Performance Contracting and Energy Service Agreements

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On this page:

• Examples from the Field
• Program Characteristics
• Reaching Underserved Communities and Addressing Consumer Protections
• Roles and Responsibilities
• Getting Started

Energy savings performance contracting, a financing technique typically used for energy efficiency projects in non-residential buildings, is designed to deliver energy savings that are at least equal to the amount of the payments needed to finance the improvement(s). This option typically involves.

• A comprehensive building energy audit.
• A financial analysis of upgrade options.
• An arrangement of project financing.
• The installation of building upgrades.
• Post-installation performance monitoring.
• Post-installation equipment maintenance.
• The use of a “shared savings” or similar model between the contractor and the customer.

Energy savings performance contracts (ESPCs) guarantee some level of energy savings for the customer. They are offered by energy services companies (ESCOs), which are commercial businesses or nonprofits that provide a range of energy solutions, including design and implementation of energy-saving projects. Customers typically arrange financing through a third party, but often the ESCO helps arrange financing for the project. ESPCs are mostly used in government and nonprofit entities in the “MUSH sector”—municipal and state governments, universities and colleges, K-12 schools, and hospitals—because that sector often has a limited budget for capital projects.

A customer and financing provider may also enter into an energy service agreement (ESA), whereby the provider delivers energy-saving services through equipment it owns and operates. Customers pay a fee for services in relation to these energy savings, but ESAs do not always have an underlying performance guarantee. ESAs do not appear on customer balance sheets as liabilities, in contrast to other structures (e.g., power purchase agreements and ESPCs) that may need to be disclosed on their balance sheet, which may be preferable to some companies.¹ ESAs are typically designed for companies and institutions. Few programs are designed to reach the residential sector. ESAs are generally not used in the MUSH sector because municipal debt has a lower cost of capital than that of an ESA provider, so it is cheaper for MUSH entities to finance projects themselves.

The ESA provider may also pay the customer’s utility bills directly, keeping the difference between the actual bill and the estimated average bill amounts. Payments are made over a contracted period (e.g., 15 years). Customers can use these agreements to finance renewable energy and efficiency projects with no upfront cost, while minimizing the risk of energy price increases.

Performance contracting programs generally share the following key features:

• They are arrangements whereby a customer owns the equipment installed by the ESCO to achieve a pre-specified amount of savings.
• They stipulate that an ESCO will monitor, verify, maintain, and repair the equipment for the contracted period to achieve the specified savings.
• They guarantee an amount of energy savings that the customer will achieve over the contract term. If the guaranteed amount of savings is not achieved, the company will pay the customer the difference.
• They are typically for larger projects (e.g., > $1 million) and for contract terms between 10 and 20 years.

ESAs generally share the following key features:

• They are off-balance sheet contracts between a customer and the financing provider, whereby the provider delivers energy-saving services to the customer at a negotiated rate using equipment the service provider owns.
• They frequently specify the customer’s payment in a fixed, kilowatt-hour rate.
• They can be used for large or small projects, and typically have shorter contract terms (e.g., 5–15 years).

Performance contracting programs may be administered by the following entities:

• ESCOs work frequently with public entities (e.g., school systems) to create an ESPC that will provide energy savings at an agreed-upon rate. Frequently, ESCOs help identify and finance clean energy technologies, allowing energy consumers to pay off these investments over time through projected energy savings.
• State governments often develop frameworks and guidelines for ESPCs to reduce the energy consumption of state-owned facilities. State governments may also advertise the use of ESPCs or ESAs to large energy customers in the state.
• Local governments can use ESPC, ESA financial arrangements, or both to lower energy use for city-owned buildings. Like states, local governments may also market the use of ESPCs to large energy consumers within the municipality.

Examples from the Field

Oregon’s Energy Savings Performance Contracting Program

• The Oregon Department of Energy published an ESPC guidebook for state agencies that considering using this form of contracting for state-owned buildings.²
• The Department provides additional resources for state agencies, including a list of pre-qualified service companies and an Energy Use Index Calculator.³

Fort Worth Partner-Ally Network

• Through improvements to city-owned buildings, Fort Worth estimated saving $65 million through 2022.
• The city selected an ESCO to implement nine ESPC projects.
• From 2003 to 2014, the city invested $69 million in ESPC projects through a combination of bonds, state loans, grants, trust funds, and capital funds; and estimates an 11-year payback period.⁴

Rockford Housing Authority

• The Rockford Housing Authority (RHA) is a public housing authority in Rockford, Illinois.
• RHA owns and manages over 1,900 public housing units, 75 percent of which were built before 1970.
• The Authority implemented a $7.5 million, 15-year ESPC to conduct an energy audit and implement energy efficiency measures at eight multifamily properties.
• RHA’s ESPC reduced energy costs by over $100,000 per year through the implementation of energy efficiency upgrades. On average, the buildings are achieving 13 percent in cost savings.⁵

Program Characteristics

Here are the typical characteristics of performance contracting.

