Follow the Government's Energy Efficiency Contracts

Although wind, solar and geothermal are likely to constitute an increasing amount of our energy supply, moves to boost our efficiency promise a more immediate bang for the buck. As part of the Energy Independence and Security Act (EISA), the government has begun awarding a series of $5 billion contracts to a range of firms, under another handy acronym, ESPC, which stands for Energy Savings Performance Contract.

In all, the government intends to award 16 ESPCs, for a total of $80 billion. There is no formal commitment to spend that money, as these are Indefinite Delivery Indefinite Quantity (IDIQ) deals. Had enough acronyms? Me too.

Even though these contracts are open-ended, they could be completed and renewed for another $5 billion to $6 billion if the government finds them to be beneficial. And a lot of that depends on the price of fossil fuels over the next 24 months. If oil and coal remain cheap, the Obama administration may be hard-pressed to justify these contracts' hefty price tag. But many expect the current supply cutbacks in oil and natural gas to steadily boost energy prices later in 2009, and that should pave the way for ongoing ESPCs.

So who are the beneficiaries? Mostly utilities and energy consultants, but also companies that are involved in the construction, heating and cooling of government facilities. For example, Pepco Energy Services, a division of Pepco Holdings (POM - commentary - Cramer's Take), has been advising state and local governments on a range of efficiency products. Yet Pepco Holdings is primarily a utility, and it trades as such, so shares are unlikely to respond to these types of contract awards.

If you're looking for a pure play on this theme, check out Ingersoll-Rand (IR - commentary - Cramer's Take), which was also just awarded an ESPC, through its Trane division. This contract could provide a halo effect for Ingersoll-Rand, as private companies also seek cost-effective ways to boost efficiency and save money.

---

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.