The ABCs of ESCOs

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.

Buying cheaper electricity is more complicated 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.

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.”

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,” Cebula says. 

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. 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.”

Finally, you’ll want to make sure that your chosen ESCO has a solid reputation and has not had numerous complaints filed at the Public Service Commission. 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.”