Everything You Need to Know About Energy Savings Performance Contract (ESPC) in Texas

Whether you have some familiarity with energy savings performance contracts or this is the first time you’ve heard about them, this article will serve as a primer on how to develop and implement a successful energy performance project for your public establishment.

What is an Energy Savings Performance Contract (ESPC)?

Energy Savings Performance Contracts (ESPCs) are a procurement option available in Texas that allows public entities to finance facility improvements with savings from future operations and maintenance budgets over up to 20 years. This legislation was first enacted in Texas in 1989, and since then, hundreds of municipalities, K-12 schools, universities, and hospitals have implemented successful energy savings performance contract projects.

Texas Energy Performance Governing Legislation

• Public Schools (K-12): Title 2, Education Code §44.901
• Local Governments (Cities & Counties): Title 9, Local Government Code §302
• Public Higher Education:  Title 3, Education Code §51.927
• State Agencies: Title 10, Texas Government Code §2166.406
• Public hospitals fall within the State or Local jurisdiction of the above codes

Why an ESPC?

Before we get into the how, it’s important to understand the why behind Energy Savings Performance Contracts (ESPCs). These projects are structured so that the savings they generate help offset the project cost.

A key reason this works is because Energy Service Companies (ESCOs) provide an energy savings guarantee. In simple terms, if the projected savings aren’t achieved, the ESCO covers the difference. That guarantee is what allows ESPCs to remain cost-neutral—or even cash-flow positive—for your Maintenance & Operations budget.

In addition to that financial protection, your ESCO provider should also offer a no-change-order guarantee. This ensures the agreed-upon project cost remains fixed throughout construction, eliminating the risk of unexpected cost increases and protecting you, the owner.

That’s where the structure of ESPCs becomes especially powerful. Not only are the savings guaranteed, but in Texas, the definition of “savings” is intentionally broad. Texas allows both energy and operational savings from historic baselines to count toward ESPC savings. Additionally, legislation clarified in 2017 that avoided Maintenance & Operations (M&O) costs can also be included.

For example, if you have deferred maintenance or are planning to budget $500,000 for a chiller replacement next year. But instead, you can complete that replacement as part of an ESPC, eliminating the need for that future expense. That $500,000 can then be counted as cost avoidance and applied toward the project’s savings.

Why is this important?

The scope of your ESPC can include a variety of energy and water-related measures, but the overall project must pay for itself throughout its term. Some measures, like lighting, smart irrigation, etc., have a quick return on investment. Others upgrades, like roofing, windows, and HVAC, can take longer. By balancing and considering all forms of savings, you can create a comprehensive project that addresses a wide range of capital needs and allows payments over time. It’s similar to a bond issue without the need for a voter referendum.

Multiple types of financing are allowed for ESPCs, including your cash or bond proceeds, 3rd party financing, or ESCO financing. One of the most common methods is a tax-exempt municipal lease purchase (TELP), as it can be paid within your M&O budget and is not considered debt. TELPs are a powerful tool that allows you to prioritize bond funds for other essential needs, while taking care of infrastructure projects through your existing M&O budget without impacting tax rates.

ESPCs are designed to be large, comprehensive projects with multiple considerations and stakeholders, so that the process can take time.

Steps to ESPC Development for Public Entities

Step 1: Preliminary Utility Audit

Estimated Duration: 14-45 days
Your Commitment: 1-3 meetings with key decision-makers

The ESCO will conduct a Preliminary Utility Audit (PUA) and provide a comprehensive report. This no-cost assessment includes onsite facility walkthroughs and a detailed review of utility bills to evaluate current conditions. The goal is to establish a high-level understanding of potential project scope, costs, and savings, giving you the insight needed before making any decisions or financial commitments to move forward.

Step 2: Present Preliminary Utility Audit

Estimated Duration: 3-10 days
Your Commitment: 1-3 stakeholder meetings, including decision-makers

Engage all key stakeholders in reviewing the PUA report to ensure alignment, transparency, and informed decision-making across your organization. Because ESPCs impact facilities, finances, and operations, early input from the right groups helps build confidence in the approach and reduces the risk of delays later in the process.

