Energy service agreements: Potential big kid in town?

(ACEEE blog, 13 Feb 2019) Energy service agreements (ESAs), a type of financing, are growing in popularity. Under an ESA, a service provider delivers energy-saving services using equipment it owns and operates.

Recent projects include multimillion dollar investments by financial institutions (Citi and Generate Capital) and a large utility (National Grid). While most ESAs target large businesses and institutions such as hospitals and universities, at least one vendor now provides these services to homeowners.

ESAs, available for many years, have gained notable support in the past year because they provide services guaranteed to save energy in a way that is designed to be off company balance sheets at a cost that is less than or equal to existing utility charges. Many companies want to minimize the liabilities shown on their balance sheets and therefore often prefer off-balance-sheet financing. In contrast, some other financing strategies – such as power purchase agreements and operating leases (including many energy savings performance contracts and shared savings agreements) – that previously were off the balance sheet now need to be disclosed on company financial statements under new guidance from the Financial Accounting Standards Board (FASB).

Under a typical agreement, the ESA provider develops, finances, and operates projects, with the customer paying for these services through a services charge based on realized savings. The ESA provider often subcontracts engineering and installation to an energy service company that can implement complex projects and guarantee savings. In some cases, the ESA provider pays a facility’s energy bill and in turn bills the customer for the combination of energy and energy efficiency services (this variation is sometimes called a “managed energy services agreement” or MESA).

An ESA can also be used to finance and install distributed energy equipment (e.g., solar or combined heat and power) or water efficiency (commonly labeled “efficiency service agreements”). Sometimes the terms “efficiency as a service” or “energy as a service” (EaaS) are used instead, as highlighted in a recent ACEEE technology brief. A 2017 Navigant Consulting research report estimates the annual global market deployment potential of EaaS in large Fortune 500 commercial and industrial sector buildings will reach $221 billion by 2026.

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ACEEE blog, 13 Feb 2019: Energy service agreements: Potential big kid in town?