Utilities - November 20, 2019
Views from the top: Ameresco and the evolution of performance contracting
George Sakellaris, president and CEO of Ameresco, founded the company in April 2000. He aspired to build a technology agnostic and supplier-independent energy company offering the skills, capabilities, and foresight to create independent energy solutions that went beyond just conservation to address a customer’s entire energy stream including supply and demand, energy efficiency and renewable energy. Today he leads this public company of more than 1,000 employees and more than 70 local offices throughout North America and the United Kingdom.
In a recent exclusive interview at Smart Energy Decisions’ offices, Sakellaris spoke about what led him to found Ameresco and what’s next for the company.
SMART ENERGY DECISIONS: Let’s start with a bit about your background.
SAKELLARIS: I’ve been in the energy business since 1969 when I started working for New England Electric, which was a local electric company. Originally, we did transmission and distribution studies, then moved on to the generation studies on what kind of power plants we were going to build. In 1979, with the energy crisis, we were trying to build two nuclear power plants. Guy Nichols, the CEO, approached me and asked, ‘George, does it make economic sense to promote conservation, energy management, cogeneration, and avoid the need to build these two nuclear power plants?’
We did linear programming and expanded the system to estimate what kind of generation, transmission lines, and distribution we would need, as well as the levelized per-unit cost to the ultimate customer. Basically, we came up with a U-shaped curve. If you put this on a scale, the cents per kWh is levelized and the optimal point was about 3%. We developed a strategy to reduce consumption by 15%. They didn’t build another power plant.
After we made the presentation to the Board, someone said, ‘If you don’t want to sell kilowatt-hours, why don’t you go sell energy efficiency?’ That’s exactly what we did – we started an energy efficiency company for New England Electric, the first created under a utility company. We set up the company and said, ‘We want to reduce your consumption of energy and add cogeneration and save you 20%.’ Nobody believed us. I went back to my Board and said, ‘Why don’t we put up the money and take a share of the savings?’ The first deal went to the Boston Mercantile Wharf building. Ed Fish was the owner. I had gone in with the proposal to change their boiler, change the old air conditioning system, and I wanted a 10-year deal in return for 60% of the savings. Ed asked, ‘What happens if it doesn’t work?’ I said, ‘You keep the boilers, we keep the chillers and I get fired!’ That’s how it started because back then nobody would finance all these deals, but little by little we convinced them. We underwrote the projects and took a share of the savings. In that way, we did the first performance contract in the country.
SMART ENERGY DECISIONS: Does that make you the father of performance contracting?
SAKELLARIS: I don’t know if I’m the father! What happened next was that even my management didn’t really believe it would work, so we signed 10 different deals -- apartment buildings, commercial, industrial - and we monitored them for two years to see what would happen. Sure enough, we predicted the savings, everything worked, and then we developed a plan to create a business. In the meantime, though, if you finance all the projects, you basically leverage your balance sheet a lot. Ultimately, in order for this business to fly, you have to get the banks behind you to finance these deals. We worked for about 10 years and by 1990 then the banks start coming in. They realized that guaranteeing the savings is a way for us to package our offering and get a couple of extra margin points.
SMART ENERGY DECISIONS: You were an entrepreneur operating within a utility.
SAKELLARIS: Yes, but then new management came in and didn’t want this part of the company - too many risks and more headaches than it was worth. I bought the energy efficiency contracts and went out on my own, built a national company and then sold it in 1997. I built both my first company and Ameresco to be customer-focused, technology agnostic and focused on what makes the best economic sense for the client.
SMART ENERGY DECISIONS: That’s proven to be a good philosophy.
SAKELLARIS: It has served us very well. Eventually, I sold that business because as a utility, every time you do a project you have to go to a Board to get it approved. I said, ‘Forget that.’ I left and started Ameresco. This company is much broader and deeper in technology expertise. We cover all the energy efficiency and all the technologies - smart lights, boilers, chillers, microwaves, battery storage, and all renewable technologies. If you look at our offerings on energy efficiency, we have a one-stop-shop, from developing the offering, designing it, financing it, implementing it, and then operating and maintaining it. On that route, we arrange the financing for the customer and guarantee performance so there is no upfront risk for the client. If the savings are not there, we will step up and do something different.
SMART ENERGY DECISIONS: Utilities are not traditionally viewed as being very customer-focused. How did you, in a utility, come up with this consumer focus?
SAKELLARIS: When I set up the company, I was the president. I was the developer. I was the salesman. I used to arrange about three to four meetings a day and on Friday I would sit back and analyze what the customers said. If you don’t deliver what the customer wants at the end of the day, it’s the end of a service business. We had to be flexible enough to design our offering to meet the customer need and hopefully make some money on it in the process. If you deliver what your customer wants, they want you to stay in business. Our best clients are repeat business clients. We do good work. We’re rated number one in the federal sector. They say we have 100% customer satisfaction.
SMART ENERGY DECISIONS: The legend of Ameresco tells how, after selling NORESCO, you met some colleagues at a bar and sketched out the new business plan on a napkin. Is that true? What was the plan to be different with this next business venture?
SAKELLARIS: It’s true. There were three goals to accomplish in order to be competitive. The first was to gain broader and deeper technical expertise and a fully integrated product offering. Then we started making acquisitions to get a footprint; we now have 72 offices across the United States. And the last, which is extremely important, is that customer focus. You need the flexibility to fine-tune your offering. We’re the creators of our offerings, so we should be flexible enough to give the customer what they want.
