Energy Service Performance Contracts: Energizing Facility Improvements

Tackling energy projects can be eased with energy service performance contracts.


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Tackling energy projects can be eased with energy service performance contracts.
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Energizing Facility Improvements

Tackling energy projects can be eased with energy service performance contracts.

Energy Service Performance Contracts: Energizing Facility Improvements

By Facility Executive Staff
From the June 2020 Issue

Energy management is an aspect of facility management that is ever-present. While facility projects may have slowed for some in the beginning of 2020 due to the COVID-19 pandemic, the opportunity for energy improvements remains strong throughout facilities of all types. An energy service performance contract (ESPC, or EPC) is a financial mechanism used to pay for facility upgrades with future energy savings. An ESPC constitutes a partnership between a facility owner and an energy service company (ESCO), and is considered a time and cost-effective method for completing comprehensive energy improvements.

Facility Executive spoke with Timothy Unruh, Executive Director of the National Association of Energy Service Companies (NAESCO), about energy service performance contracts and how facility management professionals can access and maximize the benefits of this approach to improve the energy performance of their buildings and grounds.

Energy Service Performance Contracts
(Photo: ManonLabe)

What is an Energy Service Company?

At its heart, energy service companies (ESCOs) are construction companies, but what’s different than a standard construction company is its focus and the breadth of expertise. An ESCO is required to work on a lot of technical aspects where they have to do building retrofits. The key thing about these companies is that saving energy and reducing facilities operations cost is their core business. They become acutely aware of how to create the opportunities, how to capture these opportunities, and then how to verify that the opportunities continue to perform over the life of an energy service performance contract. In many cases, the life of these contracts can be 10 to 25 years.

Another key thing is this business focuses on client referrals to get the next project going. They work very hard to maintain strong relationships.

Energy Service Performance Contracts
Dr. Timothy Unruh,
Executive Director, NAESCO

And, they’re more than a contractor. ESCOs need to overcome barriers to get the work done that can include things like the technical barriers (how do you replace boilers and chillers? How do you lower the energy costs of a building? How do you do a central plant design in some cases?)

And there’s also the financial aspect. These companies need expertise in the financial area as well. They have to understand who are the financial suppliers in the industry that can deliver the financing, because these projects are long-term.

And then finally, ESCOs have to work with the people in the client organization and understand the goals and even the culture. In the case of retrofitting existing facilities, they interact with the people working in the building, because it often does not shut down during a long-term project.

So, these energy service companies provide a very dynamic solution for their clients in a variety of facility types.

Can you describe the process of energy service performance contracts? And, what is a primary difference from a traditional energy improvement contract?

Well, normally in a process of having work done, the facility manager would hire perhaps an engineer or an architect. That person develops a scope of work and plans of what needs to be done. Then, those plans are sent out to a bid, and a contractor is hired to perform the work.

I wouldn’t say that performance based contracting (an ESPC) is necessarily more complex. It’s different from the traditional formats. The client is selecting the contractor before they know their scope of work. That’s because after the client selects the ESCO they want to work with, that contractor then begins auditing and developing that firm scope of work. Then the client and the ESCO work together to get approval.

And, another distinction of performance contracting from traditional contracting is that facility managers may oversee only one or two performance contracts in their career. For instance, the head of facilities at a school district may set up a performance contract that lasts 15 years. That may be the last one they do if they stay in that position.  So maybe, they’ve only had the opportunity to do one performance contract. So, lack of experience combined with a different procurement process means that it looks different and feels different, but it doesn’t mean that it performs differently from other energy improvement projects.

One of the strengths of the performance based contract is that being a long-term investment in infrastructure, the contractor remains available to answer questions and to help understand what’s happening at with the facility improvements. NAESCO members provide long-term engagement with their clients through measurement and verification, for instance… whatever contract fulfillment they have over the term of the contract.

What types of organizations are eligible to engage in energy service performance contracts? Do both private and public organizations pursue these agreements?

All organizations are eligible to pursue a performance contract. What we find is that public buildings use performance contracting significantly more than the private sector does. The reason that we see for that is the availability of capital for energy improvement projects. A private organization often has the ability to get capital to do what they deem necessary for their facilities, so long as it meets internal hurdles.

A public building however, often has to go through some sort of a legislative budgeting. The appropriations process might occur once a year and may involve political challenges to get something passed to do work that may be necessary for school systems. Those processes can be slow and arduous, and, in the end may not provide the money to do the work.

Over the years, legislators have recognized that performance based contracting is an available option. Every state now has language in its laws that allow performance contracting of some sort to be done in their states. And with that, the net budget impact is zero.

In what scenario might a facility executive consider looking into energy service performance contracting?

When a facility executive is finding that they have failures in equipment, growing deferred maintenance, or if they have organization-wide goals that call for energy improvements, the obvious solution is to solve the problem by funding those projects. The problem is that not every organization has all the money they need to do all the work that’s necessary. So, when you see that there’s more work to be done than what you have money to do it, you probably should have an ESCO come in and look at the site. The energy service company’s goal is to use the reductions in cost that they can achieve to help fund an overall infrastructure improvement project. They may be able to do that with only energy savings. They may say there needs to be a capital contribution. But when there is a shortfall of what you want to do versus what you have money to do, an ESCO can come in and help to fill that gap.

NAESCO oversees accreditation for companies in the energy service business. From the facility manager’s perspective, how does accreditation help with evaluating a provider?

The NAESCO accreditation process includes a rigorous background analysis, financial analysis, and customer reference analysis to determine how well a project an ESCO can carry out, how well they document the savings from those projects, how well they’ve maintained the client. The accreditation process reviews at least 50 projects that an ESCO has done.

When selecting an energy service provider, facilities should start with an accredited ESCO for some assurance that they have been vetted and that they provide quality work. Beyond accreditation, a key thing is to call references by reaching out to clients of the ESCO being considered.

Dr. Unruh is Executive Director of the National Association of Energy Service Companies (NAESCO). In this role since January 2019, he manages the representation of its member energy service companies. NAESCO provides advocacy for the industry at the federal, state, and local levels, and provides for member company accreditation. Prior to this role, Dr. Unruh was Deputy Assistant Secretary of Renewable Power at the Energy Efficiency and Renewable Energy (EERE) Office of the U.S. Department of Energy (DOE). In that role, he managed the nation’s renewable power research, while also providing oversight to the Grid Modernization Initiative.

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