Three ways to pay for the same project
An efficient lighting, power or smart infrastructure project can be paid for in three main ways. The equipment and the work can be identical. What changes is who provides the money, when the customer pays, who carries the risk and who keeps the savings.
Before comparing, establish a baseline: what the existing system costs to run and maintain today. Every option is measured against it, and an ESCO depends on it, because the savings it is paid from are calculated from that baseline.
ESCO: paid from the savings
With an energy services company (ESCO), the provider funds and delivers the whole project: design, equipment, installation and maintenance. In return it receives a share of the savings the project produces over a defined contract term. Because payments come out of money the customer no longer spends, an ESCO can be cash-flow positive from day one, with no out-of-pocket capital.
- Risk: the provider carries the financial and performance risk over the term
- Savings: shared during the term, then kept in full by the customer
- Suits: owners who want the upgrade now without finding capital
Lease: paid over time
A lease puts the equipment in service now and spreads the cost over agreed payments, monthly, quarterly, semi-annually or annually. Payments can come from operating budgets, and the savings often help cover them. At the end of the term the customer can buy the equipment at fair market value, buy it for $10 under a $10 buyout lease, continue to lease, or end the lease.
- Risk: payments are fixed, whether or not the savings meet expectations
- Savings: kept by the customer from the start
- Suits: owners who want predictable payments and a choice at the end
Purchase: own it outright
In a conventional purchase the customer pays up front and owns the equipment from the start. There are no contract payments and no one to share the savings with. The trade-off is that the full cost must be found and approved before work begins, and the customer carries every risk of the project.
- Risk: carried entirely by the owner
- Savings: kept in full from day one
- Suits: owners with capital approved and in hand
Approvals and budgets
A purchase usually waits for a capital budget, which can take a full planning cycle in public organizations. An ESCO or a lease can often move sooner because it is paid over time rather than all at once. In every case, check who must approve the contract and how long that takes.
How each option is treated in the accounts depends on the contract and on the customer's own advisers. Ask them early, before choosing.