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Energy Services Companies (ESCOs) most commonly work with large clients, including public housing agencies, to achieve energy-efficiency improvements at scale. ESCOs conduct energy audits and recommend energy-saving interventions; arrange financing;
design and implement the improvements; and perform post-improvement assessments to verify energy savings. Through energy performance contracting, a practice unique to ESCOs and some of their nonprofit counterparts, ESCOs also assume all upfront costs, which are financed with expected savings from energy-efficiency upgrades.

Energy performance contracts establish the terms by which contracting organizations re-pay the cost of capital improvements, labor, and project management. While contracts may be structured in several ways, they typically shift the financial burden of delivering improvements in building performance to the ESCO.

This may be achieved in a couple of ways:

Photo courtesy of Urban Land Institute Development Case Studies
  • With guaranteed savings contracts, the contracting organization agrees to a fixed-payment schedule based on projected energy savings; ideally, energy savings from lower utility bills will equal or exceed payments for each billing period. If the improvements fail to yield the projected reduction in energy usage during part or all of the payback period (depending on the contract), the ESCO pays the difference. Guaranteed savings contracts offer contracting organizations the least amount of risk, although ESCOs often charge a premium for this guarantee. Agreements may include additional incentives for ESCOs to achieve higher levels of energy efficiency. [1]
  • Contracts that call for shared savings agreements split the energy cost savings between the ESCO and the contracting organization according to a pre-determined formula, so the ESCO receives compensation for its services only if the agreed-upon energy savings materialize. In many cases, the ESCO's share of the savings is greatest in the early years of the contract, and declines over the duration of the payback period. [2] With either arrangement, the contract should clearly describe methods for measuring and identifying the source of any energy savings, relative to the baseline, including stipulations for changes in building use and occupancy during the payback period, variable weather conditions, and other factors that may affect performance. (ESCOs may also undertake energy-efficiency projects without a guarantee or shared savings agreement; contracting organizations simply pay for the upgrades as they would when working with a traditional contractor.) As with all approaches, when the improvements have been paid off, typically over a period that can range in length from seven to 15 or even 20+ years depending on the scope of the project, the contracting organization enjoys the full utility cost savings. [3]
As noted, ESCOs work primarily with large clients where (1) transaction costs may be offset by the much larger total cost of the project, and (2) energy consumption and, accordingly, projected cost savings will reach a magnitude large enough to cover the scope of the work. [4] Public housing agencies (PHAs) represent one major area of opportunity for making energy-efficiency gains with ESCOs: According to one source, through 2009, public housing agencies invested some $730 million in energy performance contracts, yielding annual savings of approximately $120 million. [5]

Working with an ESCO

The Energy Services Coalition, a national nonprofit organization with a membership composed of industry experts, provides on its website several sample documents to reference when considering working with an ESCO. These include a model Request for Proposals (RFP), interview questions to ask ESCO candidates, and a model Energy Performance Contract. The US Department of Housing and Urban Development provides similar resources intended for use by Public Housing Agencies and Indian Housing Authorities.

Click on the links below to learn more about turn-key service providers:

ESCOs and Energy Performance Contracting
Energy Services Companies (ESCOs) most commonly work with large clients, including public housing agencies, to achieve energy-efficiency improvements at scale.

Community-based Nonprofit Organizations
An increasing number of community-based nonprofits that operate on a model similar to ESCOs have started to emerge, making the advantages of an ESCO accessible to owners of affordable rental properties.

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Who performs the work?
Many communities require that participants work with certified builders or contractors, or with trained program staffs to certify energy-efficiency retrofits.

Other pages in this section:

Strategies for supporting the energy workforce

States and localities can support energy efficiency through informal channels.

[1] Financing Energy Efficiency in Buildings. By U.S. Department of Energy. Rebuild America Guide Series.
[2] An Introduction to EPC. April 2009. EPC Toolkit for Higher Education.
[3] What is an ESCO?. 2010. By National Association of Energy Service Companies.
[4] Policy Initiatives. 2010. By Residential Energy Services Network.
[5] What is an ESCO?