SECTION 5. EXAMPLE

ESCO contracts with FA under an ESPC ESA to install, maintain ownership of (until the end of the contract), and provide operation and maintenance of a renewable energy generation asset at a federal site. The FA will purchase all of the electricity generated onsite at a rate that is less than the FA’s current and forecasted electricity rate.

• The contract term is 20 years.

• The contract price, including operation and maintenance, is based on a fixed per-kWh basis and must be paid for by the FA from the energy savings provided under the project.

X The ESCO bears all financial risk

for non-performance. X The contract price does not vary

if the operating costs are lower than expected.

• The FA will purchase the renewable energy generation asset at FMV as appraised at the time of the sale by the end of the contract term, consistent with OMB Memorandum 12–

X The ESCO will transfer a por tion of the payments it receives from the FA into a reserve account held by the ESCO for the FA’s future purchase of the onsite renewable energy assets. The amount charged for each payment period will include both the price of power and an amount for the reserve account (separate and in addition to the price of power). X The ESCO’s deposit into the re serve account will be based on the estimated future FMV of the on-site renewable energy generation assets. To ensure that the reserve account has sufficient funds for the FMV purchase by the FA at the end of the contract term, there may be periodic reappraisals of the onsite renewable assets and contract modifications (if and as necessary). Any excess reserve account

funds after the onsite renewable asset purchase may be used to offset the final ESPC ESA payments. Alternatively, in the event of termination, funds in the reserve account at that time may be used to satisfy any termination liability of the FA, and any excess amounts will be returned to the FA. X The FMV will be determined at

the time of sale by a mutually agreed upon independent appraiser with expertise in the relevant onsite renewable energy asset industry. The valuation made by the appraiser shall be binding upon the parties in the absence of fraud or error.

• The ESPC ESA includes a schedule for each year which establishes the maximum termination liability of the FA in the event of termination prior to the end of the contract term. This ESPC ESA satisfies the requirements of the safe harbor in section 4 of this revenue procedure and the Service will not challenge the treatment of the ESPC ESA as a service contract under § 7701(e)(3).