I’ll give you an example of what we can do by getting comprehensive not only on renewables, or solar plus battery storage but also with energy efficiency. Many places where we go, solar wouldn’t pencil out. At the Minneapolis Airport, they wanted solar for carbon reduction, but Minneapolis is not a great solar resource. We tell them we can combine the project. We’ll change their lighting system to LEDs because it’s such a great payback. They got the solar along with that in one total project financed by a third party through the savings between what the kWh generated from the solar and the savings generated from the LEDs. We do that in many, many locations.
SMART ENERGY DECISIONS: You’re running a big company. How do you know so many details about individual projects?
SAKELLARIS: I’m hands-on. I monitor the reports and proposals. How many did we win, how many did we lose, and why did we win and why did we lose? I get involved. Plus, I love it. I grew up with it. And I love the way the industry has evolved in distributed generation and demand resources. The market is expanding, it’s exploding, and I think we are at the beginning of more evolution with the total deregulation of the utilities - no more central power plants. Think about what happened to the telecommunications industry. I think the same thing is going to happen to the electric power industry.
SMART ENERGY DECISIONS: What does the energy transition look like to you and where do you see it going?
SAKELLARIS: For utilities, originally there was a smaller demand for solar plants, distributed generation, combined, heat and power. It didn’t represent a big threat. But then utilities saw how these areas were taking off. For example, in Massachusetts, we went to every city and town with a closed landfill - wasted land – and said, ‘We’ll pay you X-amount to put in solar plants.’ If you’ve been in Massachusetts, you can see all the solar panels along the Mass Pike. We sold the power to the Turnpike Authority at 7.1 to 8.5 cents per kWh when they had been buying it from the utility at 15 cents. Given the cost savings to solar energy customers, the utilities lobbied legislators to lower the Net Metering incentives to slow the pace of customer purchases. Customers still demand cleaner, renewable energy, but with new utility actions to lower the incentives and to substantially increase the costs with fees, many utility customers are seeing projects failing. I think the utilities will evolve because it makes so much economic sense for the customers and for a reliable, resilient power grid. It’s going to be a transition. It cannot happen overnight.
SMART ENERGY DECISIONS: What about the growth of distributed energy generation? Looking at the fires in California and other extreme weather events, customers are looking for resiliency plans.
SAKALLARIS: The federal government became very innovative in putting these projects into play with us. Now we see other companies saying, ‘We need that too!’ That’s why we’re at this extremely exciting point in time for our company as we have this broad depth and breadth of our portfolio. It’s exciting.
We’re doing the Philadelphia Navy Yard, a new economic development project with a microgrid. We worked on one in California recently that has this combination. That’s where the market is going. We’re doing some of these programs by getting energy efficiency dollars to pay for resiliency. The project we did in Parris Island started as a normal energy efficiency project. The Base recognized an issue with resiliency so they prioritized their own central combined heat and power plant. We put in the solar plant and battery storage and then tied it together with a sophisticated microgrid. It’s a $91 million project but it all gets paid for out of the savings generated by the energy efficiency measures, including the solar plant and the CHP system.
SMART ENERGY DECISIONS: So the Navy Yard was a performance contract with no out-of-pocket expense?
SAKELLARIS: Correct. This project pays for itself from avoided capital costs and operating savings. Customers love using third party money and they’re concerned about resiliency and security. You see it more and more, starting with the federal sector and then colleges. We are working with a university in New England right now, where we’ll get them both resiliency and almost 100% carbon neutral. They are concerned about floods, so they’ll be able to operate as an energy island.
SMART ENERGY DECISIONS: The adoption of performance contracting as a business model for financing projects started with federal and higher education, but C&I has been slow to pick up on that. Are C&I companies watching what other organizations are doing?
SAKELLARIS: it’s very hard to do long-term financing because C&I buildings sometimes change hands. That’s why they have PACE programs and financing. But you will see more projects like that. We are, however, seeing an exciting growth trend in the C&I space, spearheaded by the industry leaders. Companies like Apple and IBM own their buildings; they don’t change hands. They realize both the financial and the sustainability benefits directly.
SMART ENERGY DECISIONS: What is unique about your approach in solar? We tend to think of Ameresco principally as an energy service company.
SAKELLARIS: Sixty percent of our EBITDA comes from the renewable assets we own. We didn’t articulate that story when it was smaller but now it’s more significant. When we set up the company, remember, we wanted to compete with broad and deep technical expertise. Actually, we were going to develop assets from the beginning and then have the distribution channels so 50% of the cash that we generate is used to buy new companies and the other 50% we’ll leave as renewable assets.
SMART ENERGY DECISIONS: Does that mean you own and operate the renewable projects you develop?
SAKELLARIS: Yes. However, some customers want us to develop and build the project but they want to own them. Parris Island is one example. That’s fine with us. We’ll approach it either way.
SMART ENERGY DECISIONS: What else from your point of view should we be on the lookout for?
SAKELLARIS: I think deregulation is probably the most important thing because we’ll be allowed to do what we can do. This will be dictated by the market and technologies, both of which are still evolving. The missing piece of the puzzle that will bring it all together is some effective form of energy storage, whether it’s batteries or hydrogen compressed air. Who knows what will be available ten years from now? It is certain there will be more technological evolution. The boilers are getting more efficient, the compressors are getting more efficient. Energy-efficient models are getting better and better.
Storage is a big emphasis for us. In the last year, we said we will invest in getting the right resources to effectively compete in all regions of our company. Battery storage and microgrids are areas where we want to bring our talents.
SMART ENERGY DECISIONS: Finally, what are customers asking for in terms of the next big thing?
SAKELLARIS: Sustainability is getting to be more pronounced than it was five years ago and it will continue to gain more traction – but customers will always come back to cost savings.