Energy Savings Performance Contracting

Energy Savings Performance Contracting (ESPC) is a method for developing and implementing a comprehensive project, which may include energy efficiency, renewable energy, distributed generation, cogeneration or combined heat and power, and/or water efficiency measures. An ESPC project is delivered by an Energy Service Company (ESCO), which will develop, implement, and help arrange financing for the project, and then will monitor the energy savings and often maintain the upgrades over many years (at the discretion of the customer). However, some institutions will contract with ESCOs for just long enough to be comfortable that the expected savings have been achieved and then will revert back to using in-house staff for ongoing maintenance. Many ESCOs also provide training to internal staff on how to maintain and manage the new equipment.

In most ESPC projects, the savings produced by the project are sufficient to repay the capital cost of the project over the term of the ESPC contract, which is typically 10 to 15 years. In almost all ESPC projects implemented in public buildings, the ESCO actually guarantees the savings to the customer. The graphic below depicts the contractual arrangement in a typical ESPC project where a third-party financier provides project capital and is repaid by the customer, with the ESCO guaranteeing that the project savings will be sufficient to repay the project capital costs.

ESPC Flowchart

The guarantee ensures that the ESCO has a financial stake in ensuring the performance of the project retrofits during the entire contract term. This reduces project risk for the customer. Note that this guarantee will usually be adjusted based on factors that the ESCO cannot control, such as changes in weather, building occupancy, and energy prices. If the project produces less than the guaranteed savings, the ESCO will pay the customer the difference. The value of any excess savings remains with the customer.

ESPC projects are most appropriately utilized for a customer that wants to implement a comprehensive retrofit, rather than a single measure (e.g. lighting) project. It usually takes months to develop the technical specifications and financial plan for an ESPC project. Speed is less critical in an ESPC project than in residential projects. ESPC projects have the benefit of being able to blend financing from several sources, including utility incentives or rebates, public revolving loan programs, state or federal government grants, bonds, loans and leases. Because ESPC projects involve comprehensive retrofits, they usually have relatively long project paybacks (10+ years), and have most often been used in public institutions, such as municipalities, state governments, universities, schools, hospitals (known as the MUSH market) that have long time horizons.

ESPC projects are increasingly attractive in today's financial environment, because they offer the opportunity to modernize critical building energy systems (lighting, heating, air conditioning, controls), and even roofs and windows, without requiring additional tax revenues, because the capital costs of the ESPC project are repaid from savings. In recent years, ESPC projects have also included retrofits to municipal and state facilities other than buildings, including traffic signals, wastewater treatment plants, landfill methane capture, street lights and water meter systems.

Transaction Points

State laws and regulations govern the way a public institution ESPC project is developed and implemented, and how the project ESCO is selected. These laws and regulations often vary by type of institution, (e.g. k-12 schools vs. public universities). The Oak Ridge National Laboratory maintains a database of applicable state laws, which can be accessed at the following URL: http://www.energyservicescoalition.org/resources/legislation/index.html.

In most states, the State Energy Office actively promotes ESPC projects, and can offer local governments technical assistance in developing a local ESPC program or project. Examples of technical assistance include training in ESPC program organization and implementation and lists of ESCOs that have been pre-qualified for participation in ESPC programs. Details on ESPC programs in a number of states can be found at the following URL:  http://www.energyservicescoalition.org/resources/   Please see the following URL for a list of State Energy Office contacts: http://www.naseo.org/members/states/default.aspx.

A state or local government financing program can best interact with ESPC projects by leveraging its funds to offer incremental financing that will either accelerate project development and implementation or expand the scope of ESPC projects; these funds can be matched 3 or 4 or 5 to 1 by funds from other sources. One way to accelerate project development is to offer a limited pool of funds on a first-come, first-served basis. Expanding the scope of projects involves providing incremental project financing so that one or more long-payback technologies, such as boiler replacements or photovoltaic systems, can be added to a project.

Advantages Disadvantages

+ Reduces risk for commercial and MUSH market customers
+ Enables comprehensive retrofits
+ 30 year track record; standard contracts and processes developed
+ Can easily be combined with other incentive programs to enhance the value of the project.
+ Lends itself to rigorous monitoring & verification; can provide opportunities for critical data collection

— Process requires the active engagement of the client's staff
— Difficult to standardize financing for resale into secondary markets

Resources

Past Webcast Presentations

Below are presentations from previous Webcasts. The presentations are available as Adobe Acrobat PDFs. The audio files are available as MP3 files. Download Windows Media Player.

Webcast Date Presentation Audio Transcript
Energy Saving Performance Contracting Program Implementation 01/21/10 (PDF 410 KB)    
Basics of Energy Saving Performance Contracting 01/14/10 (PDF 251 KB) (MP3 69.6 MB) (Text)
EECBG Creating Liquidity for Energy Efficiency Loans in Secondary Markets 1/22/10   (65.5MB) (Text)

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