Lower Interest Rates Reduce Average Super ESPC Payments by Agencies

August 28, 2007

Figure 1. The total interest rates ("project interest rate") for all awarded Super ESPC projects are shown in the upper clusters of data points on the graph. The lower data points show the index rates — interest rates on U.S. Treasury Securities for terms corresponding to the represented projects ("like-term Treasury rate"). The difference between the index and total interest rates represents the premiums added by the lenders.

The data on Department of Energy's Super energy savings performance contract (ESPC) projects as of April 2007 shows significant change in some average project characteristics and constancy in others. The averages and trends discussed here are based on data from the financial schedules of all awarded Super ESPCs. We draw a number of comparisons between two sets of projects: (1) projects awarded from program inception in FY 1998 through FY 2004, before the 2004 modifications in the Super ESPC contract went into effect (including six project modifications implemented during the temporary lapse in federal ESPC authority) and (2) projects awarded from FY 2005 through April 2007, after the contract modifications went into effect and federal ESPC authority was restored.

Financing Costs Reduced Significantly

After 2004, Super ESPC energy service companies (ESCOs) were required to obtain competitive financing offers for Super ESPC delivery orders. Since then, as shown by the graph below, lenders' premiums on Super ESPC projects have dropped by more than 50 percent.

During 1998 through FY 2004, ESPC customers paid average premiums of 242 basis points (bp) and total interest rates averaged 7.63 percent. After competition was implemented, from FY 2005 through April 2007, premiums averaged 116 bp and total interest rates averaged 5.96 percent.

Figure 2. Averages for the set of 125 projects awarded before competition in Super ESPC financing was required and the set of 31 projects awarded after the reforms were implemented. The amount of Super ESPC payments going toward project investment (or implementation price, including one-time payments); financing costs (interest and financing procurement price); and performance-period services, including measurement and verification (M&V), in the average project for each set. Percentages of total payments over term are shown in the chart at left; dollar amounts (thousand) at right.

What to Expect for Project Interest Rates

An estimate of the interest rate that can be expected for ESPC projects in development can be based on the trend illustrated above. The rule of thumb: take the yield of a 20-year constant maturity Treasury Security and add 116 basis points. For example, if the yield of a 20-year T-bill is 4.5 percent, the project interest rate should probably be in the neighborhood of 4.5 + 1.16, or 5.66 percent.

More Project, Less Finance Cost

Reduced financing costs allow for increases in project scope and services. The figures below compare the percentages and dollars respectively going to project investment, financing costs, and performance-period services in the average Super ESPC project before and after competition in financing was required.

Project Term

Although the average project size has increased, average project term has changed very little, from 17.36 years before FY 2004 to 17.51 years after 2004.

A More Detailed View

Figures 3 and 4 give a more detailed view of the "cost stack" for Super ESPC projects.

Better Interest Rates Reduce Average Super ESPC Payments by 16 Percent

Premiums in Super ESPC interest rates have decreased by 50 percent since the requirements for competition and transparency in Super ESPC financing were incorporated into the contracts. The decrease in interest rates has lowered agencies' total payments for their projects by 16 percent, based on the average Super ESPC project.

For more information, please contact Erica Atkin, Oak Ridge National Laboratory, at 865-574-4829.


Figure 3. Breakdown of costs paid on the average Super ESPC project, based on 31 projects awarded after competition in financing was required and after the federal ESPC authority was reinstated. Average sum of payments over term is $19.1 million.

Figure 4. Breakdown of costs paid on the average Super ESPC project, based on 125 projects awarded before competition in financing was required and before the federal ESPC authority lapsed. Average sum of payments over term is $11.19 million.

Figure 5. This figure represents two versions of the average Super ESPC project with a project investment (or implementation price) of $5.50 million. Before competition and transparency were required, financing-related costs were $4.77 million, as compared to $3.19 million after the reforms were implemented. Payments for performance-period services are greater for the project before reforms because the term is longer and ESCO services are delivered for a longer period. The average project is based on all Super ESPC awards as of April 2007.