82 Energy Project Financing: Resources and Strategies for Success
In the mid-1980s, energy prices began to drop. With lower prices, it
took longer than predicted for the firm to recover its costs. Some firms
could not meet their payments to their suppliers or financial backers.
Companies closed their doors and, in the process, defaulted on their
commitments to their shared savings customers. Some suppliers tried to
recover costs from the building owners. Lawsuits were filed and “shared
savings” nearly died a painful death.
From this tenuous thread, the “shared savings” industry in North
America survived, but its character changed dramatically. Those sup-
plying the financial backing and/or equipment recognized the risks
of basing contract on future energy prices. Higher risks meant higher
interest rates, if the money could be found. Insurance, which had been
available to ESCOs for “shared savings,” became a scarce commodity.
By the late 1980s, shared cost savings agreements had shrunk to ap-
proximately 5 percent of the market.
From the end user’s point of view, through the “shared savings”
boom, it soon became apparent that the energy payments to the ESCO
were unpredictable. All too often, the customers found themselves pay-
ing far more than expected for the opportunity. A customer, who had
accepted a shared savings deal with $3.5 million in equipment, who was
asked to pay 70 percent of a predicted $1 million annual savings for five
years, assumed the total payment would be about $3.5 million for the
acquired equipment and services. If, however, the savings were greater
than expected or the price of energy went up, the costs could easily be-
come $5-7 million for the same equipment. Payment procedures became
confrontational. In the final analysis, too often the only real benefit of the
shared savings transactions were their “off balance” sheet feature. This
was attractive to customers who did not wish to incur more debt.
Out of the “shared savings” confusion of the 1970s-1980s evolved
a new financing mechanism with the guarantee centered on the reduc-
tion in the amount of energy consumed and the value of the energy in
dollar savings calculated at current billing rates. Typically, the projected
dollar savings were guaranteed to cover any of the associated debt ser-
vice obligations of the owner. To avoid the risks associated with falling
energy prices, ESCOs began setting an energy floor price below which
money guarantees would not apply.
A new term, “performance contracting,” emerged that embraced
all guaranteed energy efficiency financing schemes, including shared
savings and guaranteed savings.