9. FAQs ABOUT ESCO PERFORMANCE CONTRACTS

9. FAQs ABOUT ESCO PERFORMANCE CONTRACTS

Warranty vs. Performance Guarantee

There is often confusion about the difference between a performance guarantee and an equipment warranty. A warranty is standard with all equipment purchases and covers workmanship, typically lasting for one or two years for most machinery suppliers.

For Example- If one buys a car and the door handle falls off that is covered by the warranty. If it had been written into the contract that the car will go from 0 to 60 in under eight seconds that is a performance guarantee. It describes how the machine will actually perform, and while it may have a time component attached (the performance levels must be reached within 60 days, or be continuous over six months, for example), it typically expires once the criteria are met.

While a warranty is a standard clause in an equipment contract, a performance guarantee is is negotiated as an integral part of the energy performance equipment contract.

Performance Contracts have to be lengthy

While making sure all the essential terms are in the contract, the length of contract if kept at minimum ensures that the contract is negotiated and closed with minimum delays.

If during an EPC, there is an increase in tariff, the ESCO opportunities for cost savings may lose out on

Savings proportionately increases when unit rate goes up. However these savings have not increased due to ESCO's inputs.

An Example:

(Baseline) (Post ECM Installation) Electricity Savings

1000 kWh/ Year 1000 kWh/ Year

Cost/ Unit

6 7 (Increase by 1 Rs/Unit)

Total Energy Cost Savings

6000 Rs/Year 7000 Rs/Year (Goes Up)

The tariff can be kept fixed or floating as per actual depending upon the ESCO and their client agrees to. The best practice is to fix the unit rate which can be the rate applicable at the time of signing the performance guarantee contract