Written by Kirk Story, Operations Director at Local Energy.
Less than a year ago, Forbes Magazine declared Groupon- link: www.groupon.com “the fastest growing company ever.” Last December, Groupon, a literal conjunction of ‘group-coupon,’ turned down Google’s $6 billion buy-out offer. Most of us are aware of Groupon’s business model: price reduction through bulk purchasing, aka economies of scale. Groupon’s web-based platform enables businesses to drive consumer demand. Customers are able to achieve 50 to 90 percent savings for bike tune-ups, sushi, or a weekend in Las Vegas. Recently, solar contractors in the Bay Area used Groupon to develop several hundred solar projects discounted through bulk purchasing of PV panels.
My company has been working to develop an energy efficiency model utilizing economies of scale in a manner similar to Groupon. The model is termed Energy Efficiency Contract Aggregation (EECAM) and is designed to fill multiple gaps in the small-to-mid market energy efficiency segment. The idea originated through a market-inventory study we performed in SLO County. Many small businesses in communities surrounding SLO proper reside in office space containing inefficient lighting, air conditioning and equipment that can be upgraded with a quick payback. Unfortunately, these small businesses have less incentive to perform an energy upgrade than larger organizations because the project cost is top-heavy with fixed costs and carries upfront cost barriers.
The EECAM allows small businesses to gain volume pricing for materials, labor and financing. As opposed to contracting for 60 small retrofits, project aggregation solicits bid for a single contract bundling all 60 projects. Bidding contractors are able to obtain bulk pricing from material distributors. Contractors are also able to lower labor and overhead hours due to workflow repetition, reduced mobilization costs, and a LEAN project management that operates under one contract- rather than 60.
The energy efficiency sector is not exactly ‘recession proof,’ but it can survive a down economy because people are interested in reducing operating expenses. In the mid-to-large energy upgrade market, upfront costs are not a hindrance to project implementation. Large projects are easily financed by private capital. Mid-market projects can be funded by private capital, but often qualify for On-Bill utility financing. However, the low-tier energy upgrade market, projects $5000 or less, does not presently have a viable mechanism for project financing. The contract aggregation model hurdles this barrier to consumer demand through aggregated financing. Let’s say the average cost of a small energy upgrade is $3500. If we aggregate 60 projects, the new cost is $2000/project amounting to a total contract price of $120,000. Private capital now has incentive to fund the projects, enabling customers to implement their energy upgrade at no upfront capital cost and use energy saving to pay for the upgrade.
This short article is only the tip of the ‘contract aggregation iceberg.’ The conversation becomes very exciting when discussing the market transformation possible through revolving fund financing.
For those interested in continuing the discussion, feel free to visit my company’s website www.locenergy.com .
