Enabling public procurement of ESCO services

The Global ESCO Network believes that governments play a huge role, not only in removing barriers which are impeding ESCO market growth, but also by becoming itself a large buyer of ESCO services to generate energy savings in public facilities and infrastructure. But policy barriers persist in many markets, despite some shining examples such as the thriving US ESCO market driven by a dominant and sustained demand for ESCO services by federal, municipal and military agencies.

The Global ESCO Network recommends that governments and policymakers review the existing procurement and budgeting frameworks and ensure that:

• Public agencies are able to directly procure ESCO services within the confines of government procurement regulations.
• ESCO contract durations are not capped by rigid multi[1]year contracting limitations.
• Energy (and maintenance) savings can be deployed to pay for ESCO services.
• Innovative procurement modalities such as Public Private Partnerships – PPP and Joint Ventures – JV transactions are enabled to optimize the mobilization of private sector capital and knowledge resources for public sector energy efficiency projects.

One of the most prominent barriers for successful market development is that government procurement regulations disallow public sector procurement of ESCO services because such performance contracts cannot, from the accounting and asset management standpoints, be classified as either “pure goods” or “pure services” contracts. ESCO performance contracts cannot be a “pure goods” procurement because the services associated with the guaranteed energy savings or shared savings agreement are not properly recognized and compensated for. Neither will ESCO contracts be classified as “pure services” procurements, because the government agency anticipates a transfer of assets at the natural expiration of the contracts.

A closely related barrier is the inability of public agencies to enter into multi-year contracts with durations or expiration dates that exceed time-bound limits defined usually by the end of the finite term of the elected officials or budgetary planning periods. Some projects will need performance contract terms of 10–15 years or longer for the full recoupment of upfront capital investments and O&M expenses, far beyond the typical 4–6-year elective cycles or public planning periods.

Many governments impose strict budgetary limitations on utilizing the monetary value of energy savings to pay for ESCO contracts. Public accounting policies in these markets dictate that all savings will have to be automatically returned to the national or local treasury. To circumvent this restriction, public agencies have proposed a new incremental budget to pay for ESCO services over-and-above the same annual energy budget, or on-bill charging of the ESCO services through energy utilities. While this remedy may work, it delays ESCO procurements and misaligns budgets with actual costs (Global ESCO Network, 2023).

Public-private partnership (PPP) contract procurement is well suited when many public buildings are bundled or when street lighting systems across several neighbouring municipalities are packaged as a singular tender. The larger scale of the project package allows full recovery of the PPP transaction costs and the budgetary overheads associated with the creation of corporate vehicles to implement the project. A joint venture (JV) arrangement between an ESCO and a state-owned enterprise or government corporation, where both the ESCO and the public company co-invest in the preparation and implementation of the activity, may be considered for smaller projects.

Policy frameworks should allow mobilization of private sector capital through such modalities.