Case Study Source: The Joint U.S.-Brazil Initiative on Urban Sustainability, part of the U.S. Environmental Protection Agency.

Summary

The ESCO model was developed to recoup the savings from implementing more energy efficient strategies onto commercial and industrial properties. ESCOs have four fundamental operational features. First, an ESCO guarantees energy savings and/or the provision of the same level of energy service at a lower cost through the implementation of an energy efficiency project. This performance guarantee can revolve around the actual flow of energy savings from a project, stipulate that the energy savings will be sufficient to repay monthly debt service costs for an efficiency project, or ensure that the same level of energy service at a reduced cost. Second, the compensation of the ESCO is directly tied to the energy savings achieved and therefore performance. Third, an ESCO typically directly finances, or assists in arranging financing, for the installation of the efficiency or energy project to be implemented by providing a savings guarantee. Last, but not least, an ESCO tends to retain an on-going operational role in measuring and verifying the savings over the financing term. Broadly, the ESCO model can be especially attractive to those considering structural rehabilitation of existing buildings that also focus on energy efficiency retrofits.

Application

In order to employ the ESCO model, a commercial or residential property owner must establish an energy performance contract (EPC) with an energy service company (ESCO), which can range from small and medium-sized enterprises to larger multi-national corporations. The ESCO is then responsible for developing, implementing, and financing (or arranging financing) for the energy efficiency project. In all instances, the ESCO starts by performing an in-depth analysis of the property, sometimes at risk, designing an energy efficient solution, installing the required elements, and maintaining the system to ensure energy savings during the payback period. These energy cost savings are often used to pay back the initial capital investment over a 5- to 20-year period or reinvested into the building to allow for additional capital upgrades that may otherwise have been unfeasible. If the project does not provide returns on the investment, the ESCO is often responsible to for assuming the difference.

Examples

The Greenworks Loan Fund is designed to mirror the process of other real estate loans, except that it offers a below-market interest rate (3%-7%) and it finances only those aspects of a project that improve energy efficiency: mechanical systems, lighting, onsite renewable energy, combined heat and power, and appropriate construction materials and building operation practices. In that way, the Greenworks Loan Fund can support energy efficiency projects based on the ESCO model, providing that it meets the 25% energy reduction requirement.

Brazil has examples of guarantee mechanisms to promote energy efficiency activities through an ESCO model. One example is the Guarantee Fund for Competitivity Promotion (FGPC), which is managed by the Brazilian National Development Bank and guarantees, in part, the credit risk exposure of financial institutions to small and medium-sized businesses.

Contact Information

EPA's Environmental Finance
Website: http://www.epa.gov/envirofinance/contactus.html