The UK market for energy service contracts is growing

Dr Steve Sorrell and Dr Colin Nolden, from the Centre on Innovation and Energy Demand, have published a new research paper entitled ‘The UK market for energy service contracts in 2014–2015’, suggests that energy service contracts are growing rapidly in the UK public sector and delivering substantial energy and carbon savings.

The recent introduction of ‘public procurement frameworks’ for such contracts has stimulated market growth, and represents “…the most important development in the UK market in the last ten years.”

Energy service contracts involve the outsourcing of energy-related services to a third party, or contractor – commonly termed an energy service company (ESCO). Typically, ESCOs invest in energy efficient equipment and guarantee a specified level of energy or cost savings over a period of several years. Energy service contracts can allow clients to reduce costs, transfer risk, upgrade assets and concentrate attention on their core activities. By delivering investment in improved energy efficiency, such contracts can also contribute to the development of a low carbon economy.

The CIED research reveals that the UK energy services market is relatively large by European standards, highly diverse, concentrated in particular sectors and primarily focused upon cost-effective technologies, such as improved lighting. While it is difficult to estimate the overall market size, estimates range from around £400 – 750 million – although much depends on how the boundaries of the market are defined.

As described in earlier research, the adoption of energy service contracts has been hindered in the past by the high ‘transaction costs’ associated with negotiating contracts and monitoring contract performance. The public procurement frameworks effectively reduce these transaction costs for both clients and contractors, thereby opening up new market opportunities.

The oldest and largest framework in the UK is the Carbon and Energy Fund (CEF). This works mostly within the health service, which faces energy bills of more than £750 million/year across its 12,000 sites and 2300 hospitals. The CEF manages and monitors complex energy infrastructure upgrades to buildings, such as hospitals, acting as a trusted intermediary between the client and the contractor, helping clients negotiate contracts and providing support throughout the tendering process. Most CEF projects are large-scale, with a minimum size of £1 million and typically around £6 million, and commonly involve combined heat and power systems, boiler replacement and the installation of building energy management systems.

RE:FIT, launched by the Greater London Authority in 2008, aims to retrofit 40% of London’s public sector floor space by 2025. The framework uses energy performance contracts that focus on delivering energy services (e.g. heating, lighting and cooling) at a reduced cost, typically delivering 15-20% energy savings over a period of 5 to 7 years. Most projects involve capital investment of around £1 million and are generally financed by clients taking on low-cost loans. RE:FIT is helping to extend energy service contract to smaller sites, with over 200 schools entering into “bundled” or multi-site contracts to improve their energy performance.

The research suggests that there is considerable scope for the UK energy service market to expand through the development of these procurement frameworks throughout the public sector. Targeted policy support for these developments, such as subsidising fees for clients, could offer substantial returns.

Read the paper: The UK market for energy service contracts in 2014–2015