 15+ closed transactions in the last 24 months lsemple@harriswilliams.com
Distributed Energy Construction
Office: (804) 915-0158
• Industrial and • Environmental Services
Infrastructure Services • TIC & Integrity Services
• Outsourced Utility Services
Drew Spitzer
Managing Director
Energy Management aspitzer@harriswilliams.com
• ESCOs • Demand Response/Smart Office: (804) 915-0174
Energy, Power • Utility Program Management Grid
& Infrastructure • Building Optimization • Billing & Workforce
2017 • Energy Management Management
Systems • Distribution Automation
• LED and Smart Lighting • Microgrids/Asset
Systems Management
• Energy Storage • EV Charging
• Electric Submeters
Select Energy Management Transactions
Leading provider of Provider of demand Provider of integrated Develops and markets Provider of integrated
demand-side response capabilities, software, data and transportation analysis cloud-based demand
management (“DSM”) energy efficiency analytics solutions to software for improving response, energy
solutions to utility projects and distributed the global energy traffic flow efficiency and
has been clients has been generation assets to has been market including has been has been customer engagement
acquired by acquired by identify, optimize and acquired by financial services, acquired by acquired by solutions for utility
monetize across capital markets, and customers
distributed energy trading and risk
assets professionals
Leading implementer Leading independent Leading cloud-based Leading provider of Leading designer of
and administrator of ESCO serving the provider of energy energy efficiency and smart submeter
energy efficiency federal, MUSH, and services management renewable energy systems and integrated
programs commercial and has received a software and services in the energy intelligence
has been has been has been has been
industrial end markets minority behavioral energy Southwestern U.S. software
acquired by acquired by acquired by acquired by
investment from efficiency solutions
1The ongoing shift towards more sustainable energy represents a more than $4 trillion opportunity over the next several
decades. Energy service companies (ESCOs) are on the leading edge of this shift, helping a wide range of organizations boost
efficiency and cut energy costs.
Understanding the Introduction to the sector
ESCO landscape
Key characteristics and drivers of value
Current market landscape
Where are we today?
Historical strategic and private equity investment in the sector
Focus areas for strategic players
Where are we headed?
Private market participants
Key considerations ESCO landscape scorecard
for investors
Key considerations for investors
2Our goal is to provide an overview of the North American ESCO landscape and framework for investment opportunities in the
context of the ongoing energy transition.
Purpose
Provide an overview of the North American ESCO market
Explore trends and areas of focus in the M&A market
Provide a framework for exploring investment opportunities in the sector
Scope
For the purposes of this discussion, we have focused exclusively on the North American market
3An ESCO is a professional services business providing a broad range of comprehensive energy efficient solutions, including
design and implementation of energy savings projects, energy infrastructure outsourcing, power generation and energy
supply, including the design and installation of DERs, and risk management.
ESCOs perform in-depth analyses of physical properties, design energy efficient solutions, install proper elements and maintain
the systems to ensure energy savings. The savings in energy costs are often used to pay back the capital invested in the
project over a five- to 20-year period, or reinvested into the building to allow for capital upgrades that may otherwise be
unfeasible. These energy efficiency projects are executed through a variety of financing structures (as outlined on page 8
herein).
ESCOs Provide Customers with a Compelling Value Proposition
The Problem The ESCO Solution
Municipal Schools Hospitals Universities C&I Municipal Schools Hospitals Universities C&I
Aging plant and equipment Upgrade and replacement of existing plant/equipment
Rising electricity costs Lower energy costs
Sustainability initiatives No or limited up-front capital investment
Rising Electricity Prices1 Increased resiliency
(cents per kilowatt-hour) Enhanced occupant satisfaction, health and safety
$0.18
$0.16 Analysis Concept Implementation Service Renewal
$0.14 Collection of data Design of the Execution of the Inspection, End of the contract
and evaluation of measures and various measures maintenance, repair period
$0.12 savings potential definition of the and verification of and ensuring of
baseline savings savings
$0.10
$0.08
$0.06 Direct benefit
25%+
$0.04 Service Direct benefit
Current energy costs Commitment
2018 2020E 2022E 2024E 2026E 2028E 2030E
Reduced energy costs
Residential Commercial Industrial
1.) U.S. Energy Information Administration
4Historically, ESCOs have primarily concentrated on projects for municipalities, universities, schools and hospitals (the “MUSH”
market) and the federal government. Increased adoption of energy efficiency measures and DERs by commercial and industrial
(C&I) represent a significant market opportunity for ESCOs in the years ahead.
