Energy Service Companies (ESCos) and Power Purchase Agreements (PPAs)
An ESCO, or Energy Service Company, is a business that develops, installs, and finances projects designed to improve energy efficiency. More often than not this will include the use of sustainable energy sources, and taking responsibility for maintenance costs for facilities over a seven to 10 year period.
ESCOs generally act as project developers for a wide range of tasks, and assume the technical and performance risk associated with the project. Typically, they perform the following services:
- Develop, design, and finance energy efficiency energy generating projects
- Install and maintain the energy efficient and energy generating equipment involved
- Measure, monitor, and verify the project’s energy savings
- 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 savings generated.
ESCO projects are comprehensive, which means that the ESCO employs a wide array of cost-effective measures to achieve energy savings. These measures often include the following:
- High efficiency lighting, heating and air conditioning
- Efficient motors and variable speed drives
- Centralized energy management systems
What sets ESCos apart from other firms that offer energy efficiency, such as consulting firms and equipment contractors, is the concept of performance-based contracting. When an ESCO undertakes a project, the company’s compensation, and often the project’s financing, are directly linked to the subsequent amount of energy that is actually saved.
The comprehensive energy efficiency retrofits inherent in ESCO projects often require a large initial capital investment, with a relatively long payback period. To ease this burden, the customer’s debt payments are tied to the energy savings offered under the project. The customer pays for the capital improvement with the money gained from the difference between pre-installation and post-installation energy use and other costs. For this reason, ESCOs have led the effort to verify, rather than estimate, energy savings.
One of the most accurate means of measurement is the relatively new practice of metering, which is direct tracking of energy savings according to sanctioned engineering protocols.
Most performance-based energy efficiency projects include the maintenance of all – or part – 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 most contracts, the ESCO provides any specialized training needed to enable the customer’s maintenance staff to seamlessly take over at the end of the contract period.
Another critical component of every energy efficiency project is the education of customers in their own energy use patterns. This is central to developing an ‘energy efficiency partnership’ between the ESCO and the customer. The partnership also helps the customer to understand how their energy use is related to the business that they conduct.
Ancillary services in a typical contract will usually include the removal and disposal of hazardous materials from the customer’s facility. Existing fluorescent lighting equipment, ballasts containing PCBs, fluorescent tubes with traces of mercury – when such items are replaced, the old equipment must be disposed of as hazardous waste.
Upgrades to heating, air conditioning, and ventilation systems may involve the removal of asbestos. Such waste would also be properly disposed of by the ESCO.
A Power Purchase Agreement (PPA) is a legal agreement between an electricity generator and a power purchaser.
The power purchaser buys energy, and sometimes also capacity and ancillary services, from the electricity generator. Such contracts can play a key role in the financing of independently owned electricity-generating technology.
The PPA is a central document in the development of independent power plants, and is sometimes key to obtaining project financing. The PPA provider secures funding for the project, maintains and monitors the energy production, and sells the electricity to the host at an agreed price for the period of the contract.
In some renewable energy contracts, the company has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.
Darwind specialises in energy supply contracts based on wind, solar and biomass generated energy.