Done right, Energy Saving Performance Contracts (ESPC) can be a great way to fund infrastructure upgrades.
Done wrong, they can cost taxpayers millions.
What is an ESPC
Energy Saving Performance Contracts (ESPC) are intended to deliver infrastructure upgrades (lighting, HVAC, controls, etc.) that pay for themselves with the energy savings they create. Rather than continuing to waste money on utilities, your budget stays the same and the equipment is brand new.
In theory it is a great concept and when done well, it is!
The issue is, not all ESPCs are done well.
Potential ESPC Problems
The energy saving performance contract (ESPC) industry has been marred by several scandals and corruption as some companies have exploited loopholes in the system. These problems typically surface on the procurement, delivery, and performance of projects.
In 2018, Schneider Electric settled a lawsuit with the U.S. government for $11 million over allegations of overcharging on an ESPC contract with the U.S. Army. The company was accused of inflating prices, submitting false claims, and engaging in kickbacks. (source).
In 2014, Siemens, a German multinational conglomerate, was awarded a $90 million energy savings contract with the City of Jackson, Mississippi. The contract aimed to retrofit the city’s buildings and water infrastructure with more efficient technology to save on energy costs, increase water revenue, and reduce the city’s carbon footprint.
However, in 2018, a whistleblower filed a lawsuit against Siemens, alleging that the company had engaged in fraudulent practices and overcharged the city. The lawsuit claimed that Siemens had installed cheaper and lower-quality equipment than what was promised in the contract, and had manipulated energy savings data to make it appear as though the city was saving more money than it actually was.
The lawsuit was settled for $89 million in 2020.
Due to the multitude of examples of poor performance contracts, many states have implemented or are considering reform their statutes overseeing ESPCs.
In 2018, the Wisconsin state legislature passed a bill that placed restrictions on the use of ESPCs by public entities, including state agencies, school districts, and local governments.
The bill, known as AB 804, required that any ESPC entered into by a public entity must be approved by the state Public Service Commission and must meet certain criteria, such as having a payback period of no more than 20 years and meeting minimum energy savings requirements.
Supporters of the bill argued that it would protect taxpayers by ensuring that ESPCs were a good deal for public entities and that the energy savings were real and verifiable.
The bill was signed into law by Wisconsin Governor Scott Walker in April 2018.
Overall, the restrictions on ESPCs in Wisconsin highlight the ongoing debate around the use of these contracts in the public sector. While ESPCs can provide a cost-effective way to improve energy efficiency, they also come with the risk of fraud and abuse, making it important to have adequate oversight and transparency.
During the 88th Texas Legislative Session, Senator Juan “Chuy” Hinojosa introduced Senate Bill 1828. This legislation aims to massively reform the Energy Saving Performance Contract process for all Texas government agencies. (bill analysis)
SB1828 has a number of reform measures, including mandatory Request for Qualifications, mandatory owner’s representatives, and more stringent oversight of measurement and verification.
In the referenced analysis, Sen. Hinojosa cites the following reason for pursuing the reform:
“ESPCs have become the focal point of an ongoing federal investigation into a large-scale public corruption scheme in which ESPCs were being used to make kickback and bribe payments to local elected officials and administrators in western Hidalgo County. The investigation came to light after five LGEs received federal grand jury subpoenas in May 2021.
As of March 2023, almost a dozen local public officials and subcontractors have pleaded guilty to federal charges, while others yet to be charged have been implicated in the conspiracy to defraud the government. The federal charges to which these individuals pled guilty include extortion, receiving kickbacks and bribes, and money laundering.
According to court documents and federal authorities, the common denominator is a single ESCO, which approached and convinced these LGEs to borrow millions for “energy savings” projects and circumvent competitive bidding procurement methods. Funds from the overcharges and inflated costs were used to payout at least $1.5 million to local officials involved in the massive bribery and kickback scheme.”
As of the time of this writing, the bill is pending in committee.
The Value of an Owner’s Representative
While ESPCs are pitched as a “no cost” way to upgrade infrastructure, they are still complicated, multi-million dollar projects. They have complex procurement laws, sophisticated energy calculations, and convoluted project delivery stacks.
One of the best ways to avoid overpaying for a project and/or not receiving the expected savings later is engaging a knowledgable owner’s representative.
An owner’s representative should have experience developing and implementing energy savings projects and preferably hold a recognized credential, like the Association of Energy Engineer’s Certified Energy Manager.
In addition, they should have direct experience with the Energy Saving Performance Contract project development, procurement, and implementation process.
Lastly, they should have deep understanding of the International Performance Measurement & Verification Protocol (IPMVP) Options for verifying energy savings. There are four methods. Option A, Option B, Option C, and Option D. Each of these is different and appropriate for different scenarios based on the system and goals.
A good owner’s rep will more than pay for themselves with savings to the project and assurance that long term savings are achieved.
This document from the Department of Energy talks in more depth about the value and qualifications of an ESPC owner’s rep. They also provide several examples of how customers saved hundreds of thousands of dollars through the insight provided by their owner’s rep.
Energy Saving Performance Contracts can be a very good way to upgrade infrastructure, reduce operating cost, and increase sustainability.
However, they should not be entered in to lightly.
We at Holistic Utility Solutions have years of experience with energy projects and the ESPC process. We can be your advocate throughout the project and ensure you select the best Energy Service Company (ESCO) and implement a project that is a win for you and your constituents.
Related Reading from Holistic Utility Solutions:
How to Implement a Cost-Effective Energy & Sustainability Strategy
Increased Water Revenue & AMI Deployments