ESPC-Performance Contracting in the Private Sector: What are the barriers?

We have spoken several times now about ESPC and how it is such a widely used tool in the public sector.  I will take some time to explore today why ESPC is not as popular in the private sector.  I will borrow from several resources, with the first being a blog post from Pike Research that was posted in November 2010.  One of the first quotes in the blog post stated that ESCO (energy services company) model would not work in the private sector.  Here are the reasons listed for this comment:

  • limited capital budgets
  • long payback period
  • lending
  • split incentives
  • lack of education

You can read the rest of this post by clicking here.

Peter White of Johnson Controls has prepared a white paper that talks in great detail about how the private sector can benefit from ESPC and it describes how the ESPC process has benefitted the public sector for years.  Seeing the recent escalation in energy prices in the industrialized world makes me think that energy savings and Performance Contracting will become an even more integral part of not only the private sector, but the public sector as well.

A third resource comes from Somik Ghosh and Deborah Young-Corbett of Virginia Tech and Suchismita Bhattacharjee of Ball State University.  Their presentation, “Barriers to the use of ESPC in the Private Building Sector: Perception of the AEC Community” gives a good overall summary of the barriers from the design and construction world.  The information below shows what they found to be some of the major obstacles to ESPC:

Market Barriers (MB)

MB # 1   Low awareness among owner/ insufficient information about ESPC
MB # 2   Inability of ESCO to provide comprehensive service
MB # 3   Limited involvement of the owner
MB # 4   Ambiguity between owner and ESCO regarding realization of estimated saving
MB # 5   Owner walking out of the contract
MB # 6   Owner reluctant to ask for external funding
MB # 7   Owners themselves implementing improvement according to ESCO‟s proposal

Institutional Barriers (IB)

IB # 1   Administrative hurdle/ complicated approval process
IB # 2   Increased upfront legal cost
IB # 3   Risk of “non-contract‟ and long negotiation period
IB # 4   Government initiative to subsidize energy price

Financial Barriers (FB)

FB # 1   Long duration of project requiring higher working capital
FB # 2   Lack of short term financial incentive
FB # 3   Reducing owner‟s credit capacity
FB # 4   Uncertainty of payments based on energy savings
FB # 5   Rent control limits the return on energy investment
FB # 6   Small size of contract
FB # 7   Inability to control user behavior regarding usage of energy
FB # 8   Conservative lending practice of financial institution

Technology Barriers (TB)

TB # 1   Lack of standardized procedure for energy audit, conservation measurement, and verification
TB # 2   Lack of technical knowledge among financial institution

As you can see, the barriers to ESPC in the private sector are many, but I believe that we are closer now than ever before to a growth of this valued service in the private sector as well as the public sector.

What is your thought?