ESCOs

An energy service company (ESCO) is a firm that develops, finances, and implements energy efficiency projects for public or private sector clients and guarantees a specified level of energy savings. ESCOs typically start with a comprehensive energy audit, identify cost-effective efficiency measures, design and install improvements, and may provide ongoing commissioning and maintenance. The business arrangement is often a performance contract in which project costs are repaid from a portion of realized energy savings, sometimes with a baseline fee; if savings fall short, the ESCO may assume the shortfall under the contract.

A central feature of ESCO projects is measurement and verification (M&V) of energy savings, using standardized methods to validate performance. Baseline energy consumption is established, with ongoing measurements used to confirm that the expected savings are realized. Common measures include lighting retrofits, HVAC upgrades, building automation, insulation improvements, and controls, with some projects adding on-site generation or solar installations. Financing may be provided by the ESCO or arranged through third-party lenders, enabling no-upfront-cost implementations.

Procurement typically follows competitive bidding and formal contracting in line with public or corporate procurement rules. Long-term arrangements, often spanning five to twenty years, reflect the duration of the energy savings payments and any ongoing maintenance. Benefits include reduced energy costs, capital preservation, transfer of performance risk, and infrastructure upgrades aligned with sustainability goals. Challenges can include accuracy of savings estimates, contract complexity, and credit risk, requiring careful M&V, due diligence, and clear risk allocation.