Energy Services Agreements
An Efficiency Services Agreement (ESA) is a pay-for-performance financing solution that allows building owners to implement energy efficiency projects without any upfront capital expenditure. ESAs are similar to energy savings performance contracts (ESPCs) in that a third party company provides energy savings for a fee. The key difference is the model’s structure, where the ESA provider pays for all development and construction costs and pays the building owner’s utility bill directly.
This model guarantees savings for an agreed upon period of time in exchange for set fees that are less than the borrower’s typical utility bills. Energy service agreement financing is often off -balance sheet, so is useful for tax purposes. Generally, no up-front costs are required for the building owner.
ESAs with third-party utility payments address the split-incentive by replicating a utility bill, allowing pass-through to tenants in the same manner prescribed in the existing lease. Additionally, if the ESA developer assumes the right to discontinue customers’ utilities, it may allow projects to access less costly credit.