Energy Savings Performance Contracts

An Energy Savings Performance Contract (ESPC) is a partnership between a system owner and an Energy Services Company (ESCO). The ESCO conducts a comprehensive energy audit for the facility under consideration and identifies improvements to save energy. In consultation with the owner, the ESCO designs and constructs a project that meets the organization's needs and in many cases arranges the necessary funding. The ESCO guarantees that the improvements will generate energy cost savings sufficient to pay for the project over the term of the contract. After the contract ends, all additional cost savings accrue to the organization.

Most ESPC projects include maintenance of all or some portion of the new equipment over the life of the contract, the cost of which is folded into the overall project. As an additional service, the ESCO usually provides any specialized training needed, so that the customer's maintenance staff can take over this duty at the end of the contract period. Benefits of ESPCs include access to private-sector expertise, built-in incentives for maximizing performance and minimizing maintenance, design flexibility, and guaranteed performance.

Many states have legislation affecting how these services are provided. Find performance contracting information by state.

Services

Types of services provided through an ESPC can be highly variable, depending on the provider. Some larger companies may focus on larger jobs and have all the necessary technical and financial staff on hand to complete the work. Some smaller companies (e.g., energy consultants) may only provide energy audit services. Typical services provided by an ESCO include:

  • Developing, designing, and arranging financing for energy efficiency projects;
  • Installing and maintaining the energy-efficient equipment involved;
  • Measuring, monitoring, and verifying the project's energy savings; and
  • Assuming the risk that the project will save the guaranteed amount of energy.

An ESCO contract "can provide or obtain project financing, operate and maintain the energy equipment and guarantee the energy savings and performance of the equipment", according to the guide How to Hire an Energy Services Company by the California Energy Commission. "If your organization knows what services are needed but lacks staff time or experience, hiring an ESCO could provide the expertise needed to complete your project."

An ESPC Sample Streetlight Project provides an example of the typical detail that might be presented by an ESCO for a customer to use in a cost/benefit analysis.

Global Management Performance Contracts

Global management performance contracts (GMPCs) are a relatively new subset of ESPCs that function similarly, performing similar services but offering some new options for street lighting. One distinct difference is that a GMPC can maintain the new equipment, as well as any existing street lighting equipment remaining within the system following a retrofit (for example, historic or decorative fixtures not included in the replacement). Additionally, in this form of contract the ESCO likely provides the financing of on-going costs, carrying all credit and performance risks and using the existing O&M costs as a baseline.

This model does not rely on the owner's borrowing power in the process of funding the replacement. The contractor initially funds the labor and equipment upgrades similar to a typical public works contract, using the contractor's own economic assets. Asset management payment is then made, based on bid item cost and time elapsed (e.g., per month or per year). All improvements become property of the system owner immediately following their installation and inspection.

The global management model assumes that an organization is fully funding its current street lighting system through existing O&M budgets, demonstrating that there are enough funds available to upgrade a system to the latest energy-efficient technology. The job of the ESCO is to leverage these funds into reducing energy and O&M inefficiencies.

The contractor commits to reducing the total cost of ownership of a street lighting system by combining energy conservation and maintenance efficiencies, while improving the level of service to a community. The system owner turns complete operation and maintenance of the lighting system (the assets) over to the contractor for the contracted period (usually no less than a lamping cycle for the incumbent technology). Like a standard maintenance contract, the contractor ensures performance of all routine and/or emergency maintenance that was previously performed by the owner or other contract resources. The contract may also encompass system reliability measures similar to or better than previously met (e.g., no more than X streetlights out at any given time, or any reported outage fixed within Y days, etc.). Unlike a maintenance contract, however, a GMPC also replaces some or all of the existing streetlight equipment with new, more-efficient technology.

Advantages

  • Risk transfer and performance guarantee – The system owner transfers all technical, operational, and financial risks to the contractor for the life of the contract.
  • Technical knowledge and expertise – The contractor is responsible for identifying the greener, safer, smarter products (i.e., the latest LED fixtures, adaptive controls systems, etc.) and services, and integrating them into a comprehensive solution for the system owner.
  • Transparency and control – The contractor implements the necessary products and processes to achieve the agreed-upon result, proceeding only with the owner's explicit approval. (Note: The owner therefore needs to decide ahead of time how much say s/he wants in evaluating/approving illumination performance, estimated life, and product warrantees.)
  • Favorable financial incentives – The GMPC approach does not impact the borrowing capacity of the system owner. The contractor commits to a fixed annual cost, at current or lower levels than the baseline O&M budget. The contractor must meet its O&M and energy savings goals throughout the duration of the contract to successfully amortize its initial investments in labor and capital.
  • Expedited implementation – As the contractor makes its profit from retaining a portion of the savings, a direct incentive exists to pursue upgrades as early as possible in the contract period.
  • Technical and urban planning – The contractor starts with an assessment of the current inventory, O&M programs, and electricity consumption, and can incorporate an understanding of city landscape and urban priorities as necessary.

Considerations

  • System Ownership – The jurisdiction having authority over lighting (i.e., a city, county, state, or university) needs to own the streetlights to be able to employ a global management model. (Note: Agencies considering the merits of such an asset purchase or transfer should understand that it may or may not be well received by the present owner, and could incur additional unanticipated costs.)
  • Existing Maintenance Practices and Labor Structure – The owner needs to assess existing labor structures to determine their actual ability to assign O&M and capital upgrade responsibilities to a new contractor. Note that the fewer components assigned to the contractor under this model, the smaller the potential savings.
  • System Size – The fewer lights, the smaller the savings to be realized, due to efficiencies of scale and purchasing power. For example, a system with fewer than 2,000 streetlights may fetch a less attractive global management proposal. (Note: The limitations of smaller systems can be potentially overcome by aggregating owners into representative organizations or alliances.)
  • Procurement and Contracting Structure – Some organizations' procurement practices are required to follow short-term contracting procedures that result in annual requests to identify the lowest bid contracts. This may limit the ability to employ a GMPC approach.