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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

The Lowdown on ESCOs

Electricity is the new green energy source. New York City’s goal to reduce carbon emissions relies on widespread adoption of electrification – powering virtually everything with electricity generated by renewable sources. The state is funding wind and solar projects to speed the process. In the meantime, though, many savvy co-op and condo boards are searching for ways to reduce electricity costs now, and buying from an energy service company, or ESCO, is one way to do that. Doing so, however, is not for the uninformed.

If you were to do a quick Google search on ESCOs, you would probably wind up on the Public Service Commission’s “Power to Choose” site. Here you can put in your ZIP code and find a large list of approved companies selling electricity and natural gas. You will also find, even before entering the site, a rather alarming “consumer advisory” warning about doing business with ESCOs. This market has had a rocky history in New York State, and unlike Texas, where energy regulation is anathema and consumer bills skyrocketed during the recent February cold snap, regulation of the business practices of ESCOs has grown over the years.

To buy electricity for your building, however, is a more complicated process than simply choosing from a list of vendors. First, you need to make sure your utility data (which is probably limited to the common areas) is accurate because that’s what an ESCO will use to determine its pricing. Then you’ll need to make sure your contract is as favorable as possible. Many management companies oversee ESCO purchases, either by employing in-house professionals or contracting with outside consultants. Given the risks involved, it makes sense to hitch your buying decision to someone who knows what they are doing.

 

Under the Hood

At the property management company AKAM, Matt Cebula, director of energy services, is the point person for ESCO business. Approximately 90% of AKAM’s 250-building portfolio buys energy from ESCOs, he says, and purchases are made building by building. AKAM works with an energy broker, Aurora Energy Advisors, which is responsible for setting up the Requests for Proposals, getting competitive bidding and negotiating the finer points of the contract.

“It’s more than a question of who’s offering the best price,” says Alex Zafran, a senior energy consultant at Aurora. “We have to take a look under the hood of these companies and find out how they are operating, what are their business practices, ethics and how they handle customer requests.” There are hundreds of ESCOs, from startups to established companies, and each is trying to compete for the same customers and provide the same service. “Unfortunately,” Zafran says, “we have seen many firms go out of business for legitimate reasons, and others reprimanded or censured for unethical behavior or violations of the terms and conditions of business.”

One such company was East Coast Power & Gas. In May 2020 it announced that it had decided to cease supplying electricity and natural gas in New York, New Jersey and Delaware as early as June 2020. For customers doing business with East Coast, this meant that they would automatically be switched to their local utility so supply would not be interrupted (this is how the ESCO market works). But for those who had created energy budgets using East Coast prices, this interruption had a big impact.

“This was a very unique situation,” says Tal Eyal, the president of FirstService Energy, who had 50 accounts with East Coast. “Because of COVID-19, energy usage drastically dropped. To be an ESCO requires a lot of expertise. If your prices are too high, nobody will buy from you, and if they’re too low, you’ll lose your pants.” When East Coast pulled out of the market, FirstService Energy had to protect its buildings, not only by hiring legal help to make sure clients weren’t financially harmed but also by finding ESCO replacements so that building budgets remained intact.

 

ESCO Options

Energy purchased through an ESCO can be bought at several different rates: fixed, variable or partially fixed. With a fixed rate, you lock in a price that you’ll be paying for the contract’s duration, usually a 12- to 24-month term. “A lot of buildings like the fixed rate because it gives budget certainty,” says AKAM’s Cebula. “We manage a very big complex out in Coney Island where they consume over a million therms of gas every year. That’s close to a $1.3 million budget item, and by locking in a fixed price they can control roughly half of this energy expense.” The other half, which is out of an ESCO’s control, is the cost of delivering therms or kilowatts charged by the local utility.

Most boards, however, choose the variable rate. Cebula says that this rate affords a 5% to 10% savings on utility supply, mainly because Con Edison and National Grid have no incentive to be competitive on the supply side. “All their profit is made on the delivery portion of a bill,” he says. Another advantage to choosing a variable rate is that a building can convert it to a fixed price at any time. “If you achieved a certain level of savings and you want to guarantee that you’re not going to be overpaying for the rest of the year, it might make sense to switch,” Cebula says. “Once an agreement is fixed, you’re stuck with that for the contract term.”

 

Contract Considerations

In simplest terms, when you sign a contract with an ESCO you are agreeing to buy a certain amount of electricity or gas at a certain price (if it’s a fixed contract) and for a certain term.

Whether you decide to embark on securing an ESCO contract on your own or have a professional conduct the search for you, there are three important considerations to keep in mind. The first is the all-inclusiveness of the price quote. “If someone says there’s going to be a contract price for 7 cents, the first question to ask is: ‘What does this include?’ ” says Aurora’s Zafran. New York State mandates something called the Clean Energy Standard, which is an additional charge on electricity that is continuously changing. “You might get a quote for 7 cents per kWh, but it might not include a charge for the Clean Energy Standard,” Zafran says. If you sign the contract without knowing this, you’ll be getting larger bills than you budgeted for.

“Every ESCO contract has a provision that if there are any new government-imposed fees, it has the right to pass them along,” says Jason Bokor, a co-owner of Metropolitan Refunds, a utility and property tax auditing firm. “We include all the known ones and explain to our clients that this is a risk. For smaller projects these fees are not significant, but they can be in larger ones.” Basically, he adds, “you want to see bids that are all-inclusive, except for sales tax.”

The second provision to look for is what is called a “full requirements contract.” This means that there won’t be a penalty – called a swing charge – if your building experiences a big drop or a big increase in usage. “If an ESCO is offering a great price,” Bokor says, “but wants to make sure you are staying within a certain bandwidth – not too much usage or not too little – we will tell our client, ‘Listen, XYZ ESCO is offering a fantastic price, but they are insisting you stay within a 20% bandwidth. You can’t go 20% higher or lower on your usage, otherwise you’re going to be subject to certain penalties.’ ” Understanding your building’s historic energy usage will enable you to decide if the risk is worth the cheaper price.

Finally, you’ll want to make sure that the ESCO you are doing business with has a solid reputation, has not had numerous complaints filed at the Public Service Commission and is responsive. This is where the advice and expertise of an energy broker or savvy managing agent is imperative. “Technically, there’s nothing stopping a board from trying to do this on their own,” Zafran says. “Do they know how to vet these ESCOs and compare the right ones to the wrong ones? Probably not fully. That’s where a board really needs to ask itself if it’s being effective.”

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