How Energy Savings Performance Contracts can pay for your client’s energy efficiency upgrades

ESPC financing

As part of our Energy Efficiency Loan Program, we’re exploring 8 ways businesses, nonprofits, and local governments can pay for energy efficiency improvement projects. In this article, we’re discussing how to use Energy Savings Performance Contracts to pay for energy upgrades.

Energy Savings Performance Contracts  or ”ESPCs,” also called “Performance Contracting,” allow a customer to pay for today’s energy efficient upgrades with tomorrow’s energy savings. An ESPC is a budget-neutral approach to energy efficient upgrade in which the customer enters a contract with an energy service company, or “ESCO,” and the energy savings generated from the new equipment is what pays for the installation and equipment over time.

Performance contracting is often a cost- and time-effective way to pay for facility upgrades. Here’s how the ESPC process works:

  • The business, nonprofit, or public agency (the “client”) decides to pursue energy or water-saving equipment upgrades and vets different Energy Service Companies (“ESCOs”) to find the best partner.
  • The client issues a contract to the ESCO to perform an energy audit and identify ECMs (Energy Conservation Measure) on the property. The ESCO will itemize the cost and savings for all proposed measures and any possible bundling of multiple projects.
  • The client and ESCO negotiate their contract and financing mechanism, and the ESCO implements the agreed-upon projects. The contract will include a measurement and verification component to ensure the equipment is performing as specified, which the ESCO is responsible for measuring.

Energy Performance Contracts eliminate project risk from the decision of the company or local government investing in the project. Financing for these projects, whether from the ESCO or a third-party financial institution, often have terms that allow the proposed energy savings to exceed the payments of the financing. This structure creates a cash flow positive investment by the client when payments are less than savings, but the payments are still defined by the Energy Performance Contract or the financing mechanism with the 3rd party financial institution.

The financing mechanism for an Energy Performance Contract can be a lease or a loan, therefore, ownership of the equipment will vary depending on the type of financing structure.

For more information on Energy Savings Performance Contracts, visit energy.gov. If you’re interested in an energy efficiency loan with our 2% rate, please contact me to discuss details!

Stay tuned for more ways you and your clients can afford energy efficient upgrades and

Energy Blog post by Brandon EnglandBrandon England
Director – Energy Efficiency
Brandon.England@pathwaylending.org
(615) 425-7192
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Next in our series will be an overview of Energy Performance Contracts. In the meantime, visit our Energy Efficiency Resources page for our four-step process to start an energy project.

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