This section begins by describing a typical energy services agreement (ESA) because it is the most common efficiency-as-a-service structure. Then the two "Alternative Approach" sections we will discuss different structures in comparison with the ESA. Note that efficiency-as-a-service space is rapidly evolving, so many different arrangements are in use, and more are in developing.
Under an ESA, the provider enters into the ESA directly with the customer for a contracted period (typically 5-15 years). Before equipment is installed, the ESA provider performs a baseline of the customer's energy consumption and calculates an upfront estimation of savings. The ESA provider then pays and manages a contractor to install the high-efficiency equipment and help maintain the equipment through the contract period. Once project installation is complete, a measurement and verification (M&V) analysis is performed to determine actual savings compared to baseline energy use.
The customer then enjoys lower utility bills throughout the contract term. The customer pays the ESA provider a charge per unit of energy saved that is set below its baseline utility price, resulting in immediate reduced operating expenses. The ESA payment can be structured either as a percentage of the customer's utility rate or as a fixed dollar amount per kilowatt-hour saved. The ESA provider retains ownership of the equipment for the duration of the ESA term and pays for maintenance to ensure reliability and performance. New efficiency measures can be added during the duration of the contract. At the end of the contract, the customer can elect to purchase the equipment at fair market value, extend the contract, or (less commonly) return the equipment.
An ESA can be thought of as an energy efficiency version of the Power Purchase Agreement (PPA), a structure commonly used to finance renewable energy systems. Under an ESA, the customer doesn't bear the project performance risk since it only pays for savings actually achieved. Instead, the ESA provider bears this risk and gets paid less if the project savings are lower than expected. However, ESAs vary significantly in terms of contract structure, method used for measuring realized savings, and how the customer and provider split performance risk and upside. Some ESA providers are exploring the possibility of combining ESAs with on-bill repayment.
Typically, ESA projects are funded through a combination of equity from the ESA provider and outside debt from a lender. The ESA provider typically forms a special purpose entity (SPE) that owns all project equipment and is repaid by customer payments under the ESA.
ADVANTAGES
ENERGY SAVINGS PAY FOR PROJECTS- Efficiency-as-a-service allows customers to redirect a portion of their current utility spending to pay for efficiency improvements; ESA payments are based on realized energy and operational savings and set below the current utility price.
OFF BALANCE SHEET-Efficiency-as-a-service is designed to be an off-balance sheet financing solution, with regular payments that are treated as an operating expense similar to a standard energy utility bill or PPA.
ENHANCED RELIABILITY OF OPERATIONS-Efficiency-as-a-service providers pay for periodic maintenance services to ensure long-term reliability and performance of the project equipment. Under a MESA, the customer has a single point of contact and a single payment for all utility expenses and the MESA provider actively manages energy consumption at the facility.
FLEXIBLE ENTERPRISE-SCALE FINANCING
Many providers can bundle together multiple sites that have smaller project opportunities into a single package (e.g., bundle 10 sites with $500,000 projects into a single $5 million service contract).
DISADVANTAGES
SIZE LIMITATIONS-Providers tend to look for larger project sizes ($1M+) and some will not consider smaller projects (less than $250k), though there are exceptions.
BUILDING OWNERSHIP CONSTRAINTS-While efficiency-as-a-service can work in leased or owned space, its is typically only viable in leased space if the contract term does not exceed the lease term.
LONGER CLOSE TIMES-Transaction costs can be high if each deal is heavily negotiated; for more complicated retrofits with no preliminary energy audits completed, deals can take 9-12 months or more to close.
