What is it?
Performance contracting is a time-tested tool used by local governments to increase energy efficiency, while guaranteeing energy savings are enough to cover the costs of the project. Contractors don’t get paid upfront; they get paid through real-world energy bill savings–giving both contractors and owners a built-in incentive to focus on projects yielding the biggest returns.
By ensuring efficiency projects are picked based on potential savings—and paying contractors directly from the savings—performance contracting makes it easier for home and business owners to obtain financing and avoid the often high up-front costs of retrofits.
How it works
A public agency applies to participate in the program and enters a contract with a private-sector Energy Services Company (ESCO). The ESCO performs an initial energy audit to determine where the greatest energy savings can be found. Performance contracting requires that a project guarantee enough energy savings to cover the up-front capital costs of the improvements over the length of the contract.
The benefits of performance contracting are threefold:
- There is no bidding process for the work since the state registers a selection of pre-approved contractors. The ESCO handles all aspects of the work, from the audit through the completion of the project.
- There is no up-front cost for the project since the financing is pre-arranged between the state and the ESCO based on anticipated energy savings.
- Since the ESCO is paid from energy savings, if they fail to meet anticipated energy savings, they don’t receive payment. This provides an inventive to the ESCO to do the work that will save the most energy—and money—for the agency.
What it could mean for homeowners
The principles of performance contracting, if applied to local loan programs for homeowners, would ensure that the most effective energy retrofits are the ones that get made. It takes high up-front costs off the shoulders of families and puts money back in their hands once the retrofits are paid off.