An energy savings performance contract energy sales agreement (ESPC ESA) is a project structure, similar to a power purchase agreement, that uses the multiyear ESPC authority to implement distributed energy projects—referred to as ESA energy conservation measures (ECMs)—on federal buildings or land. The ESA ECM is initially privately owned for tax incentive purposes, and the federal agency purchases the electricity it produces with guaranteed cost savings. An ESPC can be used for the acquisition of utility services per 48 CFR § 41.102(b)(7) (2015).
Benefits of ESPC ESAs
- ESPC ESAs do not require any upfront capital from a federal agency for the ESA ECM.
- ESPC ESAs provide guaranteed cost savings, and a federal agency only pays for the electricity that is generated, minimizing federal risk.
- The energy service company (ESCO) may be able to take advantage of federal and other tax incentives and can sell the renewable energy certificates generated by the ESA ECM to reduce the ESPC ESA price.
- The ESCO is responsible for ESA ECM operations and maintenance, and for equipment repair and replacement, which also reduces federal risk.
ESPC ESA Contract Vehicle Options
ESPC ESA Requirements
ESPC Authority Requirements: The ESPC ESA must meet all ESPC legal requirements (see 42 U.S.C. § 8287, et seq.), including the requirement that the agency pay for the cost of the ESPC ESA from the energy cost savings generated each year over the life of the contract. The ESCO must be on the U.S. Department of Energy's (DOE) Qualified List of ESCOs or an agency’s list of qualified contractors prior to contract award.
Office of Management and Budget (OMB) Requirements: In order for the ESPC ESA contract to be scored annually, it must be consistent with the requirements under OMB Memo M-12-21, “Addendum to OMB Memorandum M-98-13 on Federal Use of Energy Savings Performance Contracts (ESPCs) and Utility Energy Service Contracts (UESCs),” including the requirement that the federal government retain title to on-site energy generation by the end of the contract.
Tax Incentive Requirements: The ESCO may be eligible for tax incentives such as the federal Investment Tax Credit and the Modified Accelerated Cost Recovery System. The Internal Revenue Service Revenue Procedure 2017-19, published in Internal Revenue Bulletin 2017-7, provides a safe harbor under which the IRS will not challenge the treatment of an ESPC ESA as a service contract under 26 U.S.C. § 7701(e)(3). Section 4 specifies safe harbor requirements, including a maximum contract length of 20 years. Section 5 contains details regarding an example ESPC ESA project. Tax incentive eligibility due diligence is the responsibility of the ESCO, not the government.