Frequently Asked Questions
About Performance Contracting
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 out of the energy savings as they
accrue. The contract length is usually chosen so 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 decide to
undertake 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 through an
analysis of utility bills. Baseline (before retrofit)
consumption is determined using past energy bills, and
then savings are calculated using the actual energy
bills received throughout the contract period, adjusted
for weather, occupancy, and other conditions as agreed
to by all parties prior to signing a contract.
Monitoring your savings with your ESCO on a regular
basis is critical for discovering and addressing
performance deficiencies. To learn more about
measurement and verification procedures, 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 large enough for
the savings generated by the project to 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 viable.
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
(systems) 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.?In this
case, 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. |
