Energy Savings Performance Contracting: A Tutorial

Energy Savings Performance Contracting was established in Pennsylvania in 1998 under Act 62 Pa.C.S. § 3752 and later § 3758 (2004 Amendment, Act 77 ).

The program provides Commonwealth Agencies with a way to achieve large-scale capital improvements and energy savings with no upfront costs and in a timely manner. By contracting with a qualified energy service company (ESCO), Commonwealth Agencies are able to pay for facility upgrades today with tomorrow’s energy savings.

The GESA process is unlike the typical “design-bid-build” process in which the lowest responsible bidder wins. The GESA procurement process enables commonwealth agencies to select the ESCO who is the best qualified, provides the best value, and is the best fit for the agency. Selection of the ESCO is through a formal RFP process.


  • Energy Conservation Measure (ECM) – An individual energy improvement item that an ESCO will propose. Typical ECMs would be lighting upgrades and installation of low-flow water valves.
  • Energy Services Company (ESCO) – Service providers who enter into the GESA contract.
  • Investment Grade Audit (IGA) – A rigorous examination of the operating conditions and energy use of the buildings investigated and the proposed plan for energy savings. The IGA is the basis for securing financing of a defined project scope and the basis of the resultant GESA Agreement.
  • Measurement and verification (M&V) – The process of quantifying the energy and cost savings resulting from improvements made to energy-consuming systems and equipment.


Initial Assessment – Typically, an ESCO or an engineering firm meets with the agency to discuss goals and review the location(s) to help guide the school district or commonwealth agency in identifying energy-saving strategies. The school district or commonwealth agency then develops a scope of work to solicit proposals from ESCOs.

RFP and Partner Selection – The school district or commonwealth agency sends an RFP to the ESCOs, soliciting technical and cost proposals for the project. Interested ESCOs survey the location(s), and then submit their proposals for review, which also includes an oral presentation. Evaluation includes past performance and experience, technical approach and capabilities, and cost approach. One ESCO is selected, final plans are agreed upon, and project is approved.

IGA Phase – The ESCO performs a comprehensive analysis of the building(s) for energy efficiency improvement purposes. Energy usage, building characteristics, weather data, and typical usage of the building are analyzed. The IGA report details each energy conservation measure and identifies the savings, payback period, financial impact and environmental benefits. Financing will be based upon the finalized IGA. Once the report is accepted by both parties, it becomes the technical and cost basis of the final Energy Savings Agreement.

Design and Construction Phase – The ESCO begins the project, purchasing and installing the equipment. This phase is typically completed in one year (typical range 7 to 20 months). Upon completion of construction, the ESCO trains facility staff on operations and maintenance of the new equipment.

Performance Period – The ESCO provides monitoring reports to ensure actual savings are achieved.

During this period, which can be 20 years, the ECMs are operated and serviced by both the ESCO and the agency in accordance with the Agreement. During this time, the ESCO has guaranteed a certain amount of energy savings, which are measured and verified by the M&V method outlined in the Agreement. If the energy savings fall short of what has been guaranteed, the ESCO reimburses the agency for the costs associated with the shortfall.


Overcome the Barrier of Limited Budgets – Limited capital budgets present a barrier to funding energy efficiency projects. ESPC can remove the financial barrier by using savings to pay for upgrades today instead of waiting for a capital budget allocation. Postponing infrastructure improvements due to lack of funding can be more expensive because the cost of continuing to pay high utility bills during the waiting period exceeds the interest cost of financing the improvements today.

Improve Facilities and Systems Quickly – ESPC’s comprehensive approach may upgrade some or all of an owner’s systems or facilities at once, capturing synergies and economies of scale. It modernizes infrastructure, improves the work environment, and streamlines maintenance practices to sustain savings and effective operations.

Demonstrate Environmental Stewardship – Reducing long-term energy use through efficiency and renewable energy conserves natural resources, reduces air and water pollution, and reduces our dependence on fossil fuels. Many governments have climate and energy savings goals or long-term sustainability plans. ESPC provides the financial means and technical expertise to achieve those goals, comply with environmental standards, replace antiquated systems, improve processes and operations, and reduce waste.

Use Capital Budget Dollars Wisely – Capital budgets are limited and often stretched across many priorities. With ESPC, utility, and O&M dollars that are no longer needed for their original purpose are invested in infrastructure improvements. Reducing energy and water use helps stabilize the utility budget, reducing the risk of future volatility in energy prices and reducing the associated taxpayer burden.

Support Economic Development – ESPC projects create jobs, and some ESCOs report anecdotally that as much as 70% of the project cost remains in the community. ESCOs often use local contractors that are familiar with the facility and already have a good working relationship. Many owners have challenged ESCOs to buy locally and contract with local companies as much as feasible—an objective stated in the ESCO solicitation.

Streamlined Project Plan – By using this method of procurement, Public / Governmental entities can accomplish and address more of their needs under one umbrella project with a single source of execution responsibility, as an alternative to the traditional bid and spec method with multiple low-bid prime contractors. This saves time and manpower during the installation and minimizes disruption to building occupants, activities, and schedules.

Maximized Rebate / Grant Programs – Performance Contracting allows for greater leverage in maximizing potential utility rebate programs to help fund these projects. The performance contracting company will also look to include any and all available grants associated with specific scope measures further offsetting costs to the customer.

Contractor/ Manufacturer Control – Performance Contracting provides Public / Governmental entities the freedom to dictate which equipment manufacturers and contractors are used to upgrade/modernize their facilities. This eliminates the low bid “…and or equal” aspects of the bid and spec procurement method, resulting in customers having to settle for substandard work. Owner’s Reps and engineering firms have also found this approach beneficial in serving the Owner for the speed, flexibility, and end results this provides following identification of necessary facility improvements

Guaranteed ROI – One of the most valuable aspects of Performance Contracts over traditional bid/spec projects is the project guarantee. The guarantee provides for defined energy / operational savings to the customer while maintaining or improving comfort. This minimizes the entity’s financial risk associated with the installation by guaranteeing an ROI. Providing a turnkey solution guarantees that the finished project will meet the customer’s agreed-upon expectations.

Budget-Neutral / Lesser Budget Impact – Reducing energy and water use results in utility savings over time which can help fund the cost of capital improvements.


Common facility modernization projects include:

  • Lighting, lighting controls, and daylighting
  • Modernized heating, cooling, ventilation, and temperature control systems
  • Envelope components such as: Windows, doors, roofs, insulation, and weatherization
  • Installation of renewable energy sources such as: Photovoltaics (PV), geothermal, oil/coal to natural gas conversion, and more.
  • Indoor air quality systems/improvements
  • Security systems
  • IT/ Communications infrastructure