The million euro question: How can ESCOs close deals faster.
Selling energy efficiency remains the number one pain point for the overwhelming majority of Energy Service Companies [ESCOs) in Europe.
Every ESCO knows that solar panels alone will not transform Europe’s energy expenditure. A kilowatt-hour spent is a kilowatt-hour spent, and where energy demand is concerned, less is more: The European Commission has calculated that 40% of the EU’s energy consumption and 36% of its total CO2 emissions in the EU come from buildings, of which the majority are owned and run by small to medium sized enterprises [SMEs]. These companies have major gains to be made by investing in sustainable energy assets, including improved processes, increased comfort, better CSR, and most importantly, significant cash savings.
Despite the benefits, however, the majority of ESCOs struggle to sell energy efficiency, which severely limits their growth and competitiveness. On average, the sales cycle is typically 9 to 18 months per project. The crux of the matter is that energy efficiency is a difficult sale, as people are not ‘excited’ by the opportunity to spend money now in order to save later. The situation is exacerbated as ESCOs are often engineering focused firms and may lack marketing and sales expertise. They also struggle to access a steady stream of finance and may be forced to finance projects themselves.
However, the sales challenge can be mitigated and successful models are now being implemented within the US and across Europe. Here are three key lessons Joule has learned through our years of experience in the field. ESCOs must be sales oriented organizations to succeed – shortening the sales cycle is key:
1. Remember that psychology is everything.
Clients in this market are typically owners of hotels, factories, grocery stores or other retailers. Like ESCOs, the majority of these potential clients are SMEs, and typically look to spend their limited resources on new hires or marketing. Profit margins, followed by reputation, are their top priorities, whereas upgrading HVAC or lighting is low on the list. Improving the energy performance of their building, therefore, should never be about the engineering or technology, no matter how innovative. Nor is it about savings - it should be about accessing new revenues for key business processes - in cold hard cash and upgrading buildings at 0 cost. Energy savings therefore enables access to new revenue streams and an improved building site. This is the message that needs to be driven home and quantifiably demonstrated to the client.
2. Define the contractual structure before engaging with customers and let the contract guide the sale
Many ESCOs overlook the fact that the contract is a big piece of the sale as it defines the deal. There is a tendency among energy efficiency experts transitioning to an energy-as-a-service model to choose the contractual structure on a project-by-project basis, waiting until the client has voiced interest in energy efficiency to decide on the specifics. The question of following an Energy Performance Contract [EPC], whereby the ESCO takes on the upfront costs of the project and is reimbursed over time through the client’s cash savings, or a straight energy efficiency upgrade where the client pays all equipment and installation costs upfront, is often left until after a building audit and concrete Energy Conservation Measures [ECMs] have been proposed.
While it is understandable that companies in transition have uncertainty about using EPC, this lack of contractual clarity ultimately does them a disservice, leading to confusing sales messages, inefficient negotiations, and lowering the likelihood of successful deal closure.
ESCOs should therefore offer a clear and simple, repeatable contract structure that incentivizes the customer to engage in a project. In this vein, EPC can be effective in boosting the attractiveness of an energy efficiency project to on-board new customers, removing the financial burden from the client. However, to maximise the sales message, this model should be proposed at the outset of the sale as part of the complete sales message. To ensure the contract is ready for the negotiation stage, it is also necessary to ensure it covers key elements such as measurement and verification, and performance risk.
3. Creating client trust pays:
Trust is key to a successful sale and implementation. This is especially true for complex projects that combine several ECMs, and is of particular importance for EPC, which guarantees the energy savings, enabling the project payback. How can the client know that the proposed measures are the best ones, that the expected savings have been calculated correctly and will be achieved, and that the technology will work efficiently over the long term?
This is where the input of a third party expert providing independent due diligence and a performance insurance quotation can be invaluable. Joule Assets has capitalized on energy efficiency insurance provided by internationally recognized insurer, such as HSB Engineering Insurance, to build its business in both the US and now Europe. This insurance is tailored for large multi million Euro projects all they way down to projects of €100k and less. A quotation demonstrates that the quality of the project has been independently verified by an internationally recognized third party. ESCOs can therefore demonstrate that they both have a risk mitigation strategy in place and independent backing.
Energy Efficiency Insurance itself provides protection for all aspects of the project, ranging from material damage (equipment breakdown) of the installed systems, to business interruption (protecting against loss of revenue in the event of equipment failure). The final element, which makes this product unique, is the asset performance insurance covering a shortfall in energy savings.
However, even if insurance is not used, the ESCO will benefit from independent project verification from a due diligence provider.
To summarize: ESCOs that come with a strong and defined sales package, including both the deal, insurance and finance – backed by third party analysis – is more likely to gain the respect and trust of a client than those that go it alone.
The industry is freeing revenue spent today on energy but which could be placed in job creation and growth. We are unleashing hidden potential in our clients. This can be independently proven. The opportunity and technology is there – success depends on sales.