Last week, the White House announced a goal of acquiring $2 billion in energy efficiency upgrades at federal buildings over the next three years.  This $2 billion goal is in addition to existing commitments that the Obama Administration made in 2011, under which $2.7 billion has already been committed to fund energy efficiency upgrades.  The new goal, which was announced along with a series of other new energy efficiency and solar deployment initiatives (including the return of solar panels on the White House roof), is part of the Obama Administration’s focus on developing a clean energy economy.

The White House intends to meet its new $2 billion goal through energy savings performance contracts (“ESPCs”) under which the private sector finances the cost of upgrading a building in exchange for a portion of the cost savings resulting from the upgrades.  In the past, agencies have used ESPCs to acquire a wide variety of energy-efficient upgrades, including more efficient windows, doors, and insulation; automated controls to actively manage energy use; and solar arrays and other green-energy generation capacity.  The Department of Energy, the General Services Administration, and the Department of Defense have established indefinite-delivery, indefinite-quantity ESPCs, which provide a mechanism for agency buyers to contract in a more stream-lined fashion.  Recently introduced legislation, if enacted, would authorize the Department of Defense to expand the use of ESPC contracting to upgrade transportable vehicles, devices, and equipment, such as ships and deployable generators.

ESPCs have emerged as an important contracting tool since the late 1990s.  They have the benefit of not requiring an initial federal capital investment and can avoid the use of appropriated funds altogether, although an agency may choose to finance a project with a mix of private and federal funds.  ESPCs often allow federal agencies to benefit from the availability of private sector financing.  In addition, federal agencies can take full advantage of the cost savings after the expiration of an ESPC’s term, which is statutorily capped at twenty-five years.

However, the unique nature of ESPC contracting can present its challenges.  For instance, many key terms that allocate risk under ESPCs are subject to negotiation.  ESPCs may vary, for example, with respect to operation and maintenance requirements, as well as obligations relating to equipment repair and replacement.  ESPCs may also vary with respect to risks associated with future modifications to a facility, which may be of particular concern due to the length of most ESPCs.  And, as we discussed in a recent article in the BNA Federal Contracts Report, considerations such as these can become the source of dispute during contract performance.

In sum, the White House’s recently announced goal of acquiring $2 billion in energy efficiency upgrades to federal buildings will likely lead to a number of new opportunities.  However, contractors should be aware of the unique nature of ESPCs, including the overall risk allocation, as they examine these new opportunities.