The Problems with ESPCs and ESAs
For any commercial building owner planning to install efficiency upgrades, Energy Savings Performance Contracts (ESPC) and Energy Sales Agreements (ESA) most certainly come up in their research. Both ESPCs and ESAs were conceived to help building owners offset the high upfront costs associated with energy efficiency projects by allowing the projects to be paid for over time through energy savings.
For decades, these mechanisms have been used to fund large energy savings projects, but these complex contracts aren’t a good fit for every type of building or business. Here are a few of the drawbacks to consider when thinking of signing on to an ESPC or an ESA.
ESPCs and ESAs usually take 10 to 25 years to fulfill. During this time period, the building owner is on the hook for payments regardless of their circumstances. A lot can happen in 10 to 25 years. A business’s goals may change, or its financial situation may deteriorate. Building and energy technology can improve in leaps and bounds during that time. With a long-term contract, building owners can get stuck with outdated technology or trapped in a financial agreement that no longer makes sense.
Uncertain Cash Flow
While there are a variety of agreements that can be used for an Energy Savings Performance Contract, generally monthly payments are made based on the energy savings of the project. This model creates a problem for the cash flow of a business. The energy savings must be calculated based on an estimation of what the building’s energy costs would have been without the improvements. There is no way to know for sure how much electricity a building would have used, given changes in the weather and slight fluctuations in a building’s operations. This leaves businesses with a big question mark on the balance sheet at the beginning of the month on how much electricity they will actually save and how much money they will actually owe.
Because these contracts can only estimate energy savings, there is no guarantee about how much money the project will save in the long run. Even if an Energy Savings Performance Contract includes a cap on the amount a business will owe each month, it’s possible that by the end of the contract the business will be stuck with upgrades that don’t deliver the promised energy savings.
Inflated Project Cost
With an Energy Savings Performance Contract, the company providing the upgrades benefits from building the largest project possible, increasing the cost and hedging their bets on efficiency technology that may not have proven to be entirely effective. This model saddles building owners with the cost of technology that may not be the best fit for their situation.
Energy costs fluctuate and so do payments through an Energy Savings Performance Contract. Rather than generating a fixed cost that businesses can plan for, ESPCs introduce uncertainty into business managers’ budgets.
There is another way to get energy efficiency upgrades without the risks and costs associated with ESPCs and ESAs. Through D.I. Pathways monthly utilization fee, business owners get risk-free upgrades for one low monthly payment. This contract can be canceled at any time, letting business owners get the energy savings they want while remaining flexible.
To learn more about how to get risk-free efficiency upgrades, contact D.I. Pathways today.