Energy-Saving Performance Contracts

As energy costs continue to escalate, cash-strapped government agencies are looking for ways to update their old electrical systems. The problem, however, is that many are unable to pay for upgrades. Enter energy-savings performance contracts (ESPCs), a third-party system that aids in the assessment of energy usage and equipment installation.

ESPCs are when a private entity audits, designs, installs, maintains and finances energy conservation projects for government entities. The federal government initially used ESPCs to improve energy efficiency in poor areas.

The concept caught on with other entities such as state and local governments and schools, all of which have budgetary constraints. For many, ESPCs are the only way to fast track an upgrade.

The third-party system an ESPC uses is called an energy service company (ESC0). The ESCO essentially recoups money for the cost of the equipment through the savings that the end-user realizes through the newly installed system.

This allows ESPCs to be a financing mechanism, because those who cannot outright afford energy-efficiency measures can do so using different mechanisms.

Different types of ESPCs

There are two kinds of ESPCs: a guaranteed and a shared savings. The guaranteed savings contract is when the ESCO promises the end-user that a certain amount of savings will occur. The ESCO only receives payment if that promise is upheld.

In a shared savings scenario, the ESCO and the end-user split the savings between each other. The ESCO’s portion goes toward paying down the costs associated with the ESPC. If, for instance, the end-user realized a $100 savings on his or her energy bill, the ESCO would receive $50.

“ESPCs can be a great resource for customers who cannot pay for energy improvements upfront, who want assurances that a project will save energy, or who prefer a long-term service contract over traditional financing,” said Joe Loper, vice president of the Alliance to Save Energy.

There are drawbacks, however. “They can be complicated, and energy services companies will, like any other business, charge for any financing, guarantees and other services they provide. ESPCs are not free or even cheap. But they are better than doing nothing; they can save customers money and reduce air pollution,” Loper said.

Contractor considerations

Many contractors may wonder where they would fit into the ESPCs. The simple answer is that ESCOs do not actually do the installation work.

More often than not, they subcontract that work out to electrical contractors. The other potential area of benefit to contractors is that as part of the ESPC, the ESCO is also responsible for the maintenance of the newly installed systems as well. This could translate into installation and maintenance opportunities for contractors.

Contractors may not need to know all of the intricacies associated with ESCOs per se, but understanding them could lead to more business in the long run.

Take for instance a contractor who has a school district as a customer. Through routine dealings with the school, the contractor learns that upgrading the electrical system would result in lower energy usage. Mentioning the benefits associated with an ESPC may start the ball rolling, and having established some preliminary relationships with a few ESCOs could help things along even further.

It may sound a bit unusual, but extra business is extra business and, in today’s competitive marketplace, being creative can be profitable. EC

STONG-MICHAS, a freelance writer, lives in central Pennsylvania. She can be reached at



About the Author

Jennifer Leah Stong-Michas

Freelance Writer
Jennifer Leah Stong-Michas is a freelance writer who lives in central Pennsylvania.

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