Non Conventional Performance Based Financing Vehicles

Guaranteed or shared savings performance-based financing provides low risk and responsibility to the host facility and higher risk and responsibility to the contractor/investor. Consequently, they provide lower net financial benefits to the host facility and greater financial reward to the contractor/investor. Performance-based contracting is a specialty field, which generally consists of large ESCos that have the full range of technical and financial resources to analyze, develop, design, install, maintain, and manage large projects. Performance-based contracting is also done by smaller design-build engineering firms in joint venture with firms that have substantial financial resources.

The following is a list of non-conventional performance-based financing vehicles, with brief descriptions of each:

• Guaranteed or insured savings agreements are programs that utilize the savings of energy cost generated by the energy efficiency equipment to service a third-

party financing of the equipment. The financing entity may be the installing company or an institutional investor. The energy savings are guaranteed by either the installing company and/or an insurance program underwritten by a top rated national company. Guaranteed savings agreements call for a pre-arranged, one-time, or ongoing savings verification program.

• A shared savings agreement is an arrangement in which the contractor/investor installs the equipment and receives payments from the end-user/host facility based on the energy savings produced by the equipment. Shared savings agreements are sometimes considered to be off-balance sheet financing, which often makes them attractive.

Two general types of agreements are fixed and true shared savings contracts.

• Fixed shared savings contracts define the savings based on a one-time savings analysis. The savings-based payment is not subject to change following acceptance by the customer. This may be based on an analysis prepared prior to construction, a verification analysis at the time of project completion, or one year after project completion. These are somewhat similar to many standard guaranteed savings agreements.

• True shared savings contracts require the savings to be verified periodically (e.g., monthly or yearly) and the savings-based payment is subject to change based on the period measurement of savings.

To proceed with a shared savings agreement, the third-party, contractor/investor, or financier is required to provide a detailed program for verification and guarantee of the savings revenue stream. Funding for such a guarantee can be provided in the form of a letter of credit or by posting a performance bond for an amount that would equal the customer's share of the savings over the term of the contract.

One of the keys to ensuring optimization of these types of energy cost savings programs is effective projection and validation of savings to ensure maximum financial returns. In addition, if recommended measures are not properly designed, then the use of poor quality components, technical obsolescence, early retirement of equipment, and excessive maintenance can erode the savings stream over the life of the project.

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