This may be a multi-step effort depending on your organization’s complexity. Consider starting with a core group pre-meeting to review details, followed by a leadership discussion, and ultimately presenting to your board or council for final input and direction.

Step 3: ESCO Selection Process

Estimated Duration: 30-90 days
Your Commitment: RFQ Committee to facilitate solicitation and review of proposals + Board/Council Approval

While you have been working with a specific ESCO up to this point with no long-term or financial commitments made, you now want to select a particular ESCO to move forward with engineering and project development.

Typically, you will follow the steps for procuring professional engineering services as defined in Section 2254.004. This requires a Request for Qualifications (RFQ) selection process. RFQs do not include project pricing but instead focus on the capabilities and performance record of the ESCO. We recommend finding an ESCO that uses open-book pricing and is committed to transparency, as many providers may hide margins of 30-40%. With pricing transparency, you can understand exactly where your dollars will be spent and why.

Alternatively, if you are happy with the ESCO you’ve been working with, you may be able to contract with them directly through a cooperative purchasing agreement. Check with your legal counsel before pursuing this option.

After completing the selection process, you’ll move forward with your selected ESCO to prepare an Investment Grade Audit with a financial obligation for the remaining steps. To document this effort, expect to sign a Letter of Intent

Step 4: Investment Grade Audit

Estimated Duration: 60-90 days
Your Commitment: Site access, multiple meetings with occupants and leadership, building drawings, detailed utility, and operational costs. Cost of study.

In this step, detailed project design and set pricing and savings are developed and delivered in the Investment Grade Audit (IGA). The IGA should be completed by qualified, licensed engineers and will take several weeks of site visits followed by several weeks of detailed calculations, engineering, subcontractor bidding, equipment quotations, etc. Because of this time commitment and level of detail, expect your ESCO to present a fee for the engineering services. This cost is generally rolled into the project, but you’ll be obligated to pay the IGA fee as agreed if the project doesn’t move forward. The exception to this is if the results of the IGA show a significantly different picture than the PUA. In this case, you should be able to walk away with no obligation. This protection is in place to prevent “bait and switch” tactics.

Step 5: Present Investment Grade Audit

Estimated Duration: 7-10 days
Your Commitment: 1-3 meetings with key decision-makers + Board/Council review and approval

The full IGA document should be reviewed in detail with all stakeholders. This is the opportunity to tweak the scope to ensure the right needs are met.

During this step, you’ll have a 3rd party Professional Engineer (PE) with experience in energy calculations review the IGA and confirm the savings. Your ESCO can help refer a PE, but the independent 3rd party engineer must have a contract with you to avoid potential conflicts of interest. This is an essential step for your protection and is required by the state of Texas.

Step 6: Project Approval

Estimated Duration: 7-10 days
Your Commitment: Board/Council review and approval

With all the details buttoned up, you will go to your board or council for final approval!

Step 7: Project Construction

Estimated Duration: 4-18 months
Your Commitment: Support throughout construction

Construction typically takes 4-18 months, depending on the scope of work and seasonal timing. Your ESCO will act as the general contractor and construction manager, ensuring all subcontractors perform correctly and safely to deliver the project on-time and on-budget. Read more about the benefits of a design-build approach.

Step 8: Measurement and Verification 

Estimated Duration: Ongoing (5-10+ years)
Your Commitment: Access to utility and operations data. Annual board/council meeting results discussion.

If you elected to have savings guarantees in your contract, the ESCO would provide ongoing reports on your building performance. Expect an annual fee for this monitoring service, which should have been negotiated and set before project approval. The first year should be closely monitored every quarter. After Year 1, we suggest you provide annual updates to your leadership and council/board to showcase the success of your ESPC!

Getting Started

Energy Savings Performance Contracts are an excellent construction procurement option for modernizing your facilities and dealing with deferred maintenance issues. The benefits of having a single source of responsibility from a great ESCO will yield years of energy and sustainability benefits while also providing flexibility in your budget.

If you would like to learn more about implementing ESPCs, please reach out to discuss further.

A detailed document is also included here from the Texas Comptroller’s office.