The public sector dominates the ESCO market in the US. There are several reasons for this, but a main consideration is the long term versus short term thinking of building owners. Public sector customers have long payback horizons and use ESCO projects to supply capital for neglected building maintenance and building modernization. Privately owned commercial buildings, particularly rental buildings, generally will not implement long-payback projects. They look for a quick paybacks through the implementation of a single technology project (e.g. lighting or controls upgrades), because short-payback projects produce short-term increases in net operating income, which increases the capital value of the building. Therefore commercial rental buildings are not the target customer base for an ESCO.
The way that a guaranteed savings project works in the US non-federal markets is that the financial institution (FI) executes a loan/lease/bond and advances the project funding to the customer. The customer pays the ESCO for the project on completion of construction. If the project does not produce its guaranteed savings, the customer has a claim against the ESCO. In addition, the customer may make some ongoing, modest payments to the ESCO for operation and maintenance services on some equipment or the annual cost of the M&V reports.
This model was pioneered in the mid-90s because it separates the project credit risk from the project technical risk. The FI takes the credit risk and the ESCO takes the technical risk. Guaranteed savings financing also provides 100% debt financing, which is cheaper than shared savings financing, which has debt and equity components.
FIs also prefer projects for government customers, because the credit risk to the FI is lower than for private customers. Most of the financing is tax-exempt, which results in low interest rates.
Average duration of contract is 10-20 years.