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What is an ESCO?

What is an ESCO?

An ESCO, or Energy Service Company, is a business that develops, installs, and may arrange for financing projects designed to improve the energy efficiency and maintenance costs for facilities over an agreed on period of time. ESCOs generally act as project developers for a wide range of tasks and assume the technical and performance risk associated with the project. Typically, an ESCO offers the following services:

  • Energy audit of the facilities;
  • Develop, design, and bundle energy conservation measures for the project;
  • Install and sometimes maintain the energy efficient equipment involved;
  • Measure, monitor, and verify the project's energy savings; and
  • Assume the risk that the project will save the amount of energy guaranteed.

These services are bundled into the project's cost and are repaid through the dollar savings generated.

ESCO projects are comprehensive, which means that the ESCO employs a wide array of cost-effective measures to achieve energy reduction and savings. These measures often include high efficiency lighting, high efficiency heating and air conditioning, efficient motors and variable speed drives, and centralized energy management systems.

What sets ESCOs apart from other firms that offer energy efficiency, like consulting firms and equipment contractors, is the concept of performance-based contracting. When an ESCO undertakes a project, the company's compensation is directly linked to the amount of energy that is actually saved.

Typically, the comprehensive energy efficiency retrofits in a project requires a large initial capital investment and offers a relatively long payback period. The customer's debt payments are tied to the energy savings offered under the project so that the customer pays for the capital improvement with the money that comes out of the difference between pre-installation and post-installation energy use and other costs. For this reason, ESCOs verify, rather than estimate energy savings. One of the most accurate means of measurement is the direct tracking of energy savings through energy management software.

Some performance-based energy efficiency projects include the maintenance of some portion of the new high-energy equipment over the life of the contract. The cost of this ongoing maintenance is folded into the overall cost of the project. Therefore, during the life of the contract, the customer receives the benefit of reduced maintenance costs, in addition to reduced energy costs. As an additional service in some contracts, the ESCO may provide specialized training needed so that the customer's maintenance staff can take over at the end of the contract period.

Another critical component of every energy efficiency projects is the education of customers about their own energy use patterns in order to develop an "energy efficiency partnership" between the ESCO and the customer. A primary purpose of this partnership is to help the customer reduce energy use and understand how their energy use is related to everyday actions.

Professional trade groups, including the Association of Energy Service Companies (http://www.naesco.org) sponsor ESCO accreditation programs. In earning accreditation, an ESCO has been determined to possess:

  • The technical and managerial competence to develop comprehensive energy efficiency projects, including lighting measures; efficient motors and drives; and measures involving heating, ventilation, and air conditioning systems;
  • The technical and managerial competence to provide a full range of energy services, including energy audits; providing or arranging for project financing; design engineering; providing operations and maintenance services; and verifying energy savings according to accepted industry practice;
  • And the regular business practice of developing performance-based projects for which the ESCO’s compensation is contingent upon the projects realizing verified cost savings.