A Win-Win Strategy to Energy Financing Challenges—Performance Contracts

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ABSTRACT Energy users such as industrial production plants, public service entities, hospitals, universities, and others may desire to upgrade their energy system, often including such things as HVAC, lighting, furnaces, cooling towers, etc. These energy users are referred to as “clients.” “Performance contracts” provide a unique financial arrangement between a “client” and an energy service company (ESCO) that allows the client to replace its aged and inefficient equipment and upgrade its energy system, while investing relatively little money. With a performance contract, the client can get significant energy savings and assume little risk. The ESCO takes the responsibility of leasing / purchasing the system from the manufacturer / vendor, installing the equipment, and ensuring maintenance, for which they are paid a portion of the client's energy savings/revenues throughout the contract. As such, the performance contract presents a win-win strategy for all parties involved, including the client, the ESCO, and even related parties such as the equipment manufacturer, the maintenance organization, and the utility. The article is divided into three parts. First, the fundamentals of performance contracts are introduced. Second, the implementation process of a typical performance contract is outlined. Finally, a case study is provided to show the financial interactions and to present the economic analysis for each party involved.