Energy Saving Performance Contracting

Performance contracting is a budget-neutral approach that enables governments to pay for energy efficiency improvements with the energy savings resulting from the completed project rather than paying upfront at the start of the project.

How Does Performance Contracting Work?

Performance contracting is different from other construction financing approaches as contractors are not paid upfront. Instead, they are paid with the savings achieved on the back-end after the project is completed. The payback period is agreed to prior to the work starting, so if the project meets energy efficiency improvements, the contractor will know how much they can potentially earn on a monthly basis.

The benefit of Energy Savings Performance Contracting (ESPC) is the real estate owner has the ability to select a contractor based on the best-projected outcome, and project financing is covered by the contractor. This process gives the real estate owner a highly effective win-win where they achieve both significant energy savings without having to tap into capital budgets. The contractor wins on the back-end, taking the financial equivalent of energy saved as a monthly payment.

The Steps in selecting an Energy Services Company (ESCO) listed by DOE are as follows:

1. Investigate whether or not your State has an ESPC umbrella contract by contacting your State Energy Office.
   • If so, use it, provided your procurement agent agrees that you can do so.
   • If not, develop a Request for Proposal (RFP). Consider using a model/sample RFP available on the Energy Services Coalition website.
2. Select several ESCOs that operate in your geographical area. Identify ESCOs using the National Association of Energy Service Companies (NAESCO) website, or the Energy Services Coalition website.
3. Collect building and utility data. 
4. Issue RFP to selected ESCOs.
5. Hold a pre‐bid meeting and walk‐through of facility with all ESCOs at the same time.
6. Explain overall objective of the project to the ESCOs including minimum energy savings percentage goal.
7. Audit cost gets incorporated and financed with the final ESPC contract.
8. Limit the ESCOs to 30 days to develop proposals.
9. Receive proposals from ESCOs.
10. Review proposals and select the ESCO that appears to be best suited to your project and that you feel will be the best long term partner for your organization

Governments are beginning to ramp up construction projects at the local, state, or federal levels as new infrastructure dollars are starting to roll in. Schools and educational facilities especially will be beneficiaries of new programs, including $3 billion in federal financing available through the Innovative Clean Energy loan guarantee program. No matter the scope of work, real estate owners and primary contractors are looking to deliver or even exceed their outlined energy performance goals while obtaining maximum value for the taxpayer. Performance contracting serves as an avenue to obtain these tangible savings. 

To better understand the process, the DOE has produced this guide to starting an ESPC.