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How to Make Performance Contracting Work at Your Utility

Contracting with an energy services company can be a wise way for water and wastewater utilities to implement efficiency improvements. Performance contracting is a powerful tool, but success usually happens only when both parties fully tap the specific knowledge each participant brings to the project, and apply best practices.

An energy services company (ESCO) is a commercial business that delivers operational efficiency improvements in a progressive design-build environment. The facility owner benefits from the savings and pays a fee to the ESCO in return. ESCOs provide a guarantee of energy savings, which are specified in a performance contract. They also provide a financial guarantee to project lenders that the savings generated will cover the debt service for any new required equipment. Black & Veatch has offered performance contracting services since 2008.

“The first key to success in working with an ESCO is to maintain reasonable expectations,” said Mike Hanna, Black & Veatch Project Manager specializing in performance contracting. “It is not as simple as it sounds. Every performance contract is a business proposition – the two parties need to share the risks and the rewards appropriately. The utility cannot transfer all of the risk to the ESCO nor expect the ESCO not to be paid reasonably for taking clearly assumed risks.”

Hanna said this issue is not necessarily a problem as long as all parties fully understand how the savings are calculated, how the savings will be measured and verified, and exactly what is being guaranteed.

“Unfortunately, some utilities and ESCOs don’t fully explore and discuss all of these issues,” Hanna said. “As a result, the utility may not clearly understand actual savings and how they are measured. This means disputes as to whether there is a shortfall may arise.”