As an emissions-free and renewable power source that produces energy where it is consumed, solar energy has been championed as a response to looming concerns of resource depletion, air pollution, global warming, national security, and energy security (Byrne et al., 1999 and 2004; STEAB, 2002; Lovins & Lovins, 1982). While PV is not directly cost-competitive with fossil fuel generation in the bulk power service market, there is a growing recognition that PV’s true value can be better understood when evaluated in the context of the energy services market (Byrne et al., 1997, Perez et al., 1999). The PV value chain includes the technology’s value as a peak-shaving and load management tool, as a source of emergency power, as an emission-free generation technology, and as a building component in lieu of glazing or roofing (Byrne et al., 1998). In light of these service-oriented, non-commodity contributions, Byrne et al. assert that, "price comparisons that neglect these economic and social contributions are likely to be misleading on the question of market development” (2004: 293).

While taking externalities into account and evaluating PV as a service technology can dramatically improve the economics of PV, the technology has historically not enjoyed significant market penetration in the energy services industry. From a recent study of 1,500 projects from 51 ESCOs, for example, only one was found to incorporate PV (Goldman et al., 2002). Despite this record, it is conceivable that a variety of factors may prompt ESCOs to re­examine PV as a technology option. As will be discussed below, mounting environmental and security concerns are leading large institutional customers to demand that ESCOs incorporate distributed, renewable energies into their facilities. Furthermore, the rapid change and intense competition that has recently characterized the energy services industry (Vine et al., 1998; Dayton et al., 1998) could inspire ESCOs to turn to PV as a differentiation strategy to attract customers seeking PV’s specific service values (Singh, 2001). Finally, the US Federal government, through FEMP, has created conditions for PV to be evaluated as both a service technology and an energy generation technology by building managers.

While there are several different mechanisms for delivering energy service technologies (utility programs, retail distributors and installers, fee-for-service contracts, etc.), this paper uses performance contracting as the framework for examining PV’s diffusion into the energy services market. In a typical performance contract, an ESCO installs energy or water saving technologies on existing buildings. The resulting utility bill savings are then used to pay back funds borrowed to finance the installations. In this way, facility managers can correct operational inefficiencies without increasing their budgets. Because ESCOs generate their revenue from a portion of the savings, they have a significant incentive to maximize project performance. While directly funding energy projects can be less expensive than performance contracting (Hughes et al., 2003), many facilities in the institutional and private sectors lack the up-front capital necessary to pay for retrofit projects (Rufo, 2001). As a result, performance contracting may be the only way that many buildings can install energy service technologies (Hughes et al., 2003).

While performance contracting has not traditionally been used to deliver renewable energy systems, there are some who have suggested that it could serve as an effective mechanism for PV deployment (Eckhart, 1999). As stand-alone projects, PV systems can be difficult to finance because their simple payback terms extend beyond the maximum terms permitted by
institutional regulations (Stronberg & Singh, 1999). In performance contracts, technologies with longer paybacks, like PV, can be bundled with quicker payback technologies, such as lighting, to produce a blended payback term acceptable to the customer (Raman, 1998: 10). The Federal government encourages this synergy by allowing its facility managers to make investment decisions based on the "life-cycle cost-effectiveness” of an entire project, rather than on the basis of a single project component’s payback term (ORNL, 2003: 4). Without this provision, PV systems would be disallowed from Federal performance contracts since PV systems can have payback terms of 30-40 years, and the maximum Federal contract length is 25 years (FEMP, 2004a).