68 Energy Project Financing: Resources and Strategies for Success
from public sector clients.* Properly structured EPCs can be treated as an
operating, rather than a capital expense.
If you search for the phrase “energy performance contract,” a va-
riety of definitions appear. The U.S. Department of Housing and Urban
Development (HUD) says that a performance contract is “an innovative
financing technique that uses cost savings from reduced energy consump-
tion to repay the cost of installing energy conservation measures...” The
Energy Services Coalition—a national nonprofit organization composed
of energy experts working to increase energy efficiency and building up-
grades in the public sector through energy savings performance contract-
ing—states that a performance contract is “an agreement with a private
energy service company (ESCO)... [that] will identify and evaluate en-
ergy-saving opportunities and then recommend a package of improve-
ments to be paid for through savings. The ESCO will guarantee that sav-
ings meet or exceed annual payments to cover all project costs... If sav-
ings don’t materialize, the ESCO pays the difference...”
Notice that both definitions mention “payment.” Let’s dig a little
deeper.
DOE claims that “Energy performance contracts are generally financ-
ing or operating leases† provided by an Energy Service Company (ESCO)
or equipment manufacturer. What distinguishes these contracts is that
they provide a guarantee on energy savings from the installed retrofit
measures, and they usually also offer a range of associated design, in-
stallation, and maintenance services.” The NY State Energy Research and
Development Authority (NYSERDA) states that “An EPC is a method of
implementation and project financing, whereby the operational savings
from energy efficiency improvements is amortized over an agreed-upon
repayment period through a tax-exempt lease purchase arrangement...”
Meanwhile, the Oregon Department of Energy says, “An energy savings
performance contract is an agreement between an energy services compa-
ny (ESCO) and a building owner. The owner uses the energy cost savings
to reimburse the ESCO and to pay off the loan that financed the energy
conservation projects.”
So, what is the funding mechanism used in an EPC? Is it a financ-
ing or operating lease (two very different structures—see EQUIPMENT*A Survey of the U.S. ESCO Industry: Market Growth and Development from 2000 to 2006.”
Lawrence Berkeley National Laboratory, LBNL-62679. May 2007.
†Emphasis in all quotes was done by the author, not the publishers of the websites.