Energy service companies (ESCOs) develop, install, and fund projects designed to improve energy efficiency and reduce operation and maintenance costs in their customers' facilities. ESCOs generally act as project developers for a wide range of tasks and assume the technical and performance risk associated with the project.
ESCOs are set apart from other firms that offer energy-efficiency improvements by performance-based contracting. When an ESCO undertakes a project, the company's compensation is directly linked to the cost savings from energy actually saved.
The comprehensive energy-efficiency retrofits inherent in energy service company projects typically require a large initial capital investment and may have a relatively long payback period. Debt payments are tied to the energy savings guaranteed for the project, so the facility pays for the capital improvement with the money saved by the project—the difference between pre-installation and post-installation energy use and other related costs.
There are two types of energy service companies: