An Energy Savings as a Service contract, often called an Energy Service Agreement (ESA) or Energy-as-a-Service (EaaS) arrangement, is a pay-for-performance financing model that allows commercial, institutional, and municipal facilities to upgrade their energy infrastructure without spending any capital upfront. Under this structure, a service provider covers the full cost of project development, equipment, and installation. In return, the customer makes service charge payments based on the actual energy savings achieved, with those charges set at or below the customer’s existing utility price. This approach transfers financial and performance risk away from the facility owner and onto the provider.
How Energy Savings as a Service Contracts Work
In a typical Energy Savings as a Service contract, the provider finances, installs, and manages all energy-saving measures — including commercial HVAC maintenance and other facility-wide upgrades. The customer does not take on debt or make a capital investment. Instead, the provider recoups its costs over time by keeping a share of the verified savings. The customer pays a fixed output-based charge tied to actual energy reductions realized. According to the U.S. Department of Energy’s Better Buildings Solution Center, the customer makes service charge payments “for actual realized savings, with a fixed output-based charge set at or below the customer’s existing utility price.” This structure means the provider bears the performance risk. If savings fall short of projections, the provider is paid less, not the customer.
Because the contract is off-balance-sheet, the energy upgrades do not appear as debt on the customer’s financial statements. This feature is especially attractive to organizations that are budget-constrained or want to preserve borrowing capacity for other priorities.
Key Differences from Traditional Energy Financing
Energy Savings as a Service differs in several important ways from traditional Energy Savings Performance Contracts (ESPCs) and Energy Service Company (ESCO) agreements. Understanding these differences helps facility managers and executives choose the right financing path.
Asset Ownership
In the EaaS model, the provider typically owns the equipment for the duration of the contract. In an ESPC, the customer often owns the equipment from installation or has the option to purchase it at the end of the term. This distinction affects balance sheet treatment and the allocation of maintenance responsibilities.
Upfront Costs and Debt
Both EaaS and ESPC offerings can provide no upfront costs. However, ESCO contracts sometimes require the customer to make a capital investment or take on debt, and they are not always off-balance-sheet. Energy Savings as a Service contracts require zero capital and add no new debt.
Performance Risk
Under an Energy Savings as a Service contract, the provider takes the performance risk. If the energy savings are less than projected, the provider gets paid less. In many ESPC structures, the customer may bear some or all of the performance risk. The ACEEE report notes that in ESCO contracts, “performance risk may be borne by the customer,” whereas in EaaS the provider assumes that risk.
Contract Flexibility
EaaS contracts typically allow the customer to add new retrofits during the contract term. ESCO contracts make mid-term additions difficult. This flexibility is valuable for facilities that plan phased upgrades or want to incorporate new technologies as they become available.
Typical Components of an Energy Savings as a Service Contract
While the specific measures included vary by facility, most Energy Savings as a Service contracts cover a comprehensive set of energy efficiency upgrades. Common elements include lighting retrofits (LEDs and controls), HVAC improvements, power optimization through voltage regulation and variable frequency drives, water conservation fixtures, and on-site solar generation. Some contracts also include benchmarking services and fractional energy management to track performance over time. Providers like Onsite Utility Services Capital offer these turnkey solutions bundled into a single agreement, with full maintenance included for the contract term.
Financial Structure and Payment Terms
The financial arrangement in an Energy Savings as a Service contract is designed to be straightforward and low-risk for the customer. There is no upfront capital expenditure and no new debt incurred. Payments are made only after savings are verified, and the service charge is set at or below the customer’s current utility rate. This means the customer’s energy costs do not increase as a result of the project. According to the Institute for Market Transformation, an ESA can be thought of as an energy efficiency version of a Power Purchase Agreement (PPA), where the customer pays only for the energy benefits delivered.
Contract terms typically range from 5 to 20 years. The Better Buildings Solution Center notes that terms can be “as short as 5 years with the option to buy out annually.” At the end of the contract, the customer may purchase the equipment at fair market value, have it removed, or extend the service agreement.
Risk Allocation – Who Bears What
One of the most compelling aspects of an Energy Savings as a Service contract is the shifting of risk from the customer to the provider. The provider assumes technology risk (equipment performing as expected) and performance risk (energy savings meeting projections). The customer benefits from guaranteed cost savings without worrying about equipment breakdowns or underperformance. As the U.S. Department of Energy explains in its federal guidance on ESPC ESAs, these agreements “provide guaranteed cost savings” and “minimize federal risk” because the agency only pays for the electricity that is generated. The same principle applies in commercial settings: the customer only pays for confirmed savings.
Potential Limitations to Consider
While Energy Savings as a Service contracts offer many advantages, they are not ideal for every situation. Providers often prefer larger projects, typically those with a minimum investment of $1 million. Smaller facilities may find it difficult to attract a provider under this model. In leased spaces, the contract is viable only when the contract term matches the remaining lease term, which can be a constraint for tenants with short-term leases. Additionally, the negotiation period for an ESA can take 9 to 24 months, which may delay project implementation. Organizations should weigh these factors when evaluating whether this financing model fits their needs.
Frequently Asked Questions
What is the typical length of an Energy Savings as a Service contract?
Contract terms generally range from 5 to 20 years. Some agreements offer a minimum term as short as five years with an annual buyout option. The length is usually chosen to match the facility’s expected occupancy or the useful life of the installed equipment.
Can we buy the equipment at the end of the contract?
Yes. At the end of the contract term, the customer typically has the option to purchase the equipment at fair market value, have the provider remove it, or extend the service agreement. This flexibility allows the customer to decide based on their long-term plans.
How is energy performance measured and verified?
Performance is measured using industry-standard measurement and verification protocols. The provider tracks actual energy consumption before and after the upgrades, and payments are based on verified savings. If savings fall short, the provider is paid less, ensuring the customer only pays for results delivered.
What happens if the energy savings are less than projected?
The provider bears the performance risk, not the customer. If savings are lower than expected, the provider receives reduced payments. The customer’s service charge remains capped at or below their previous utility cost, so they do not experience a financial penalty from underperformance.
Is this model available for leased buildings?
It can be, but the contract term must align with the remaining lease term. Tenants with short-term leases may find it challenging to commit to a long-term agreement. Property owners or long-term lessees are typically better suited for this financing structure.