What is an ESPC ESA?
An energy savings performance contract energy sales agreement—known as an ESPC ESA or ESPC with an ESA—is a project structure, similar to a power purchase agreement (PPA), that uses the multiyear ESPC authority to implement distributed energy projects on federal buildings or land. These distributed energy projects, referred to as ESA energy conservation measures (ECMs), are initially privately owned by the energy service company (ESCO) with which the federal agency has contracted, while the federal agency purchases all electricity generated by the system.
Who should I contact to get started on an ESPC ESA project?
U.S. Department of Energy (DOE) Federal Energy Management Program (FEMP) ESPC ESA Program Lead Rachel Shepherd at 202-586-9209 can help you get started. You can also contact your region's federal project executive. Visit the FEMP Assistance Request Portal to inquire about technical assistance for distributed energy projects.
Where are some key resources that will help me better understand ESPC ESAs?
Additional key resources that are helpful to better understand ESPC ESAs include:
- The ESPC ESA web section, which includes information and links to the following resources:
- A fact sheet providing a description of the ESPC ESA project structure, recommendations, and further resources for federal agencies
- Case studies, including successful ESPC ESA projects, at National Institute of Standards and Technology and U.S. Drug Enforcement Administration facilities
- Descriptions of contract vehicle options and associated resources/templates, including:
- DOE indefinite-delivery, indefinite-quantity (IDIQ), a streamlined master contract that allows federal agencies to work with 21 DOE-qualified ESCOs holding the current DOE ESPC IDIQ.
- DOE ESPC ENABLE, a standardized and streamlined procurement process to implement basic ECMs under an ESPC with one of more than 20 DOE-qualified ESCOs on the General Services Administration Supply Schedule SIN 334512.
- Site-Specific/Stand-Alone Contract Vehicle, resources for selecting a DOE-qualified ESCO through a request for proposal process.
- Comparison table of ESPC ESA project contract vehicles
- ESPC ESA Toolkit for projects implemented using the site-specific/stand-alone contract vehicle, including editable templates to download
- ESPC ESA recorded webinars hosted by FEMP are available on demand, along with announcements for future ESPC ESA-related webinars.
Why should my federal agency consider using an ESPC ESA?
A federal agency should consider an ESPC ESA if they:
- Are interested in a cost-effective, on-site distributed energy ECM
- Have limited long-term contracting authority options
- Lack upfront capital for a project and would like to benefit from tax incentives
- Would like to enhance site resilience (if configured to operate during a grid outage)
- Would like to secure a predictable price for a portion of their electric load
- Want to outsource operations and maintenance (O&M) and repair and replacement responsibilities (services that are provided by the ESCO during the ESPC ESA contract period).
What requirements does an ESPC ESA have to meet?
An ESPC ESA must meet all ESPC legal requirements (see 42 U.S.C. § 8287, et seq.), including the requirement that the federal 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 DOE Qualified List of ESCOs or an agency’s list of qualified contractors prior to contract award. Other unique requirements and considerations include:
- Office of Management and Budget (OMB) Memorandum 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),” which includes a title retention requirement for annual scoring
- Internal Revenue Service (IRS) Internal Revenue Bulletin 2017-7, which includes Revenue Procedure 2017-19, providing an ESPC ESA Safe Harbor (for tax incentive eligibility). Note that due diligence regarding investment tax credit (ITC) eligibility is the ESCO’s responsibility.
How does an ESPC ESA differ from a "traditional" energy savings performance contract?
Important differences between ESPC ESAs and ESPCs include:
- Payment is based on kWh generation and a price of energy (¢/kWh).
- The ESA ECM is privately owned during the ESPC ESA term to capture tax credits and reduce the ESA ECM price.
- While the ESPC authority allows a 25-year contract, IRS Revenue Procedure 2017-19 limits an ESPC ESA to 20 years.
- Since the ESA ECM price must be lower than the utility rate, the federal agency begins accruing savings as soon as the ESA ECM becomes operational.
Can ESA ECMs be bundled with traditional ESPC ECMs?
Yes, ESA ECMs can be bundled with traditional ESPC ECMs, although this can add to the complexity of the project. One example is the U.S. Drug Enforcement Administration's ESPC project in El Paso, Texas, which bundled a 2.5-MW photovoltaic (PV) ESA ECM with energy efficient lighting and water measures. The ESA ECM is privately owned during the contract term and the other ECMs would typically be government-owned. The site-specific/stand-alone contract vehicle is not recommended for a bundled project.
How does an ESPC ESA differ from an on-site PPA?
While similar to a PPA, an ESPC ESA differs because it uses the ESPC authority. Cost savings and all other ESPC authority requirements must be met, and there are other unique requirements and considerations (see "What requirements does an ESPC ESA have to meet?" above for additional information).
Presently, there are limited civilian agency options and authorities for PPAs. Contact DOE FEMP for more details (See "Who should I contact to get started on an ESPC ESA project?" above).
Can I do an ESPC ESA in my state?
