The Boston Globe recently reported that the town of Scituate, MA has entered into an Energy Savings Performance contract with Ameresco, the first step of which is a $33,000 audit of its facilities for efficiency opportunities. According to the story, the audit will result in a list of 300 potential projects; then, if Scituate decides to implement any of the project opportunities that Ameresco finds (and, of course, uses Ameresco to implement them), the Town will “avoid” the cost of the audit.

We’ve seen this scenario play out many times, with customers relying on this approach commonly used in the ESCO (energy service company) industry – financing the audit through project implementation. This all sounds great, giving the buyer, in this case Scituate, the ability to identify only the cost-effective projects – whether they pay back in 2, 3, 5 years, or any other period – and roll the audit cost into the projects.

But at what price? In this model, if the ESCO does not find any projects that meet the qualifying criteria of the customer, the customer now has a bill to pay, one which they rarely can afford. In the case of Scituate, the “buy-out” price seems reasonable for what is ostensibly a walk-through audit project for, I’m assuming, upwards of six town facilities, except for the fact that their Chairman of the Renewable Energy Committee, Paul Reidy, is quoted in the piece as saying “there is no capital money” for these investments to begin with, a common refrain among government entities.

Even more problematic for budget conscious-buyers could be the possibility that the ESCO intends to cover its costs – and more – through the implementation, by locking the customer into using it. We’ve seen this happen before where the cost of implementation balloons and the customer is stuck solely because they cannot cover the cost of the “free” audit.

I’d draw an analogy between this and what we often see in the retail energy supply world, where a customer opts for an “index” rate (a rate that includes an adder to the wholesale market price), with the ability to convert to a fixed price. If the customer elects to convert, the supplier may have the ability to make high margin, to the extent that the underlying energy commodity is not transparently priced—which is typically the case for electricity supply. Essentially, give away the razor, and charge a premium for the razor blade.

As we see the efficiency incentives available to the marketplace increase, I expect to see new entrants and increased competition from ESCOs and, with this, innovation around the financing of products and services that swing the balance more in favor of the customer.