In an energy savings performance contract (ESPC), after energy conservation measures are fully implemented, people typically reconcile the associated savings once a year. Because this reconciliation may occur in the middle of the budget cycle, it is a good idea to adjust the timing of the annual savings reconciliation to coincide with the governmental entity’s budget cycle. The easiest way to do this is to shorten the timeframe in the first year, and then match future savings reconciliations to the budget cycle every year thereafter.

This post responds to a question from a grantee about savings reconciliation terms with the energy services company (ESCO) that is implementing their ESPC.  More information on ESPCs is available on the Solution Center Energy Savings Performance Contracting page. 

Our ESCO wants to apply the early savings to the next budget cycle. The ESCO’s administrators suggest that accumulating these savings can help offset a future shortfall. Should we consider this option?

Answer: State and local government budgets operate on an annual basis, and budgeted funds that are not spent by the end of a fiscal year are returned to the general fund. Therefore, you need to calculate all guaranteed savings on an annual stand-alone basis.

When preparing an ESPC agreement, avoid terms that allow the ESCO to carry over savings that occur in early years to offset losses in later years. These sorts of terms do not benefit the building owner. If excess savings (any savings exceeding the guaranteed amount) occur, you should be able to recoup these savings in the current fiscal year. ESPCs do not share in the savings. Instead, the municipality retains the benefits of any excess savings, and should reconcile all savings annually, in a timeframe that coincides with the fiscal year budget cycle.

For further questions regarding ESPCs, please provide a comment to this post or contact a Technical Assistance Provider.

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