What is a Performance Contract?

What is a Performance Contract?

A performance contract is a tool that allows public entities from an entire county to a rural town, to partner with an energy systems optimization company to innovate bundled energy projects that achieve modernization of infrastructures, budget reduction, efficiency, and sustainability goals without the need for upfront capital. Performance contracts are budget-neutral as project costs are paid for by the guaranteed energy savings realized from the energy optimization projects. Many states have enabling legislation that allows local governments to take advantage of performance contracts with a qualified energy systems optimization company.

Here’s how a performance contract works.

First an energy systems optimization company should listen and learn. The municipalities representatives and the energy systems optimization company collaborate to review all the available options and create a project proposal that addresses the specific needs that impact building occupants most. The proposal includes a description of the facility improvement measures as well as budgetary costs and energy savings estimates.

Next formal procurement policies are followed to select the energy systems optimization company. Once a partner is selected an investment grade construction proposal is developed.  In this document, scope is finalized, costs are detailed, energy savings are fine tuned and design documents are created to best plan for the project envisioned.

The proposal is then shopped around to private lenders for the best rate and terms on a low interest municipal lease or bond. The public entity goes with the best loan terms and the ESO guarantees that they will save a certain amount each year in energy savings to pay the loan back.

Nothing is paid out of pocket. A bond isn’t levied. Taxes aren’t increased. And if the upgraded system doesn’t hit the energy savings target promised by the ESO post implementation, the company then pays.

As an example, let’s say that a small city with a budget of $100,000 for utility and maintenance expenditures, wants to replace a broken boiler and install rooftop air conditioning units at the City Hall.

The energy company guarantees the new system will save the city $50,000 a year in utility expenditures. The repayment of the municipal lease/loan may be $40,000, leaving the City a net positive $10,000 in annual cash flow. This means replacement of antiquated equipment, increased occupant comfort, and reduced carbon emissions, all while increasing cash flow.

Performance contracting can be used to optimize HVAC, interior lighting, street lighting, building automation systems, mechanical systems, building envelope, solar PV and more.

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