Performance-based contracting is a type of program whereby the implementation of energy efficient solutions designed to upgrade facilities and reduce operating costs is paid for by guaranteed energy savings. Implemented energy conservation measures are designed to improve on existing systems to reduce the consumption of electricity, natural gas and water. The savings that the upgrades generate fund the work over the length of the contract, often spanning several years. The identified savings that result from project implementation are guaranteed by the ESCo. Delivering on this guarantee means that the ESCo will cover any savings shortfalls and correct the situation causing the shortfall. With the performance contract financing model, organizations can improve their facilities, manage rising energy costs and reduce environmental impact. These benefits can all be accomplished without raising operating budgets.
There are two primary financing models that can be implemented; one involves the university leveraging the funding and the other involves the ESCo integrating the funding within the performance contract. In either case, the performance guarantee backs up the payments resulting in a cash-flow neutral program. The differences result in where the money flows and whether or not there is a secondary financing contract in addition to the performance contract. The illustration below demonstrates a traditional finance model whereby the client sources the funding. The finance model that will ultimately be used will be determined as part of the project development.