The Perfect Storm for ESPCs

Energy Savings Performance Contracting (ESPC) is an idea whose time has come.  The federal government is beyond broke.  The budget deficit reached a record $1.4 trillion at the end of last fiscal year.  It is projected to remain over $1 trillion annually for as long as estimators can see.  This level of deficit spending will crush the U.S. economy.  It cannot be sustained.

Yet, despite spending far more than it takes in, the government still has needs.  Every program cannot be frozen permanently or terminated.  The real question remains how to continue to provide for real needs while forcing the elimination of waste and expensive cost overruns?

Enter the ESPC.

Energy Savings Performance Contracts are highly specialized federal contracts that allow the federal government to upgrade obsolete capital assets when standard appropriations are not available.  The government pays for the upgrades out of the stream of savings generated by the upgrades over a period of time. 

ESPCs are unique in that the federal government,  and therefore taxpayers, own the upgrade from the outset but only payfor the upgrade as it produces savings.  Thus, it is the private contractor, not the government, which bears the risk if the actual energy savings are insufficient to cover the costs of the upgrade.  However, if actual savings are greater than expected, the government retains all excess savings. 

This type of performance-based contracting has been in use by the federal government for over 20 years in one form or another.  The program was last reauthorized in the Energy Policy Act of 2005, which extended the use of the program until 2016.

For years this has been a small program limited to upgrading buildings with new heating and cooling, lighting fixtures, window replacements and insulation.  All of these items don’t amount to much savings.

Where will the real savings be achieved?

Focus your attention on the Pentagon.   Regardless of which party controls Congress in 2011, the Defense Department budget will be reined in, but the United States government must still protect and defend the country.  There will still be a need for improved weapons and support systems.  As the budget process moves forward in the new Congress next year, look for ESPCs to provide an excellent option to allow technology upgrades to improve the capabilities of our war fighters while forcing contractors to provide real value and performance for taxpayers.

– Roger Morse, Visiting Fellow