Questions from grantees occasionally surface regarding the guarantees afforded by an Energy Savings Performance Contract (ESPC). Answers to questions this week focus on some of these savings-related inquiries.
** An ESPC is an agreement between a customer and an Energy Services Company (ESCO). Based on a comprehensive energy audit, the ESCO arranges to finance and implement an energy savings project for an existing building in need of an upgrade. Improvements are repaid by the customer through the costs averted in energy savings over the term of the contract. **
Question: In an ESPC cash flow analysis, what is a 'letter of credit' and who offers such a financial product? What is the cost of guaranteed savings per year?
Answer: The letter of credit is typically arranged by the ESCO through their bank. It will require that the claimant notify the ESCO in writing that there is a savings shortfall, and request payment from the ESCO. If the ESCO does not pay for the shortfall within a certain time period, the claimant can file a claim against the ‘Letter of Credit’ and the bank will pay.
The letter of credit is typically for one year, but there must be a clause stating that the bank renew the letter of credit annually for the payback period of the financing of the project. The letter of credit does not need to be for the total of the annual savings. For example, if you know that the savings from a lighting Energy Conservation Measure (ECM) will be realized - then it comes down to determining what savings can be at risk, which is dependent upon every particular ECM.
Another viable option is an irrevocable letter of credit, which can be issued by a parent company of the ESCO. The benefit is that there is typically no charge for it, so it is a good choice, if applicable. Just make sure that there is no way for the issuer to deny the claim.
If you have further questions regarding ESPCs, please comment to this post or contact a Technical Assistance Provider.
Content for this Blog post courtesy of Sentech-SRA/ICF International