When it comes to strategizing and developing a clean energy project, grantees have a number of financing options, including an Energy Savings Performance Contract (ESPC). In response to a specific grantee question, this Blog post explains various clean energy project financing options and how they differ from an ESPC.

Question:  When facilities are working toward accomplishing their energy savings goals, how can they best differentiate between an ESPC, a Utility Energy Service Contract (UESC), and a Power Purchase Agreement (PPA) when choosing the financing option that will best suit their needs?

Answer: In a UESC, a utility arranges financing to cover the capital costs of the project. The facility repays the loan using, in part, money that the facility is saving once these energy efficiency measures are in place. With this arrangement, facilities can implement energy improvements with no initial capital investment. The net cost to the facility is minimal, and it is able to save time and internal resources by using the one-stop shopping the utility provides.

An ESPC and a UESC are fundamentally the same: the energy savings help pay for the facility improvements. The difference lies in who arranges the financing, the facility or the utility. In order to make a decision about which financing to use, a facility needs to know which option will provide the lowest financing cost for the project.

A Power Purchase Agreement is a different sort of financing option. With a PPA, a third-party developer owns, operates, and maintains a solar photovoltaic or other renewable energy system, and a host customer agrees to site the system on its property. The host customer buys electricity the system produces, paying the third-party energy provider a predetermined rate for a predetermined period of time. This financial arrangement allows the host customer to receive stable, and sometimes lower-cost, electricity, while the power services provider benefits from tax credits and income generated by selling the electricity to the host customer.

There is another key differentiation between these sorts of financing options. Basically, a PPA lets a facility buy renewable energy, while an ESPC or UESC helps a facility upgrade its systems to reduce energy, water, or operational costs, along with possibly generating renewable energy. 

If you have additional questions regarding ESPCs, UESCs, or PPAs, please submit a comment to this post or contact a Technical Assistance Provider.

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Content for this Blog post courtesy of Sentech-SRA/ICF International