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Performance ContractingFREQUENTLY ASKED QUESTIONS
Are there different kinds of performance contracts?While there are a number of different ways to structure a performance contract, the model most commonly used is the “guaranteed savings” contract. In a guaranteed savings contract, all of the costs of the project are repaid annually out of the energy savings as they accrue. The contract length is usually chosen such that all of the project costs are paid out by the end of the contract period. How long is the typical contract?Performance contracts typically run from four to ten years, dependent upon the complexity of the project, the amount of savings to be achieved, and the types of measures to be implemented. Oftentimes contracts can be extended as business and facility owners look to do additional energy efficiency upgrades. How do I know that the savings are being achieved, and what if they aren’t?Verifying that energy savings actually occur is an important part of any performance contract. The most common method used to verify savings is analysis of utility bills. A baseline consumption is determined using past energy bills, and then savings are calculated using the actual energy bills received throughout the contract period. Monitoring your savings with your ESCO on a regular basis is critical for discovering and addressing performance deficiencies. To learn more about measures and verification, visit the website of International Performance Measurement and Protocol, Inc. Does performance contracting only work for projects of a certain size?Performance contract projects must be of sufficient size such that the savings generated by the project cover its costs over the length of time specified in the contract. Aggregating smaller projects into a single contract is a way to create the critical mass necessary to make performance contracting a viable option. What if my project is too small for a performance contract?There are many options available should your energy efficiency project be too small for a performance contract. Lighting suppliers and contractors, HVAC contractors, and others can provide you with the materials and expertise you need to make retrofits that will improve one or more aspects of your facility’s operation. On the other hand, consider aggregating a number of smaller efficiency projects, so that you can capitalize on the benefits of taking an integrated approach to energy efficiency. How are performance contract projects financed?Energy-efficiency measures installed under a performance contract may be financed in one of three ways: by the business itself, by a loan from a financial institution, or by the energy service company. If the ESCO provides the financing, it is termed “off balance sheet”; the business has no debt, and its only obligation is to pay the contractor all or a share of the savings during the contract period. If the business finances the investment, either on its own or through a financial institution, it does accrue debt, but the ESCO will typically guarantee that the savings will provide the cash flow necessary to repay the loan, and if not, make up the difference. |
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