Outsourcing: Energy Efficiency "To Go"

Download the free report.

Energy service outsourcing is a business relationship that allows an industrial facility to transfer responsibility for one or more energy functions—such as steam, compressed air, water treatment, lighting, or other activities—to a vendor. A contractual agreement establishes an ongoing scope of work subject to periodic renewal. The service is typically intended to relieve host facilities of the cost and effort of sustaining reliable energy-related operations. As an ongoing relationship, outsourcing is distinct from energy performance contracts for the design and installation of energy improvement projects, where vendor involvement terminates as projects reach stabilized operation.

Energy efficiency contributes to industrial competitiveness by reducing waste and associated costs. Reduced energy consumption eases stress on regional energy generation and distribution infrastructures. The environmental consequences of energy waste are reduced proportionately.

The American Council for an Energy Efficient Economy released a report on outsourcing as a way to achieve the energy efficiency program goals of industrial corporations, utility customer energy efficiency programs, regulators, and similar regional authorities. While industrial and other large facilities undertake energy service outsourcing primarily to ensure the reliability of energy performance, it can also enhance their energy efficiency.

At first glance, outsourcing appears to address all the classic impediments to industrial energy efficiency by providing some combination of capital and expertise to perform common energy functions. Closer examination, however, reveals risks to both parties in an outsourcing relationship. Broadly speaking, these risks come up in (1) the determination of adequate quantities and quality of service provision, (2) the accuracy of performance measurement, (3) assurances and contingencies for failure to provide (or consume) a prescribed level of service, and (4) mutually acceptable terms for cost recovery and related financial accounting of liabilities if capital investment is involved. Potential outsource providers and consumers alike may be intimidated by these considerations.

Some energy efficiency program administrators may consider becoming direct providers of energy service outsourcing. A more likely approach is for these administrators to influence and support the market for outsourcing as provided by vendors already serving the industrial community. This report describes business models and considerations for providing and consuming outsourced energy services. Any energy efficiency program that seeks to promote energy service outsourcing should be aware of these issues.

None of this is to imply that energy service outsourcing is impossible to pursue. Many isolated examples of its implementation exist; some are described in this report. Based on a literature review and interviews with 41 experts—both energy users and solution suppliers—we conclude that outsourcing can be a viable business solution for industrial facilities. Regional energy efficiency resource acquisition programs may find it advantageous to foster the market for these services. Doing so will require substantial program support to educate and develop the market.