Energy Savings Performance Contracting

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Recently released resource: ESPC Toolkit

DOE worked with 25 partners, including 18 states, 6 cities, and 1 school district to streamline the ESPC process, empower the market with ESPC project data, and resolve individual barriers to carrying out energy savings performance contracts. Since 2014, ESPC Accelerator partners have realized $2.03 billion in ESPC investment. Find best practices and replicable solutions in the ESPC Toolkit. 

Energy Savings Performance Contracting (ESPC) is a budget-neutral approach to make building improvements that reduce energy and water use and increase operational efficiency. By partnering with an energy service company (ESCO), a facility owner can use an ESPC to pay for today's facility upgrades with tomorrow's energy savings—without tapping into capital budgets. State and local governments can implement ESPC projects in their own facilities, as well as promote and support ESPC projects through ESPC programs.

ESPC Projects

The basic ESPC process is as follows:

  1. Facility owner decides to utilize the ESPC process and competitively selects an ESCO.

  2. Owner issues a contract to the ESCO, to conduct energy audit of the facilities and develop and implementation proposal, which identifies potential energy conservation measures (ECMs). A wide variety of measures can be part of an ESPC project. State legislation is often open ended on the types of measures that may be included, but legislation may restrict the budget categories that can be used to pay for such measures. The ESCO will identify each potential measure and estimate the itemized cost and saving, but the bottom line is what determines which bundle of measures can be included in the ESPC project. That is, some measures with short payback periods (e.g., lighting) can offset the longer payback periods of boiler and chiller replacements or renewable energy systems, if they're bundled under one contract.

  3. Owner and ESCO negotiate and finance ESPC and arrange for upfront financing. To date, one of the most common financing mechanisms for a government ESPC project is a municipal tax-exempt lease-purchase agreement. A number of national-level financing companies are knowledgeable about this ESPC approach, seek out such financing opportunities, and provide this type of agreement. Also, consider internal financing or bonds and compare the rates and benefits.

  4. ESCO implements agreed-upon ECMs, then monitors energy savings success through measurement and verification.

Ideal candidates for ESPC projects include any large building or group of buildings such as city, county, and state buildings; schools; hospitals; commercial office buildings; and multifamily buildings. The size and scope of projects are governed by the savings opportunities in facilities, the types of funding sources that can be applied, the minimum size project an ESCO is willing to manage, and the financing capability. Government facilities are generally good candidates for ESPC projects, because with long-term ownership of the facilities, governments allow for 10- to 20-year financing terms. In contrast, commercial facilities often have a 3-year payback threshold and may reject a comprehensive ESPC.

ESPC Programs

In addition to using ESPCs for its own facilities, a state or local agency may sponsor an ESPC program to increase awareness of ESPC and accelerate the uptake of performance contracting projects in its fellow agencies or broader jurisdiction. Many state energy offices and state buildings administrators across the nation have some form of an ESPC program, usually directed toward fellow state agencies and/or local governments. Such a program may:

  • Provide information and education about ESPC.
  • Develop model documents and a standardized process for procuring and contracting ESPC services.
  • Prequalify ESCOs to streamline the selection process for clients. 
  • Provide technical assistance to increase accountability for clients in development, implementation, and measurement and verification of ESPC projects.

An ESPC program is scalable, starting with a website to provide education and information, and expanding to more robust services with in-house or contract experts. Program costs can be supported through client fees to build and sustain a self-funded ESPC program.

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