Some states and utility service territories do not allow an entity other than the serving utility to sell electricity to retail customers. In some states, the third party/private developer would be subject to public utility commission regulations, which are a barrier to PPA-type arrangements such as ESPC ESAs. As of June 2019, 28 states, as well as the District of Columbia and Puerto Rico, authorize or allow for third-party PPAs for solar PV. These rules apply to ESPC ESAs as well. To check your state’s status, see "Third-Party Solar Power Purchase Agreement Policies" on the Database of State Incentives for Renewables and Efficiency (DSIRE) Detailed Summary Maps.
DSIRE information should be used as a starting point only. Contact your utility and/or the state public utility commission for additional information. Note that public utilities (such as municipalities) may have different rules than investor-owned utilities, that these rules may change, and that contract structure modifications may be possible to accommodate state/utility regulations. DOE FEMP is available to provide assistance (See "Who should I contact to get started on an ESPC ESA project?" above).
Is there any urgency to implementing an ESPC ESA project?
ITCs for solar PV will decline from 30% to 10% by 2022. The sooner federal agencies start a project, the higher the tax credit will be to benefit their project. Keep in mind that the ITC amount is based on the "commence construction" year (not the project operational date). For more information regarding the "commence construction" year and other ITC requirements, refer to IRS Notice 2018-59 and the fact sheet on Investment Tax Credit Requirements for Privately Owned Solar Photovoltaic Systems on Federal Sites. The ITC is available for other technologies, although the amount varies. See the DSIRE Business Energy Investment Tax Credit (ITC) Program Overview for additional details.
What are the respective responsibilities of the ESCO and the federal agency throughout the contract term?
During the contract term, the ESA ECM is privately owned by the ESCO, and they are responsible for performing O&M and equipment repair and replacement until the end of the contract term. By the end of the contract term, the federal agency is required to take title of the ESA ECM, per OMB Memorandum M-12-21 annual scoring requirements. The agency's ESPC ESA payment includes the electricity and a reserve account payment (see "How does the ESA ECM equipment title transfer work, and how is a reserve account used?" below for additional information).
How does the ESA ECM equipment title transfer work, and how is a reserve account used?
In order to meet IRS requirements, title transfer of the ESA ECM equipment by the end of the contract must be at the fair market value (FMV), based on the appraised value at that time. The ESCO transfers a portion of the payments it receives from the federal agency into a reserve account held by the ESCO.
The reserve account payment is initially based on an estimated/appraised future FMV of the ESA ECM. Periodic FMV estimates or appraisals during the contract term are recommended so that reserve account payments can be adjusted as needed (up or down, most likely requiring a contract modification), ensuring that there are sufficient funds for the ESA ECM equipment title transfer at FMV by the end of the contract term, with no remaining balance.
How is the final ESA ECM FMV at the time of title transfer determined?
An independent, certified appraiser should be hired to determine the FMV of the ESA ECM. If periodic estimates or appraisals were made throughout the contract term, the FMV appraisal should closely match the reserve account balance. The ESCO will include the cost of estimates and appraisals within the ESA ECM price.
What are the federal agency’s responsibilities at the end of the contract term and afterwards?
After the ESA ECM equipment title transfer, the federal agency is responsible for O&M (unless they have signed an O&M contract) and may require the ESCO to provide O&M training for agency staff. After the contract term is complete, all energy cost savings accrue to the federal agency. Depending on the remaining useful life of the ESA ECM, the federal agency may decide to remove, replace, or upgrade the equipment.
Can the renewable energy certificates (RECs) associated with an ESPC ESA be sold?
Because the ESA ECM will be owned by the ESCO throughout the ESPC ESA contract term, the ESCO will also own the associated RECs. A federal agency can direct the ESCO to sell the project RECs and reduce the ESA ECM price or have the ESCO sell the RECs to the agency with the electricity. If the project RECs are sold, then the federal agency must purchase replacement RECs if they want credit towards the Energy Policy Act of 2005 renewable goal. FEMP can assist federal agencies with determining the best solution for their specific project and location. The agency will own the RECs after the ESA ECM equipment title transfers to the agency.
What technologies can be included as an energy sales agreement energy conservation measure?
Any distributed energy technology that generates energy and results in annual savings can be included as an ESA ECM. This includes but is not limited to solar PV, solar hot water, wind turbines, geothermal, and combined heat and power. The benefits of an ESPC ESA contract structure (such as tax incentives, REC sales, and/or ancillary service sales) should be weighed against the additional costs associated with a more complex contract structure (compared to a government-owned ECM). Batteries and other types of energy storage technologies could be included with energy generation technologies like solar PV as part of an ESA ECM, as long as the combined technologies generate overall energy cost savings. FEMP is currently developing resources for battery energy storage systems that can help a federal agency determine if a project site has a cost-effective energy storage opportunity.
What happens if electricity production from the ESA ECM exceeds usage?
The federal agency will pay the ESCO for all ESA ECM electricity production based on the ESA ECM rate (¢/kWh). The value of excess electricity production to the federal agency will depend on the serving utility's net metering or other regulations, which can vary significantly by state and utility service territory. Contact your utility for additional information and reference DSIRE Detailed Summary Maps, which include state-by-state information on net metering and other policies. If the serving utility does not allow electricity export to the grid, the ESCO should ensure that the system is sized appropriately to meet facility loads only.