Developing Model ESCO Performance Contracts
6. FINANCING AN ENERGY PERFORMANCE CONTRACT PROJECT Funding is a critical part of any EPC and paying for the investment from savings is a function of the total investment costs, the terms of the contract, financing, and the savings generated. If the cost of the ECMs installed under the contract is to be paid from savings, the accumulated savings over the life of the contract need to be equal to, or be greater than, the total cost of the project, including financing costs. Once the project costs have been determined, and the level of savings agreed, the ESCO needs to establish the source, determine the applicable terms, and establish whether project financing can be structured to meet the needs of both parties (ESCO & Client).23 In any EPC project, there are basically three sources that can be used to fund an ESCO project:
direct financing provided from the balance sheet of the ESCO ; third party financing: leveraged by the ESCO, equipment suppliers, or leasing firms; or direct financing by the Customer using traditional sources of project funds
6.1.
ESCO Financing
ESCO financing, where it is available, may provide several advantages to the Customer such as: • offering a complete one-stop-shop for project – technical risks as well as the financial risks • transferring ownership of the equipment to the client once the contract is fully paid out; • offering flexible models of payments to meet the needs of the project. Not all ESCOs have the capacity to offer direct financing for their projects. ESCO financing depends on its corporate financial viability, and whether it has a strategy in place to offer a combination of financial and technical services to simplify project delivery mechanisms. An ESCO’s inability to provide direct financing is not be considered a risk to the Customer, or give rise to a negative perception about the technical capabilities or financial soundness as ESCOs are primarily technical and project oriented solutions providers, and a high level of project debt would quickly limit their operations, as their ability to access new sources of capital would become severely restricted.24 It is important to note that the implementation phase of an EE project (the actual construction of the EE installation) is a critical phase of EPC in terms of financing.
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Best Practice to EEC Tom Dreesen
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