ESCO Industry Market Segments Overview of Market Segments
(% of investment $)
Federal projects typically have many facilities
100% Federal
and are comprehensive retrofits
Public policies have enhanced and
State/Local influenced the increased development of
75% ESCO projects at the state and local levels
K-12 schools have started to install capital-
K-12 intensive, low-energy savings measures to
address maintenance backlogs
50%
Universities have the highest median project
Universities investment levels of any market with a
median project investment level of ~$7M
25%
Major HVAC retrofits account for over 50% of
Healthcare
project investment on healthcare facilities
0%
2008 2011 2014 2017 Underserved market that is seeing rising
Federal 1
State/Local K-12 Universities Healthcare C&I
C&I energy costs and new technologies
improving economics of energy efficiency
1.) Federal includes housing/other in 2008, 2011, 2014.
5
Source: LBNL, U.S. Energy Service Company Industry: Recent Market Trends (2016), State of the U.S. ESCO Industry (2019)ESCOs typically provide a broad scope of services for end users and, in recent years, projects have increased in scope and
complexity. For purposes of classification, Lawrence Berkeley National Labs classifies projects into Dominant Retrofit
Strategies (DRS), which are summarized below.
Primary ESCO Services1
Dominant Retrofit Strategy (DRS) Representative Examples
Installation of on-site generation, including solar, natural gas generation, backup generation systems and biomass
DERs gasifiers
Installation of energy storage assets
Facility Management Continuous commissioning, monitoring and preventive maintenance
Installation, upgrade and replacement of lighting control systems
Lighting-Only
Lighting retrofits
Major HVAC Major replacement of HVAC equipment, such as boilers, chillers and cooling towers
Minor HVAC Modifications and upgrades to existing equipment
Repair and replacement of pump systems
Motors and Drives
Repair and replacement of variable speed drives and electric motors
Non-Energy Non-energy facility improvements such as roof replacements and environmental abatements
System Integration Coordinating the planning and operation of energy systems across multiple pathways and/or geographical scales
Installation of water conservation measures, including low-flow showers, faucets and toilets
Water Conservation
Installation of meters and leak detection equipment
Other Installation of other high-efficiency equipment
1.) Source: LBNL, State of the U.S. ESCO Industry (2017)
6Over the last several decades, the ESCO industry has generated significant energy savings across the economy through the
installation and maintenance of energy efficiency equipment. U.S. ESCO annual industry revenues increased from
approximately $2 billion in 2000 to nearly $8 billion in 2017.
As the market has evolved, ESCOs have emerged as key players in the installation of not only energy efficiency initiatives, but
also on-site renewables, storage and other distributed energy infrastructure.
Addressable Market1 Key Growth Drivers
($ in billions)
• There are a number of large, vertically integrated ESCOs
that both develop and deploy emerging technologies that
Deployment of
$168 can increase the market potential beyond what was
New Technologies originally estimated based on efficiency technologies that
MUSH were commercially available during the last 5-10 years
$104
• Building owners and operators may opt for additional
Subsequent Retrofits
retrofits in a facility that has implemented an ESCO project
$85 in Existing Facilities to capture benefits of additional measures
C&I
$37
• It has been reported that public facilities, which are often
Project Savings Due targeted by ESCOs, have a significant backlog of deferred
to O&M Savings maintenance. For example, U.S. K-12 schools have a total
~$150 to ~$300 billion in maintenance backlog of ~$250 billion
$12
remaining market opportunity
Federal
$6
Increased Number of
• All 50 states have enacted legislation that enables various
ESCO Industry
types of institutional facilities in a state to engage in ESPC
$0 $50 $100 $150 $200 “Champions”
Upside Case Base Case
1.) Reflects the midpoint of the Base Case and Unfettered Case, respectively.
7
Source: LBNL, Updated Estimates of the Remaining Market Potential of the U.S. ESCO Industry (2017)In addition to funding through traditional secured and unsecured lease and loan structures, the energy efficiency market utilizes
specialized financing products designed to reduce up-front capital investments and encourage greater adoption of energy
efficiency measures.
Representative Financing Sources
Type Description
Energy Service Agreements are agreements between a customer and the ESA provider that provides financing for the project and
Energy Service Agreement (ESA) delivers energy savings (i.e., megawatt hours) at a negotiated price (less than retail rates for energy services).
