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Energy Service Agreements: Advantages For Building Owners

Energy Service Agreements: Advantages For Building Owners

An Energy Service Agreement (ESA) is a unique financing option for energy efficiency projects. It’s neither a loan nor a lease: The service provider pays for the upfront costs of the equipment and performs both routine and emergency maintenance. An ESA can allow building owners to pursue energy-efficient upgrades and enjoy the immediate benefits without paying a tremendous amount of money (or any in some cases) out of pocket. 

In the northeastern United States, many building owners use ESAs to implement green technologies—including heat pumps, LED lighting, and clean energy generation systems. With fixed fees and guaranteed performance, an ESA can help you implement improvements and add value to your building. 

Energy-efficient technologies can improve comfort, reduce your carbon footprint and dramatically lower your energy bills. However, they can be expensive—particularly for high-occupancy units and older buildings. Most building owners need to finance the purchase, but traditional leases and loans can quickly drain your budget. 

At BlocPower, we specialize in energy-efficient heating and cooling systems, and we offer flexible financing options that deliver long-term savings. In recent years, many of our clients have used ESAs to upgrade their fossil-fuel heating systems to modern heat pump technology. In this article, we’ll discuss a few of the advantages of ESAs.

If you’re ready to upgrade to an energy-efficient heat pump system, BlocPower can help you find financing. Find out if BlocPower is available in your area.

The Advantages Of An Energy Service Agreement 

Traditional financing options have several major disadvantages. While the building owner owns all the upgraded equipment outright, they’re responsible for maintaining that equipment. If the equipment fails outside of its manufacturer’s warranty period, the building owner must pay for any repairs. Many warranties also require maintenance records to be in good standing, including verification that maintenance was provided by an appropriately licensed technician. If they aren’t, it can void the warranty.

Standard loans and leases can also carry expensive monthly payments and complex contract terms. For example, while BlocPower’s experts take steps to optimize the installation process for each building, some larger buildings may require scaffoldings. Lenders may not want to assume the risks of this type of high-cost installation without collateral (which typically means creating a lien on the building). 

In an ESA, the service provider assumes most of the risk. ESA contracts include standard, predictable payments with no interest rate—the service provider earns money via the installation, while the building owner benefits immediately from lower energy costs. The equipment acts as the collateral, so an ESA doesn’t require a lien on the building. 

Some reasons to consider an ESA: 

  • Guaranteed Performance — An ESA bundles maintenance with installation, and since the service provider owns the equipment, the service provider is responsible for fixing any issues. Since the service charge is based on realized energy savings, the service provider has a strong incentive to get the best possible performance from the installed units.
  • Lower Monthly Costs — Compared with other financing options, ESAs often have a low monthly cost, particularly for larger buildings that require complex installations. This is due to the longer term of the contract—fifteen years—which allows for the lowest possible monthly payment.
  • Limited Upfront Investment — ESAs don’t require any upfront capital investment.  However, you can always use a down payment to reduce monthly payments.    
  • Easy Approval—In our experience, most building owners can qualify for ESAs. The equipment is the collateral and financial institutions can use an applicant’s personal credit or business credit to approve financing. 
  • Simple Accounting — ESAs are off-balance sheet financing solutions, which can be beneficial for businesses that need to minimize capital outlay.

Will I own my equipment at the end of my energy service agreement?

Because the service provider assumes the risk associated with the installation and maintenance, the building owner does not own the equipment. In a typical Energy Service Agreement template, the building owner can decide whether to purchase the equipment outright (at a discounted rate) or upgrade to a new system at the end of the agreement. 

Remember that terms may be different for every Energy Service Agreement. Sample terms may have different buyout percentages or maintenance schedules than the final contract, so review your agreement thoroughly. 

Alternatives to an ESA For Energy-Efficient Upgrades

While ESAs offer incredible opportunities for retrofitting larger buildings, they’re not always the optimal choice for every upgrade. 

For smaller buildings, a capital lease agreement may offer a better return on investment, since the costs of the installation will be limited and the monthly payments will be relatively low. Under a capital lease agreement, the maintenance costs are not bundled with the installation—you’ll need to pay for routine and emergency maintenance out of pocket—but if you’re working with a reputable service provider those costs should be affordable over the term of the agreement. Even so, if you’re concerned about the costs of an energy system upgrade, an ESA can enable you to minimize upfront costs and the predictable payments can offer peace of mind.

Regardless of the size of your building, capital availability, and other factors, BlocPower can help you find a financing solution that works for you. We offer flexible terms for both capital leases and energy service agreements to help our clients maximize their return on investment—while enjoying the substantial benefits of energy-efficient heating and cooling. 

BlocPower offers flexible financing for state-of-the-art heat pump systems. Get started today by answering a few quick questions about your building.