Performance contract or of “shared savings” seeks to generate an economic flow, measurable, justifying investment in an asset or project to reduce energy consumption. Conceptually, the contract allows the customer to benefit from a technological change that – by definition – is more efficient, and as a result, reduces the energy invoice amortizing costs, generating a profit for the ESCO, and, ideally, a positive saving flow for the customer.
Performance contracts can have many variables according to each case, but mainly considering:
- Determination of an energy saving opportunity in a facility that can be a building, office or industrial type installation.
- Confirmation of a technical solution that generates a flow of savings coming from reduced consumption of electricity or thermal energy.
- Need to acquire and install machinery and equipment that will allow generation of savings.
- Amortization and project repayment within an annual or multi-annual defined period of time.
Implementation of a performance contract carries certain risks:
|Risk||Who assumes it?||How is mitigated?|
|Project Execution||Entity providing capital or financing for the project.||Execution risk is mitigated selecting an ESCO having a proven track record of similar executed projects. Another way to mitigate for the financing entity is imposing execution conditions to ESCO.|
|Non-payment||ESCO Company||This non-payment risk is inherent to the contract and the ESCO can mitigate it by structuring a contract where the following is considered: Payment of moratory interests Sureties in case of non-payment favored to ESCO|
|Null or Minor Savings estimated by ESCO||ESCO Company||Being a performance contract where the end customer does not pay resources and the payment is subject to results, risk must be mitigated by ESCO|
|Property of Equipment||ESCO Company||Linked to “Non-Payment” risk whereby the way of mitigating it is similar to that described in this one.|
It is important to note that from determined risks, the customer benefits the most for he does not assume any risk, because incentives are aligned to ensure project success.