Energy Services Company
Energy Services Companies (ESCOs) develop, install, and secure financing for projects that improve the energy efficiency for research campuses. ESCO options include guaranteed energy savings, shared savings, and power purchase agreements. Read below for examples of how schools are using RLFs to support new energy efficiency and renewable energy projects on their campuses.
Energy Services Companies Overview
With a service contract typically between 7 to 20 years, ESCOs typically bear the responsibility for turn-key project development, as well as the technical and performance risks. In addition, the ESCO may make recommendations of retrofits, maintenance services and training, and/or other conservation measures.
The ESCO industry is characterized by diverse companies with different corporate and ownership structures. While many are large engineering or equipment manufacturers, others may be subsidiaries of oil and gas companies or non-regulated energy suppliers. It is also common for regulated utility companies to own an ESCO.
ESCOs typically engage clients through Energy Performance Contracting (EPC) where the ESCO assumes performance risk, guaranteeing a minimum amount of energy-use reduction. EPC addresses the main issue that tends to prohibit facility owners from investing in energy efficiency projects—an inability to guarantee savings and a return on capital investments.
Energy Services Company Options
Performance-based contracts can take different forms including guaranteed energy savings, power purchase agreements and shared savings agreements.
Guaranteed Energy Savings
In a performance-based contract, the ESCO guarantees a specific reduction in energy use, which is not necessarily tied to cost savings as billing rates may change over a defined length of time. If the ESCO fails to produce such savings because of their own actions, they are responsible and must pay the client the shortfall amount using a pre-determined utility rate calculation. After the guaranteed savings period has ended, the owner, or in this case the research campus, retains the full value of the energy savings.
Through the EPC, an ESCO can define a payment structure where their sole compensation comes through a share of the utility-cost savings. Due to the large investment upfront, a greater percentage typically goes to the ESCO, but then decreases over the life of the project.
Power Purchase Agreements
Power purchase agreements (PPAs) facilitate the financing and implementation of onsite energy installations. An independent power producer, or provider, and a private entity, or buyer, enter into a contract where the provider builds, operates, and maintains a renewable energy system located on the buyer's property (in this case the research campus) and sells back the generated energy. Learn more about PPAs for research campuses.
Energy Services Companies Examples
- The National Renewable Energy Laboratory (NREL) was able to save a total of 41 billion British Thermal Units (Btu) in natural gas through a new efficient combustion system developed by Ameresco. NREL established an arrangement whereby Ameresco financed the construction of the plant, purchased back the wood waste and received regular payment made possible with the proceeds from NREL's utility cost savings. Read more about this project on NREL's site.
- The University of Utah set up a multi-year campaign of energy management upgrades, including lighting and thermal projects through a partnership with an ESCO. In less than three years, the projects saved $6.6 million in energy costs. Read more about this project on the Rebuild America site.
- For a comparison of different financing options for energy performance contracting, please refer to page 13 of the April 2009 EPC Toolkit for Higher Education.