In energy performance contracts, what does the term "shared savings" refer to?

The term "shared savings" in energy performance contracts refers to a financial arrangement where the energy savings achieved through the implementation of energy efficiency measures are divided between the Energy Service Company (ESCO) and the client. This model incentivizes both parties, as the ESCO receives compensation for its investment and efforts, while the client benefits from reduced energy costs.

In this approach, the ESCO typically guarantees a certain level of energy savings. If the savings exceed that guaranteed level, the additional savings are shared between the ESCO and the client according to a pre-established formula. This arrangement aligns the interests of both parties, as it encourages the ESCO to implement effective measures that maximally reduce energy consumption while ensuring that the client enjoys lower energy bills.

Other options presented do not accurately capture the essence of "shared savings." For example, a profit-sharing scheme for ESCO employees does not relate to the economic structure of energy performance contracts, nor do discounts for early payment or government subsidies pertain to the concept of shared savings within the contractual framework.