Leveraging Facilities to
Generate Operational Savings
Many businesses are often challenged with how to deal with
their aging facilities and infrastructure. Simultaneously,
reducing overall operating costs often conflicts with a facility’s maintenance needs. As a facility matures and equipment begins to falter, the need for repair or replacement can
increase overall maintenance costs.
When faced with lack of funds, companies often address only
the most pressing needs within an existing or reduced budget. On the surface, this short-term approach seems to make
financial sense. Maximizing revenue is paramount for most
companies, and their facilities are typically viewed as a cost
of doing business. Spending that drives revenue will typically
carry more weight than facility improvements.
However, a company’s facility can have a significant effect
on many aspects of a business that can impact the bottom
line. For example, failing equipment can disrupt production
processes, decrease product quality, and increase operating
costs. Further, the state of a facility can impact employee
safety, health, and overall satisfaction, leading to higher
turnover and increased employee acquisition, training, and
Despite these quantifiable and intangible impacts, deferred
maintenance remains the default approach when funds are
limited. Although it is one of the largest assets on a company’s balance sheet, most companies cannot quantify the
impact their facilities have on financial health, other than on
the cost side of the equation.
What if a company could improve its infrastructure needs
and increase cash flow without requiring capital investment? One possible solution is Energy Savings Performance
How ESPCs Work
Performance contracts have been leveraged in the public sec-
tor as a way to improve infrastructure without capital appro-
priations. Financed by third-party dollars and implemented by
Energy Service Companies (ESCOs), these agreements utilize
the energy, operations, and maintenance savings the project
produces in order to offset both the cost of the infrastructure
and the debt service. ESCOs can also guarantee savings,
thereby further reducing risk for the business.
Although federal agencies typically refer to ESPCs as budget-neutral projects, ESPCs can achieve savings long after the
equipment and debt service is paid off. In fact, these contracts
can often be structured to deliver positive cash flow from the
start of the project.
Two factors primarily influence the amount of positive cash
flow: the volume of savings generated and the effective life
of the equipment. For example, a project worth $8 million
in equipment and services may generate a positive cash flow
exceeding $3 million over the life of the equipment (typically
Let’s review the process of developing an ESPC.
Define the “Rules of the Game”
An ESPC starts with a preliminary audit to assess the facility’s
potential to generate enough savings to justify a project. The
preliminary audit provides an initial list of energy conservation
measures (ECMs), analysis of current utility usage, and initial
energy savings calculations. Most ESCOs provide this high-level preliminary audit at no charge. This is a critical step for
both the ESCO and the business because it develops an initial
agreement that lays out the benefits to the customer.
This audit serves as the basis for developing the parameters
or “rules of the game” that will influence the direction of the
project, including acceptable finance terms for the customer,
expected payback requirements, and prioritization of the
For example, some companies might not be comfortable with
a 20-year term for a facility improvement project. Other companies might have a strict seven-year payback requirement for
all projects. Different companies may have different priorities
for their ECMs, especially if they operate equipment nearing
the end of life, for example.
BY ART THOMPSON