An energy savings performance contract (or simply, performance contract) is an agreement between a building or facility owner or occupant and a performance contractor. The contractor identifies, designs, and installs energy conservation measures (ECMs) and guarantees their performance.
Under performance contracts, financing is often arranged by the contractor. As an option, the building owner or a third party may provide financing. Performance contracts also can incorporate utility incentives or government subsidies that may reduce the total cost of the project.
The term of a performance contract commonly ranges from 5 to 10 years for a simple project. The term can extend to 20 years or more for larger projects. The term should not exceed the expected useful life of any of the upgraded systems. Contracts normally have buyout provisions should the facility owner wish to terminate the agreement early.
In general, a performance contract is appropriate for projects that can (1) produce reliable, significant, and long-term energy-related cost savings and (2) capture all economically viable energy system improvements in an organization’s entire stock of buildings and facilities. Because a performance contract offers continuing operations and maintenance services, it is an opportunity to capture long-term savings.
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How It Works
Performance contracts are structured so that the payment for financing the ECMs is recovered from the energy cost savings those measures create. Performance contracts can be used to reduce energy use and costs in existing equipment, upgrade capital equipment, and improve the maintenance of existing facilities as well as enhance new construction design through the use of energy modeling. The performance contract agreement may specify that all cost savings be used to pay the financed amount or that the savings be split between the finance payments and the building owner or occupant.
How to Proceed
- Look for more than the low bid. Select an ESCO with a good track record that can provide other necessary services, such as project design, installation, and maintenance. Get references.
- Negotiate a contract that limits ESCO profits to a reasonable amount and establishes a win-win arrangement. Weigh the pros and cons of sharing savings rather than paying fees for services and other contractual arrangements.
- Require the ESCO to take a comprehensive approach to energy conservation rather than a cream skimming approach.
- Ensure that the agreement prevents the ESCO from sacrificing quality for energy savings.
- Ask the ESCO to incorporate extended product warranties and personnel training into the bid.
- When the contract is signed, organize an in-house team to work with the ESCO to choose energy measures, prepare bid specs, qualify prospective bidders, and perform other tasks.
- Work with the ESCO to determine the performance and applicability of new technologies.
- Design the project and coordinate construction to minimize disruption of the building’s functions.
- Document both the energy and the non-energy benefits of the project.