Full Title: Leveraging of Funds in Performance Contracting Projects
Author(s): John Shonder
Publisher(s): Oak Ridge National Laboratory
Publication Date: March 29, 2023
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Description (excerpt):
Performance contracts are widely used in the public sector (and to a lesser extent in the private sector) to implement energy efficiency, renewable energy, and energy resilience projects. Customers, as well as commercial building owners, contract with an Energy Services Company (ESCO), which installs new or upgraded equipment such as boilers and chillers, control systems, interior and exterior lighting, and solar PV arrays consistent with the customer’s requirements, using private sector financing.
In a related contracting arrangement called a Utility Energy Service Contract (UESC) the customer contracts with a serving electric, gas, or water utility to obtain the upgrades. In both cases, the customer repays the project financing using the energy, water and operations and maintenance (O&M) cost savings that result from the new or upgraded equipment and facility improvements. While such projects can be accomplished at no up-front cost to the customer, capital contributions from the customer, when available, provide several advantages.
First, they can reduce the finance term, which is of critical importance in cases where the project term would exceed the statutory limit in the absence of the contribution. Customer contributions can also increase the total investment of the project, allowing inclusion of measures with longer paybacks than would be possible without the contribution, or expansion of the size or scope of one or more measures. A performance contract allows the savings from additional scope to be capitalized and leveraged over the project term, thereby creating even more project
investment.
The objective of this report was to determine the amount of additional investment that is achieved by leveraging customer funding contributions to the project. Using a representative project based on 40 Task Orders awarded under the U.S. Department of Energy’s Federal Energy Management Program (FEMP) energy savings performance contract (ESPC) indefinite delivery indefinite quantity (IDIQ) contract over the past five years, we found that the leveraging ratio of customer contributions ranges from 1.3 to 2.1. That is, given the assumptions made, a given contribution increases the size of the project (in terms of the quantity of measures that can be installed) by 1.3 to 2.1 times the size of the contribution. This result suggests that to maximize its buying power, available capital funding should always be used in concert with performance contracting.