Many plants know where energy is wasted but lack the capital, time or confidence to fix it. Energy performance contracting removes part of that risk by tying an ESCO’s payment to savings that are measured and verified. To see what such projects can include, browse our range of energy saving products and solutions.
This guide explains how the contracts work, compares the main models, walks through a documented Indian project and lists what to settle before you sign.
The Short Version
• An ESCO’s earnings depend on verified savings, so performance risk shifts toward the ESCO.
• Guaranteed savings and shared savings are the two main models.
• The baseline and measurement method decide who gains, so agree them first.
• Pick a partner on accreditation, track record and clear terms.
What Is Energy Performance Contracting?
Energy performance contracting is an agreement under which an energy service company designs, installs and often finances efficiency upgrades, then earns its fee from the savings those upgrades deliver. The more the plant saves, the more the ESCO earns.
An energy service company, or ESCO, usually handles the whole chain: audit, design, procurement, installation, commissioning, measurement and maintenance. The owner gets one accountable partner instead of several vendors.
In India, the Bureau of Energy Efficiency (BEE) accredits ESCOs. A BEE accredited ESCO company has been assessed on its baseline and verification methods, technical manpower and financial strength. ES Electronics is a BEE accredited ESCO company, so audit, supply and installation sit under one roof.
Which Contract Models Exist?
Four models are in use: guaranteed savings, shared savings, deemed savings and outsourced energy. They differ mainly in who funds the project and who carries the risk if savings disappoint.
| Model | How it works | Who carries the risk |
|---|---|---|
| Guaranteed savings | The owner pays an agreed sum linked to guaranteed savings. If savings fall short, the ESCO pays the difference | ESCO covers the shortfall, while the owner usually arranges finance |
| Shared savings | The ESCO designs, finances and installs, then takes an agreed share of savings as revenue | ESCO carries both performance and funding risk |
| Deemed savings | Payments follow savings agreed in advance, often with utility or government payments | Depends on how the deemed figure is set |
| Outsourced energy | The ESCO operates the equipment and sells an output, such as cooling or lighting, at an agreed price | ESCO invests and operates, with ownership typically staying with the owner |
These definitions follow BEE’s guidance on ESCO business models. In a shared savings deal, the owner also keeps all the savings once the contract ends.
What Does A Real Indian Project Look Like?
A well-documented case of energy performance contracting in India is the Mahindra Towers retrofit in Mumbai. The ESCO funded the work, and the two companies shared monthly savings 50/50 over a 36-month term.
• The retrofit cost about Rs 18.9 lakh, covering lighting and HVAC, with no upfront payment by the owner.
• Electricity use fell 14% in the first year, saving 543,108 kWh worth roughly Rs 40.7 lakh.
• Payback came in under six months.
• Savings reached 18% in year two and 12% in year three.
The year-three dip came from air conditioning running beyond working hours, a reminder that day-to-day operations affect results. Details are in the NRDC and ASCI case study of the Mahindra Towers retrofit.
It is a 2009 to 2012 commercial building, so industrial plants will see different numbers. The structure is what carries over.
How Are Savings Measured And Verified?
Savings are never read straight from a meter. They are calculated by comparing post-retrofit use with an agreed baseline, adjusted for changes in production, weather and occupancy. The method must be written into the contract.
At Mahindra Towers, the baseline for each month was the average of the same month in the two preceding years. Other projects use different methods, which is why the baseline and the measurement and verification (M&V) protocol need agreeing before work starts.
Changes in load or hours that have nothing to do with the retrofit should be adjusted for in both directions. Otherwise, one side feels cheated.
IoT-based energy monitoring gives both parties the same live data, which cuts disputes and supports industrial energy management long after the contract ends.
What Should An Agreement Contain?
A sound energy performance contracting agreement fixes the baseline, the M&V method, adjustment rules, term, payment basis, equipment approval and dispute resolution before work begins. Each item removes a source of later argument.
• Baseline: the data period and calculation method.
• M&V protocol: what is measured, how often and by whom.
