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Defense contractor BAE Systems is in the business of understanding extreme risks: it designs and makes a variety of technologies for war zones, from communications and surveillance systems to weapons. But it didn’t want to deal with any risks when it came time to invest in becoming more energy efficient. So the company adopted a novel strategy that kept them to a minimum.

In December BAE, which has its U.S. headquarters in Arlington, Virginia, announced a $2 million project to upgrade heating and cooling equipment, pumps, and motors and control systems at its facility in Greenlawn, New York. The company won’t be paying that price for the upgrades, however. Instead, it will pay project developer Metrus Energy an amount based on how much it saves on energy use. Crucially, Metrus will not only develop the project; it has lined up financing to pay for it, and it will pay Siemens Industry to install and maintain the equipment.

The energy service contract will last 11 years and promises to save BAE about $300,000 in annual energy and operational costs. About 70 percent of the savings will come from using less energy, and about 30 percent will result from spending less on maintenance because the equipment is new and improved, says Don Hill, director of facilities in BAE Systems’ Electronic Solutions business. At the end of the contract, BAE will pay for the residual value of the equipment and installation, Hill says. “It frees up capital for us to invest more strategically,” he says.

The project, set for completion in 2011, reflects a growing market for energy efficiency projects in which payment is tied to the amount of energy saved over time. This approach has been common for about two decades in public facilities such as government buildings, academic institutions, and hospitals, says Peter Larsen, a researcher at the Lawrence Berkeley National Laboratory, which has tracked the energy service market for over 15 years and amassed a database of about 3,500 projects.

Project developers typically guarantee certain savings, some or all of which are used to pay the cost of installing and maintaining the equipment; on the assumption that customers will use less energy, the developer charges them less than they would pay the utilities. If the money saved on energy falls below the guaranteed amount, then the energy service company will have to make up the difference. If it exceeds the guaranteed amount, then the customer gets to pocket the extra. Energy service companies tend to set conservative estimates for the savings they could deliver.

“What we’ve found is more than 85 percent of projects in our database met or exceeded the guaranteed amount,” Larsen says.

Companies such as Johnson Controls and Honeywell collected about $4.1 billion in revenue from energy service contracts in 2008, and the figure should increase to around $7.3 billion in 2011, according to a Berkeley Lab study published in June 2010.

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Credits: BAE, Lawrence Berkeley National Laboratory.

Tagged: Business, Business Impact, Corporate Energy Strategy

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