Performance based contracting is the process by which schools, universities, towns, cities and counties enter into contracts with private companies to design, implement and monitor energy and water savings projects. As a result of HB 2830, the Energy and Water Savings Accounts Law, enacted in 2012 by Governor Jan Brewer, municipalities can now enter into agreements with Energy Services Companies or ESCOs for execution of self-funded energy efficiency projects.
ESCOs provide both design, implementation and monitoring services of energy efficiency projects while contracting with a third party financial institution to take on the performance risk of the project. Contracting out performance risk means that municipalities have a guarantee on project performance and will receive financial compensation should energy efficiency projects not deliver the promised energy savings. Savings from utility costs once these projects are complete make them a budget neutral line item, with savings realized after the project payoff resulting in direct savings to the municipality’s bottom line.
Under the Energy and Water Savings Account Law performance contacts must include the following:
- A detailed list of the measures to be implemented by the ESCO
- Cost savings guarantees from the ESCO
- The planned cost repayment schedule
- An independent, third-party validation of the cost savings calculations by a credentialed engineer, paid for by the ESCO
After implementation of the project, measurement and verification (M&V) is crucial to ensure the projected savings is consistent with actual savings. The level of complexity to the project makes the M&V process even more essential. Under the Energy and Water Savings Account Law, ESCOs must take on financial risk if projects are not meeting the performance standards outlined in the contract. According to State law, contracts with schools must guarantee savings resulting from the project will pay back the full cost of the project within 25 years. For counties, cities and towns the repayment period is shortened to 15 years.
With the safeguards put in place by the Energy and Water Savings Account Law, municipalities have significant incentives to explore performance based contracting when considering energy efficiency projects.