Energy Efficiency at Your Service
Financing energy efficiency projects may be challenging. Many projects never make it past the planning stage because of the capital costs involved and competition with other investment opportunities. However, financial institutions, learning lessons from the solar power industry, have begun to offer efficiency-as-a-service to bridge this gap.
Putting energy efficiency into service
A popular way to obtain on-site solar energy production is with a power purchase agreement (PPA). A PPA provider finances and installs a solar energy system at the customer’s site. The provider owns the system, and the customer pays the provider a predetermined electric rate for a limited period.
Efficiency-as-a-service works similarly to a PPA. An energy service agreement (ESA) is established between a customer and a provider. The provider conducts an energy audit and determines what upgrades will reduce the customer’s energy bill. The provider pays the project development, construction and maintenance costs. The customer makes service payments based on the savings or other agreed-upon performance metrics.
How does an ESA work in practice? Let’s use as an example a facility using 500,000 kilowatt-hours (kWh) of electricity per month at a rate of $0.12/kWh. The provider promises a reduction of 200,000 kWh if the customer will pay them a rate of $0.10/kWh for the electricity saved. The customer saves by paying $0.02/kWh less for the 200,000 kWh, with little risk and no capital outlay.
Providers typically use an energy services company (ESCO) to procure and install the equipment with a guarantee of 90% of the expected savings. The provider uses equity on hand augmented by a bank loan to fund the ESCO. The equipment is off-balance sheet with respect to the customer.
Although the provider guarantees the customer 100% of the expected savings, the bank risk is reduced by the ESCO’s 90% guarantee to the provider. Utility incentives are provided directly to the customer and are typically passed on to the provider through an increase in the rate payment.
At the end of the contract, the customer is given three choices: purchase the equipment, extend the contract or return the equipment. Because the contract term is relatively short (five to 10 years), ESAs are most popular with large commercial and industrial facilities (schools, manufacturing plants, office buildings). Providers are often willing to aggregate multiple properties located throughout the country that have widely varying utility rates.