Under an Energy Savings Performance Contract (ESPC), an energy service company (ESCO) coordinates installation and
Energy Savings Performance Contract maintenance of efficiency equipment in a customer’s facilities and is paid from the associated energy savings. The ESCO typically
provides a savings guarantee.
Commercial PACE (CPACE) Commercial property-assessed clean energy (CPACE) is a financing structure in which building owners borrow money for energy
efficiency, renewable energy or other projects and make repayments via an assessment on their property tax bill. The financing
Financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance.
On-Bill Financing/Repayment On-bill financing (OBF) and repayment (OBR) are financing options in which a utility or private lender supplies capital to a customer to
fund energy efficiency, renewable energy or other generation projects and is repaid through regular payments on an existing utility
(OBF/OBR) bill.
A Power Purchase Agreement (PPA) is an arrangement in which a third-party developer installs, owns and operates an energy system
Power Purchase Agreement (PPA) on a customer’s property. The customer then purchases the system’s electric output for a predetermined period. A PPA allows the
customer to receive stable and often low-cost electricity with no up-front cost.
Efficiency-as-a-service is a pay-for-performance, off-balance-sheet financing solution that allows customers to implement energy and
Efficiency-as-a-Service (EaaS) water efficiency projects with no up-front capital expenditure. The provider pays for project development, construction and
maintenance costs.
Customers can borrow money directly from banks or other lenders to pay for energy efficiency, renewable energy and other
Loan or Debt Financing generation projects. The customer must then arrange the purchase, installation and management of equipment by a third-party
contractor or in-house staff.
A lease is a simple financing structure that allows a customer to use energy efficiency, renewable energy or other generation
Lease Financing equipment without purchasing it outright. The two most common types are on-balance-sheet capital leases and off-balance-sheet
operating leases.
Internal funding refers to the use of an organization’s existing financial resources to pay for energy efficiency, renewable energy or
Internal Funding other generation projects, rather than seeking external financing. This is often the most simple and direct method for funding
projects.
8Innovative EaaS solutions have emerged as an attractive model to further expand the market for energy efficiency services. In
EaaS contracts, the service provider maintains ownership of the installed assets and the customer pays for the services
provided by the assets.
The EaaS Model1 Case Study: The Ohio State University2
OSU at a Glance: Energy Profile
Designs project, installs
Pays monthly, quarterly or annual
service charge for realized
equipment, provides 3 750k $115M 110 2.9M
maintenance and High-Voltage MWH of Annual MW Peak mmBTUs of
energy savings Substations Electricity Spending Demand Steam
monitoring service
Situation at a Glance
Contractor Ohio State entered into a $1.165 billion public-private partnership that will establish
Customer the university as an international leader in sustainability while generating new
Energy Services Company
Commercial Building Owner resources to advance teaching, learning and research
(ESCO)
ENGIE North America and Axium Infrastructure, which are world leaders in energy
services and sustainability, created Ohio State Energy Partners to serve the
university
How It Works
Energy Service Energy Service
Agreement On behalf of Ohio State Energy Partners, ENGIE Services operates the systems
Performance
(ESA) that power, heat and cool the Columbus campus and will install energy
Vendor Contract (ESPC)
conservation measures to meet the university’s sustainability goal for energy
Energy-as-a-Service (EaaS)
Provider
What Ohio State Gets
In return for a 50-year lease, Ohio State Energy Partners paid Ohio State $1.015
billion up-front and will pay an additional $150 million in direct academic
collaboration support. In addition, the consortium will put up the capital funds for
The EaaS model shifts the burden of financing, owning, installing and install energy conservation measures and other energy infrastructure
and managing the performance of an energy asset from the improvements
customer to the service provider
What Ohio State Pays
Ohio State pays Ohio State Energy Partners an annual utility fee that includes three
elements: an operating fee to cover costs (starting at $9.2 million based on a three-
year average of university costs), a fixed fee that starts at $45 million and grows 1.5
percent a year, and a financial return for any capital investments it funds at the
university
1.) Source: American Council for an Energy-Efficiency Economy, Energy-as-a-Service
9
2.) Source: The Ohio State University, Comprehensive Energy Management OpportunityThe ESCO market remains fragmented with market participants ranging from sector-focused players to larger, diversified
players from a variety of markets, including industrial technology, utilities, engineering and construction, international energy
services, building and facility services, renewables and professional services.
ESCO Market Participant Taxonomy
Building and Engineering &
Energy Efficiency
Facility Services Construction
Industrial Technology Lighting
International Professional Services Renewables Utility
Energy Services
10ESCOs and adjacencies have a long history of M&A activity.
