Financing: Energy Savings Performance Contracting

Energy savings performance contracting helps facilities address the #1 barrier to energy efficiency: capital availability.

SEDAC has helped over 2,200 facilities identify and implement energy efficiency measures, generating monetary savings of over $21 million annually. Based on this experience, SEDAC estimates that most public sector facilities can reduce energy consumption by about 25 percent through cost-effective efficiency improvements, leading to substantial cost savings.

In spite of the compelling economic advantages of energy efficiency, many public sector facilities fail to adopt energy efficiency measures. A recent study by Johnson Controls identified “capital availability” as the “top barrier to capturing energy savings potential,” ranking twice as high as any other factor. Many facilities, particularly within state and local government, are severely constrained for capital and are unable to invest in efficiency measures, regardless of the attractive financial benefits.

Economic constraints are formidable, but recent innovations in contracting and financing practices have enabled some organizations to implement the needed efficiency measures while staying within their annual budget limits. Energy Savings Performance Contracting (ESPC) is an innovative budget-neutral approach to financing efficiency projects.

ESPC enables owners to implement cost-saving projects now, without dipping into their capital budgets. The resulting cost savings pay for efficiency projects over time. The figure to the right demonstrates how ESPC can be used to finance improvements. Projected annual savings from the projects are guaranteed to meet finance payments and any other project costs.

ESPC Candidates and Process

Ideal candidates for ESPC include any large building or group of buildings such as city, county, and state buildings; schools; hospitals; commercial office buildings; and multifamily buildings. Measures financed through ESPC commonly include a variety of improvements, such as:

  • Lighting equipment replacements
  • Building automation system upgrades
  • Boiler and chiller replacements
  • Renewable energy systems
  • Central plant improvements
  • Traffic and street lighting systems
  • Energy management services
  • Deferred maintenance measures

Energy Service Company

An ESPC is developed and implemented with the assistance of an Energy Service Company (ESCO). This company can provide various combinations of the following services needed for an effective ESPC:

  • A preliminary energy assessment to identify and
    evaluate project opportunities
  • An investment grade audit and full energy service
  • Access to project financing
  • Energy project implementation: design, commissioning, installation, construction
  • Staff member training and ongoing maintenance
  • Energy savings verification

Each of these services comes with a cost that is incorporated into the overall project financing. Customers can choose to address some of these services internally instead of contracting with the energy service company. In a common scenario, the ESCO establishes a fixed cost for a project and guarantees that the energy cost savings will meet or exceed the costs of the project. The ESCO also may carry the risk of potential utility rate increases, variability in weather, or other unknowns, and reimburse the client if there is a shortfall in energy savings.

ESPC in Action

The University of Illinois is undertaking a set of 5 ESPCs at College of Engineering Facilities that will guarantee more than $41 million in cost avoidance over the next 20 years and reduce the campus deferred maintenance backlog by $25 million. You can read more about their ESPCs here.

The City of Urbana has recently begun the process of securing an ESPC. In early 2017, they submitted a request for proposals and have selected an ESCO to implement. Independent advice, offered by SEDAC in 2016, was crucial as they developed the RFP and worked through legal and strategy concerns. Scott Tess, Environmental Sustainability Manager, writes that the City is pursuing ESPC to:

  • Get work done without dipping into capital budget
  • Leverage future energy savings to pay for current projects
  • Catch up on backlog of maintenance and avoid emergency replacements
  • Avoid multiple design and build procurements
  • Increase energy efficiency

A Typical ESPC Process

Step 1: An organization identifies facilities, projects, or energy systems that could benefit from improved energy performance.
Step 2: The organization issues a request for proposals to energy service companies (ESCOs) to recommend ways to improve energy performance.
Step 3: ESCOs submit proposals to compete for the ESPC. This may involve a site visit and detailed energy audit with a list of energy reduction measures, their costs, and the return on investment.
Step 4: The organization reviews each proposal and conducts interviews to select an ESCO to carry out the ESPC.
Step 5: The selected ESCO completes an Investment Grade Audit to identify the energy conservation measures to be implemented.
Step 6: Once the conditions of the project are selected and agreed upon, a formal contract is made.
Step 7: The ESCO executes the implementation of the agreed-upon energy conservation measures.
Step 8: The facility works with the ESCO to verify energy savings from the energy conservation measures and to make sure payback is on track.