Program types	Energy savings performance contracting and ESA
Target sectors	Commercial; Industrial; Public; Nonprofit; Residential: Multifamily
Potential funding sources	Private lender
Security required of borrower	Often a Unified Commercial Code Filing on the financed equipment
Repayment mechanism	Monthly loan payment to the ESCO or financial institution and shared savings.
Funding needs	Typically, sponsors provide a low level of funding to make the program successful for a large number of participants
Enabling legislation requirement	May be required

Reaching Underserved Communities and Addressing Consumer Protections

When developing a financial program to overcome upfront cost barriers, considering the needs of underserved communities early in the process can help decisionmakers create a comprehensive program and incorporate consumer protections. Decisionmakers can evaluate how and to what extent marginalized communities and considerations of equity have been included in the policymaking process for developing a program by considering the following questions:⁶

• Have marginalized communities, consumer protection organizations, and organizations serving marginalized communities participated meaningfully in the policymaking process?
• Does the policy help address the impacts of inequality or inequity, or does it widen existing disparities?
• What are the barriers to more equitable outcomes?
• How will the policy increase or decrease economic, social, and health benefits for marginalized communities?
• Does the policy make energy more accessible and affordable to marginalized communities?

Underserved communities may benefit from ESPCs if nonprofits, schools, hospitals, and municipal and multifamily buildings that serve these communities use performance contracts and service agreements with performance guarantees to improve energy usage and resolve deferred maintenance.

Roles and Responsibilities

Third parties, such as ESPC and ESA providers, play a significant role in the implementation of performance contracting. ESPC and ESA providers can coordinate with energy customers (e.g., local governments), audit existing energy use, identify strategies to reduce energy consumption, and provide upfront funding for energy-saving technologies identified by the audit.

State governments can develop legislative frameworks that enable or codify ESPCs and ESAs, focusing on the requirements for public entities regarding procurement, contracting, and budgeting. State governments can review the rules and standards for ESPCs and ESAs, establish goals for energy savings, and adopt legislation to amend statewide requirements. State governments may also use ESPCs or ESAs to improve the operation of state-owned facilities. Finally, state governments can pre-qualify and advertise ESPC and ESA options, particularly to large energy consumers in the state, both public and private.

Local governments can work with ESCOs to reduce the energy consumption of government-owned buildings. Local governments may also play a role in establishing goals for energy savings and marketing the availability of ESPC and ESA services, especially to public- and private-sector entities with significant energy consumption.

Although utilities typically play a more limited role in the implementation and operations of ESPCs and ESAs, they can help make commercial and industrial entities aware of these options.

Getting Started

State and local governments should consider these steps and best practices during the design, approval, and management of an ESPC or ESA financing program:

• Identify experienced financing providers with a good history with ESPC or ESA projects to reduce risks for customers and create an action plan to develop provider interest in offering ESPCs or ESAs in your state or community. Consider developing a list of pre-qualified service providers.
• Engage with key stakeholders to assess existing baselines, establish goals, and inform the development of ESPC and ESA programs.
• Review and establish fair performance forecasting and contracting terms to improve the reliability of savings expectations for customers.
• Determine outreach and communications approaches to capture potential customers, including underserved communities, and the time and resources to ensure they are aware of the program.
• Describe the program’s potential economic and environmental benefits to the local, regional, or statewide area, depending on ESPC or ESA volume.
• When using ESPCs or ESAs for government projects, develop detailed analyses of existing and potential energy consumption levels to accurately measure project performance.

References and Footnotes

¹ Nadel, Steven. 2019, February 12. Energy Service Agreements: Potential Big Kid in Town? American Council for an Energy-Efficient Economy.

² Oregon Department of Energy. 2016, February. Energy Savings Performance Contracting: A Guide for Oregon State Agencies.

³ Oregon Department of Energy. n.d. Energy Use Index Calculator.

⁴ U.S. Department of Energy. n.d. Better Buildings Challenge: Fort Worth Resource Conservation Program Summary.

⁵ U.S. Department of Energy. 2021. Rockford Housing Authority’s Use of Energy Performance Contracting for Quality Affordable Housing.

⁶ Governments, agencies, and nonprofits have developed equity lenses and frameworks to ensure that issues of race and equity are incorporated throughout policy-making processes. These questions draw from the following frameworks: Institute for Energy Justice, “Section 2 – Energy Justice Scorecard”; City of Seattle, “Racial Equity Toolkit”; and Higher Education Coordinating Commission, “Oregon Equity Lens.”