The nearly five million commercial and industrial facilities in the United States account for nearly half of all domestic energy consumption, at a cost of over $200 billion each year. But according to Chris Pacitti, general partner at venture capital firm Austin Ventures, only five percent of that market has adopted sophisticated energy management tools. Investors are taking notice.

Software-based cleantech like energy management software (EMS) is a fast-growing segment as interest in hardware-based cleantech wanes. Leading EMS vendors like C3 and Hara offer tools that allow organizations to measure their energy consumption and, often, identify operational inefficiencies. That can lead to savings in energy consumption as well as real dollars, a fact that’s attracting some business owners’ attention.

A Pike Research report estimates the EMS and services industry will grow to $5.5 billion by 2020, from just under $1 billion in 2011. That’s a compound annual growth rate of more than 20 percent.

An example of a recently-funded EMS vendor is Noesis, backed by Austin Ventures and Black Coral Capital. The company’s Web-based tools track energy consumption across more than 640 million square feet in nearly 7,500 buildings. Noesis’ facility portfolio has grown by 200 percent in the past four months.

Sarah Groen, co-founder and director of SURGE Accelerator, says that cleantech investments are shifting from hardware plays (think wind turbines) to software plays like EMS. So-called “digital cleantech” investments fit more squarely within VC’s comfort zone.

“After minimal success with hardware-focused cleantech investments, a software play gets [VCs] back to what they’re comfortable with–the VC model of the dot-com days,” explains Wal van Lierop, president and chief executive of Chrysalix Energy Venture Capital.

Additionally, Groen says that hardware-based cleantech has received something of a “black eye” as companies like Solyndra have come to light, giving investors more confidence in funding EMS-based cleantech.

“These applications empower and incentivize both utilities and end customers to get more from their energy,” says Steve Vassallo, general partner at Foundation Capital. “Initial investments in cleantech were focused on the infrastructure, but the time has now come for the next wave of digital energy solutions and applications, of which energy management and technology-enabled conservation will play a substantial role.”

Vassallo further notes that “investing in efficiency is five times less [expensive] than investing in new [energy] supply.”

Several other factors are driving investor interest in EMS, specifically. “[Investing in EMS] is capital-light and may offer faster investment returns,” says van Lierop. In addition, customer demand is being spurred by new legislative mandates for reducing organizations’ energy consumption–which suggests lucrative long-term revenue potential for EMS vendors.

William Jaffray, an energy engineer at Associated Renewable, points out that many businesses are taking a hard look at their energy use for the first time. This stems from the desire to reduce consumption, lower energy costs, and address White House calls-to-action like the Green Button Initiative. “Good management software provides useful analysis of energy consumption and costs,” Jaffray says.

Juan Lois, financial analyst at Associated Renewable, adds, “The key to the accelerated growth of the industry is the fact that businesses and large corporations now have access to much more detailed and precise energy consumption reports. This allows them to reduce the variability of consumption–especially during peak demand times–reducing energy costs, maximizing efficiency, lowering operating costs, and increasing the value of the property.”

Vassallo is bullish on the long-term revenue potential for Software-as-a-Service (SaaS) EMS vendors, particularly from utilities customers. “While utilities historically tilted toward capital-intensive enterprise software sales, the benefits of SaaS-based approaches are simply too good to ignore,” he says. “Utilities will absolutely gravitate toward Cloud-based, managed services.”

Tom Pincince, president and chief executive of Digital Lumens, believes the most promising long-term revenue models include solutions and services delivering continuous and ongoing operational efficiency. He says that “Simple reporting and monitoring will not deliver enough value; winners will be systems that drive changes in the way a building and its occupants use energy. Ultimately we’ll see new business models such as Light as a Service or HVAC as a Service.”

Economic and legislative forces are driving numerous changes within the energy management landscape. With the re-election of President Obama, there will likely be a continued emphasis on climate change, sustainability and energy independence. This gives investors a long-term opportunity for funding a market that will inevitably be expanding for quite some time.

Ashley M. Halligan is a 2007 graduate of Marietta College (Ohio) with a bachelors in journalism. She has a background in freelance feature writing–in particular, travel, musician and human interest features. She is a market analyst at Software Advice, where she regularly reports on sustainability news and trends along with trends in the nonprofit sector. Connect with her on Google+ or follow her Contemporary Pilgrim book project.