• Adjustments: how production, weather or occupancy changes are handled.
• Term and billing: contract length, billing cycle and payment basis.
• Equipment approval: the owner’s right to approve purchases for quality.
• Ownership: who owns the equipment, and who keeps savings after the term.
• Disputes: a clear route to settle disagreements about savings.
How Does The Process Work Step By Step?
Energy performance contracting follows five steps: audit, baseline and proposal, contract, implementation, and verified savings reporting. A proper audit comes first, because its numbers become the foundation of the whole contract.
1. Audit: an investment-grade energy audit identifies measures and quantifies savings.
2. Baseline and proposal: the ESCO sets the baseline and proposes measures, costs and payback.
3. Contract: you choose the model and agree the M&V terms.
4. Implementation: measures go in, often phased with the shortest paybacks first.
5. Verify and report: savings are calculated, reported and reviewed through the term.
What Are The Main Risks And How Do You Manage Them?
The main risks are baseline disputes, operating changes that distort results, a weak ESCO balance sheet, long lock-in terms and poor equipment quality. Each one has a contract fix, so name the risk and write the remedy before signing.
• Baseline disputes: agree the method and data period in writing, with an example calculation.
• Operating changes: define normal operating hours and the adjustment for any change.
• ESCO strength: ask how the ESCO funds projects and what happens if it exits.
• Long lock-in: set a review point and clear exit terms for the contract.
• Equipment quality: keep the right to approve equipment, as Mahindra did.
Treat the contract as one part of industrial energy management. Savings last only when your own teams keep operating the plant the way the baseline assumed.
Is A Performance Contract Right For Your Plant?
It suits plants with steady, measurable loads, long operating hours and limited capital, such as HVAC, lighting, motors and compressed air. It suits poorly where output changes constantly or savings are small and hard to isolate.
Good candidates usually have:
• Round-the-clock or multi-shift operation
• Ageing HVAC, lighting or motor systems
• Capital tied up in core production
HVAC upgrades are a natural fit because the savings are easy to measure. EC fan retrofits for air handling units and cooling towers are one example.
Performance contracts are not free. The ESCO’s share of savings pays for its capital and risk, so compare the total cost with funding the project yourself if you have the cash.
How Do You Choose An ESCO?
Check BEE grading, past project data, financial strength and contract clarity. An ESCO that cannot explain its baseline method in plain language is a risk, however attractive the offer.
Ask every bidder for the same energy performance contracting terms so the offers compare fairly. Then check each offer against your own audit data rather than the ESCO’s headline savings figure.
• Accreditation: BEE grading and the scope it covers.
• Track record: references and before and after data from similar sites.
• Financial strength: capacity to fund or guarantee the project.
• Technical depth: in-house auditors and engineers, not just resellers.
• Transparency: a simple agreement without a maze of deductions.
Frequently Asked Questions
How is it different from a normal contract?
In a normal contract you pay for equipment or services whatever the outcome. Energy performance contracting ties payment to measured savings, so the ESCO shares the performance risk.
Do I pay anything upfront?
Not always. Under shared savings the ESCO funds the project, as at Mahindra Towers, while guaranteed savings usually need the owner to arrange finance.
Who owns the equipment?
Usually the facility owner, though outsourced energy models can differ. Agree ownership and post-contract savings in writing.
How long do contracts run?
Terms vary with project size and payback. The Mahindra Towers deal ran 36 months, and the owner kept the savings afterwards.
What happens if savings fall short?
Under guaranteed savings the ESCO pays the difference, while under shared savings its revenue falls with the savings. Both rely on a measurement method you agreed in advance.
Can small plants use performance contracts?
Yes. BEE’s partial risk guarantee scheme covers ESCO projects in industry and small and medium enterprises, but terms change, so check current rules with BEE.
What Should You Do Next?
Start with an audit that gives you a trustworthy baseline, then decide whether energy performance contracting suits your plant. Our team works Monday to Saturday, 9:30 AM to 6:30 PM, so contact ES Electronics for a free consultation to discuss your project and the contract structure that fits.