Acquirers
2011 2013 2015 2017 2019
2010 2012 2014 2016 2018
Ennovate
Corporation
Quantum
Engineering
Targets
11Strategic Energy Management Investments since 2017
Acquirers
2017 2018 2019
E-Mobility Energy E-Mobility Demand Infrastructure Software Distributed E-Mobility Smart EV Charging Demand Energy Distributed Smart
Efficiency Response Solutions Consulting Energy Buildings Response Storage Energy Buildings
Energy Demand Demand E-Mobility Residential Data Smart Energy Energy Demand Energy Smart Data EV Charging Energy
Storage Response Response Retailer Analytics Buildings Services Efficiency Response Storage Buildings Analytics Efficiency
Targets
12The ESCO remains fragmented with a range of private participants, including regional and local players as well as private
equity-backed platforms.
Select Private ESCO Market Participants
Company Ownership Headquarters
Bernhard Capital Partners Baton Rouge, LA
Bernhard Energy Solutions
Kleiner Perkins Dallas, TX
Cenergistic
Privately Held Fayetteville, AR
Clear Energy
Privately Held Fort Washington, PA
CM3 Building Solutions
Privately Held Prospect, KY
CMTA Energy Solutions
Privately Held Overland Park, KS
Energy Solutions Professionals
DFW Capital Partners Gambrills, MD
Envocore
Privately Held Dallas, TX
Metco Engineering
Oaktree Power Opportunities Minneapolis, MN
SitelogIQ
Privately Held Tonawanda, NY
Stark Tech Group
Bow River Capital Phoenix, AZ
Veregy
13Addressable
Key Market Segments Market Drivers Market Outlook
Market
MUSH1
Aging building stock
Operational improvements
Technology advancement $104B+
Regulations/legislation
Financing advantages Critical market segment
Commercial & Industrial
Improving indoor environment, security and comfort
Corporate sustainability and environmental priorities
$37B+
Increasing tenant occupancy and property values
Economics and shortening payback periods
Underserved relative to
the opportunity
Federal Resiliency needs and security
Transition toward distributed energy resources and
privatization
Regulations and federal mandates $6B+
Dynamic DOD/DOE initiatives
Offers counter-cyclical and
Deferred maintenance technologically advanced diversification
1.) Municipalities, universities, schools and hospitals
14What Should Investors Be Looking For?
Comprehensive Controls Facilities
Demand Measurement Project finance Engineering
energy efficiency DER capabilities integration management
management and verification solutions expertise
offering capabilities capabilities
Demonstrated
Proven track
ability to attach Business Depth of Sales pipeline
Proven project Technology End market record of organic
to the customer analytics and customer development and
execution leadership diversity and inorganic
at multiple reporting relationships conversion
growth
offerings
15The information and views contained in this report were prepared by Harris Williams LLC (“Harris Williams”). It is not a research report, as such term is defined by applicable
law and regulations, and is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities
or financial instruments or to participate in any particular trading strategy. The information contained herein is believed by Harris Williams to be reliable but Harris Williams
makes no representation as to the accuracy or completeness of such information. Harris Williams and/or its affiliates may be market makers or specialists in, act as advisers
or lenders to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide
investment banking services for those companies. In addition, Harris Williams and/or its affiliates or their respective officers, directors and employees may hold long or short
positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions, estimates and projections in this report constitute
Harris Williams’ judgment and are subject to change without notice. The securities and financial instruments discussed in this report may not be suitable for all investors and
investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and
investment objectives. Also, past performance is not necessarily indicative of future results. No part of this material may be copied or duplicated in any form or by any means,
or redistributed, without Harris Williams’ prior written consent.
Harris Williams LLC is a registered broker-dealer and member of FINRA and SIPC. Harris Williams & Co. Ltd is a private limited company incorporated under English law with
its registered office at 5th Floor, 6 St. Andrew Street, London EC4A 3AE, UK, registered with the Registrar of Companies for England and Wales (registration number
07078852). Harris Williams & Co. Ltd is authorized and regulated by the Financial Conduct Authority. Harris Williams & Co. Corporate Finance Advisors GmbH is registered in
the commercial register of the local court of Frankfurt am Main, Germany, under HRB 107540. The registered address is Bockenheimer Landstrasse 33-35, 60325 Frankfurt
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trade name under which Harris Williams LLC, Harris Williams & Co. Ltd and Harris Williams & Co. Corporate Finance Advisors GmbH conduct business.
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