Energy Performance Contracting

Credit: Ameresco
Biomass heating plant at the DOE’s Savannah River site

Editor’s Note: This article first appeared in the  July-August 2015 issue of Business Energy.

Energy efficiency is an integral part of sustainable energy strategies. Implementing a comprehensive energy efficiency reference project that pays for itself through the resulting energy savings can be a complex undertaking.

The idea of an energy savings business goes back to the energy crisis of the late ’70s. Combating energy costs suddenly was important to businesses and consumers. An early example was the Texas firm, Time Energy, which introduced a device to automate the switching of lights and other instrumentation to modulate energy use.

The reason the product did not initially sell was because potential users doubted that the savings would really happen. To fight this uncertainty, the company came up with installing the device upfront and asking for a percentage of the savings accumulating. The result was the basis for the ESCO (energy service company) model. Through this process, the company achieved higher sales, and more return since the savings were large.

Industry Catches On During ’70s, ’80s, and Beyond
As more entrepreneurs watched this market grow, more companies popped up. Early ESCOs often consisted of small divisions of large energy companies or small, startup, independent companies. But as the energy crisis became an unpleasant memory and the cost of energy went down again, companies in turn had less leverage on potential clients to execute energy-saving projects.

The industry grew slowly through the ’70s and ’80s, urged by specialist firms such as Hospital Efficiency Corporation (HEC Inc.), established in 1982 to focus on the energy intensive medical sector. HEC Inc., later renamed Select Energy Services, was acquired in 1990 by Northeast Utilities, and sold in 2006 to Ameresco.

With the rise of the cost of energy in the ’90s and the accessibility of efficiency technologies in lighting, HVAC, and building energy management, ESCO projects experienced a rebirth. The term ESCO has also become more widely known among potential clients looking to upgrade their building systems that are either outdated and need to be replaced, or for campus and district energy plant renovations.

Deregulation in the US energy markets in turn let energy services businesses experience a rapid rise. Utilities, which for decades enjoyed the shelter of monopolies with guaranteed returns on power plant investments, now had to compete to supply power to many of their largest customers. They began to look to energy services as a potential new business line to retain their existing large customers. Also, with the new opportunities on the supply side, many ESCOs started to expand into the generation market, building district power plants or including cogeneration facilities within efficiency projects. ESCOs in this country grew by 22% in 2006, reaching approximately $3.6 billion.

How Are Most Buildings Functioning?
Most buildings and facilities exhibit obstacles and limitations with respect to energy conservation and optimum maintenance. US Federal studies show that major and minor building systems routinely fail to meet performance expectations, and these faults often go unnoticed over time. The functions of a building, the number of tenants, and the configuration of the space change over time in unanticipated manners that adversely affect the systems that control building performance.

Surprisingly, almost all buildings, building complexes, and systems within buildings still operate in a disconnected, standalone manner. Proprietary systems result in buildings that needlessly waste energy. Recent studies have found that roughly 30% of LEED-certified buildings perform substantially better than anticipated, while 25% perform substantially worse than anticipated. In general, LEED certified buildings perform 25–30% better than non-LEED certified buildings with regards to energy use. It is ultimately difficult or impossible for customers to construct a single integrated picture that correlates energy usage and maintenance costs to control system performance, space usage, conservation measures, and the behavior of those using the facility space.

A more recent development is the concept of combining the benefits of performance contracting with the benefits of green buildings, affectionately described as green performance contracting. The reason the concept makes sense is because for green buildings, the costliest prerequisites to meet are usually the energy efficiency requirements. The LEED rating system requires buildings to be benchmarked using the EPA EnergyStar system.

The minimum score to meet the LEED prerequisites is a score of 75 or greater (meaning the building is in the top 75 percentile of benchmarked buildings). Since performance contracting attempts to find all the sources of energy waste, then a building that has gone through the performance contracting process should meet the LEED prerequisite. Green performance contracting can be used to achieve sustainability goals in new building design and construction as well as in existing buildings.

In new buildings higher-efficiency choices are compared to the modeled performance of the as-designed less-efficient building. Applying performance contracting to buildings being designed and built is the perfect cure for pressure to “value engineer” the efficiency and sustainability out of new buildings as they are designed. In new buildings, performance contracting bridges the gap between the first-cost and life-cycle cost perspectives by using long-term energy savings to pay for the incremental first-cost of high-efficiency measures.

Green performance contracting in existing buildings provides a mechanism for implementing and financing the building’s efficiency and sustainability upgrades, including improved operations. Achieving sustainable building performance in existing buildings can be done at reasonable costs. If needed, system or building upgrades can be spread out over time and implemented when capital dollars become available. Green performance contracting provides comprehensive integrated solutions to a wide variety of building, site, and infrastructure improvements. BE_bug_web

  • Anees Azzouni.

    Excellent article. I wish to read more of the same quality.


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