Top image: Energy history screen from Nest’s iPhone app.

Energy management firm Schneider buys D5X and Vizelia — Many analysts and venture capitalists are predicting that a hot sector next year in cleantech will be in building controls, but it looks like the game is already afoot: Yesterday, energy management leader Schneider Electric announced that it bought two French energy software firms. D5X makes software that optimizes the use of commercial space, while Vizelia’s software allows for real-time energy monitoring of buildings.

Chinese carmaker BYD to launch an electric car in the U.S. — The Warren Buffet-backed company plans to start test-marketing the e6 next year, according to the Wall Street Journal, and will make it available to buyers by 2012. It is also in talks to supply electric buses and potentially build a manufacturing plant in Los Angeles. BYD’s U.S. electric car plans were delayed a year, and the company reportedly canceled electric car plans in China due to lukewarm sales of its hybrid there — lack of charging infrastructure was partly to blame. BYD has also been stretching itself into product offerings in the home energy efficiency market.

Russia to launch gas-electric hybrid car — Russia’s first gas-electric hybrid car will be called the Yo and get about 67 miles per gallon — better than the Toyota Prius, the New York Times reports. The Yo will be powered by an engine that can burn gasoline or natural gas and is backed solely by Russian billionaire Mikhail D. Prokhorov, owner of the New Jersey Nets. Prokhorov plans to invest about $200 million into a company called e-Auto to manufacture the Yo.

Solar market may be getting overheated — This year was a good one for solar, with industry-wide capacity doubling, driving up the stocks and forecasts of solar inverter companies like Power-One — and global demand is expected to grow 13 percent next year, the Wall Street Journal writes. But subsidies in the powerhouse market of Germany are cooling off and rising euro-zone bond yields are hurting the economics of solar financing in the region. Solar companies will likely feel a squeeze on margins and pricing next year, the WSJ reports.

Soladigm raises $30 million for self-tinting glass – The company announced its third round of funding today, led by DBL Investors and Nano Dimension. It plans to use the cash to kick its $130 million factory in Mississippi into high-volume production. Soladigm makes energy-efficient glass that can be used to create smart windows that automatically adjust tint throughout the day to reduce glare and cut heating and cooling bills.

[Image via Flickr/electricnude]

The addition of Hara Value Chain effectively widens the scope of Hara’s main product, a software called Environmental and Energy Management (EEM)  that identifies energy inefficiencies within companies. EEM – which counts among its customers the city of Las Vegas and Safeway — can make recommendations about potential energy savings and track carbon emissions.

Hara has had some nice momentum lately, most recently landing the city of Philadelphia as a customer. It has signed up some 40 clients — big names that include toymaker Hasbro and Coca-Cola — and tripled its workforce in the last year.  The company, has, however, lost executives to competitors – most notably Enxsuite.

The Hara Value Chain module marks the company’s seventh release in 21 months.

“We opted for a much faster deployment and innovation cycle. It’s still a relatively early market,” Waibel said. “A year ago no one really looked into the value chain capability.”

Indeed, the company is moving at a fast clip. But this new release begs the question: Why would a customer pay for a software that helps its suppliers analyze energy efficiency?

Risk mitigation, for one. As Hara Chief Technology Officer Udo Waibel explains it, the software requires the company and its suppliers to enter data into the system, which the company could then use to project how costs could change in the event, say, oil prices rise. It also allows companies to achiever greater energy efficiencies by casting a broad net that looks outside the company itself.

“At the end of the day it’s purely cost-oriented. If you help your suppliers figure out how much energy they consume and eventually provide them with tools and methods to help improve…the parts that you buy might become less expensive,” Waibel said, adding that Hara developed the new module in response to feedback from existing customers.

Hasbro and Intuit, for example, have already been piloting the new program. Pricing for the software is based in part on the number and type of facilities customers want to analyze.

With this announcement, Hara is also unveiling a number of upgrades – the system is now available in seven languages, a mark of its adoption globally. The EEM software is in use in 94 countries.

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