An energy service company (ESCO) is a company that is engaged in developing, installing, and financing comprehensive, performance-based projects, typically 5-10 years in duration, centered around improving the energy efficiency or load reduction of facilities owned or operated by customers. Projects are performance-based when the ESCO’s compensation, and often the project’s financing, are meaningfully tied to the amount of energy actually saved, and the ESCO assumes the risk in linking its compensation directly to results. Performance contracting is another term for the performance-based approach.
Energy performance contracts can be distinguished from two contracting approaches commonly utilized by other types of energy-efficiency service providers: (i) contracts for installation of efficient equipment for a specified fee, which is typically backed by a manufacturer’s equipment warranty contract, and (ii) energy consulting services, such as building audits and advice on potential energy – efficiency improvements. Contracting based on performance does not necessarily have to be undertaken by an ESCO, but in practice ESCOs have been the pioneers and major users of performance contracting for energy-efficiency projects. ESCOs used performance contracting primarily as a method for assuring their clients that they would confidently achieve energy and cost savings—there were no other companies in the marketplace taking this risk. For this reason, ESCOs are fundamentally different from consulting engineers and equipment contractors specializing in efficiency improvements; the former are typically paid a fee for their advice, whereas the latter are typically paid a fee for their equipment, and both accept no project risk. Such risk creates the highest possible motivation to properly specify, design, engineer, install, and maintain savings over the length of the contract.