Are You Reducing Your Energy Costs? The Key to Performance Contracting Is Truly in the Performance

Light bulb with dollar sign

By David Clamage

The application of performance contracting to your business can be very profound and highly effective – as well as economical. You are using the savings derived from new and improved energy assets to pay for themselves.

We have been on the finance side of this industry for many years and have learned this acquisition and contracting model is both a valuable tool and a process that merits close scrutiny and focused management from your side of the contract. This article is a short introduction that we’ll follow with more detailed discussions in the months and years ahead. We hope you’ll send us your questions, stories and feedback to refine our data, making it more useful and specific to you.

Like your operation, this too is a dynamic model with changing technologies; local, state and federal legislation; and, new providers with new ways to contract with your organization. Here’s how the Energy Services Coalition defines a performance contract…


What Is Energy Performance Contracting?

Here’s How It Works…

You enter into an agreement with a private energy service company (ESCO). The ESCO will identify and evaluate energy saving opportunities and then recommend a package of improvements to be paid for through savings. The ESCO will guarantee that savings meet or exceed annual payments to cover all project costs — usually over a contract term of 7-10 years. If savings don’t materialize, the ESCO pays the difference, not you. To ensure savings, the ESCO offers staff training and long-term maintenance services. Many types of building improvements can be funded through your existing budgets — new lighting technologies, boilers and chillers, energy management controls and swimming pool covers, to name a few.


Essentially, an ESCO or other qualified contractor broadly in your energy and operations equation, implements Energy Conservation Measures or Facility Improvement Measures (ECMs or FIMs), designed to reduce costs and/or the consumption of energy. A water or wastewater utility consumes energy and operational costs on many levels from pumps, filters and more. Let’s use a simple example:

  • You are currently using incandescent lights – 100 ea. 100-watt incandescent lights running 10 hours per day, five days per week;
  • Your local utility cost is 10 cents per kilowatt hour;
  • So, your energy bill for those lights is about $2,600 per year.

Your ESCO comes along and proposes to convert you to 23-watt LED lights that provide you with substantially the same light quality as your old 100-watt incandescent lamp:

In a performance contract, the ESCO would then take on the responsibility to guarantee that savings of more than $2,000 based on accurate measurement of your use; current utility rates; and, proper and prudent maintenance of your lights. And, before we get into how this impacts and/or benefits your agency, let’s discuss for a moment the nature of that guarantee.

Dollars vs. Dekatherms

The ESCO can’t see into the future of your utility rates and most guarantees are based on units of energy saved versus dollars. When your use is benchmarked – in the case of the lights, the actual “run time” – that is then converted to kilowatt hours saved and applied to the current rate. So, while your project is presented in dollars for the purposes of your operational economics, the fine print is in units of energy and often includes the application of reduced “person hours” where maintenance is also decreased.

David vs. Goliath

It is important that your ESCO or other form of contractor have both the technical expertise and financial wherewithal to honor their guarantee. For the period of your contract, you will rely on them to monitor and potentially even maintain your new equipment and systems and present to you a solid case for the energy and operational savings.

Documentation, Diligence & Deployment

There are many resources available to you to compare and contrast contract documentation, and that can often begin with your State Energy Office. Very often they will have information and resources unique to the laws in your state and we recommend starting with the National Association of State Energy Offices at naseo.org. Not only will they provide you with information about the process of energy conservation, they provide links to the many state offices and officials that monitor and provide access to tools and techniques in your market. Additionally, both the Energy Services Coalition, (energyservicescoalition.org), and National Association of Energy Service Companies, (naesco.org), can help you with the industry perspectives and help you access their members, workshops and other educational forums.

Being a proud Coloradan, and an active member of our Colorado Energy Office and Colorado Chapter of the Energy Services Coalition, I would also like to refer you to the process and documentation materials our state has successfully used in nearly $500 million in projects at www.colorado.gov/pacific/energyoffice/public-energy-performance-contracting. You will find a great overview of the steps we use in the Rocky Mountain State, as well as sample documents that have been approved by our State – all yours for the price of a mouse click.

North Carolina State University and the Department of Energy also publish and maintain the Database of State Incentives for Renewables & Efficiency (DSIRE) at dsireusa.org. This invaluable resource can help you find and filter the many incentives, grants and rebates available to help subsidize your project.

The federal government also is very active in energy efficiency with the signing of the first Federal Energy Management Program (FEMP) in the 1970s. While many of their policies and procedures are unique to the federal governments contracting laws, there are many great resources, case studies and stories that are useful and educational as you consider your project.

What’s Unique About Water?

As a water utility, you have unique legal points in your states that can help you modify your perspective on contracting and funding these projects. For example, many of you can enter into firm term vs. non-appropriation financing, (please see our earlier article in this publication on the difference), that can often lower your interest rate and lengthen your term. Additional concerns are in re: P3 and PPA models that may be impacted by your state “public utilities commission” and regulations and we’d encourage you to learn about those options and note we’ll be discussing that in future articles.

For those of you with larger systems, the access to the guaranteed performance contract model is very strong and well served by both the major ESCOs as well as local ESCOs and contractors in both energy and metering. And in smaller systems, you may be well served by non-guaranteed projects where you rely on the equipment guaranty vs. energy savings. We know your State Energy Office can often prove to be a great resource and a directory can be found at naseo.org. In the future, we will do a deeper dive into “water centric” issues and encourage you send your questions and comments to me at davidc@saulhill.com.

Next Steps

All of us have issues with deferred maintenance, constrained budgets and equipment and systems not performing optimally. And while these assets consume more energy and time than we’d like, that first step of dollars is often too big an obstacle for our budget. Performance contracting may be one tool to add to the toolbox of financial and operational solutions. Taking that first step with your state or the national associations may uncover for you techniques that get your agency to the next step in energy and operational efficiency.


David Clamage is the founder of Saulsbury Hill Financial, based in Denver. He specializes in large project and lease financing for virtually all terms and asset types, as well as “small ticket” and equipment for municipal finance.

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