While these growth trends are only suggestive, it appears that this finance mechanism is emerging as a viable method for deploying PV in multiple sectors. However, the practice faces several barriers to continued growth:

1. Absence of performance contracting authority: In some states, no legal authority for performance contracting exists.

2. Low maximum contract terms: In the states where performance contracting authority is in place, maximum contract terms can vary by state. Term ceilings of 10 years or less, for example, may not allow enough flexibility to bundle PV into performance contracting. This is also true to some extent at the Federal level. While 25 years is the maximum term government-wide, some agencies have established their own, lower term ceilings (Strajnic, 2003).

3. Over-dependence on rebates: Almost all of the projects in the survey relied on rebates to drive the contract economics. A change in the policy environment could suddenly limit or eliminate available rebates. This could result in the scaling back or outright cancellation of PV performance contracts. In light of this vulnerability, PV performance contracts may have difficulty penetrating both rebate and non-rebate state markets.

4. Limiting life-cycle analysis criteria: While the Federal government encourages its facility managers to evaluate projects based on their overall life-cycle cost — effectiveness, there is no such directive in place for state and local government. Negotiations for a potential PV performance contract in New York almost collapsed, for example, because each component was evaluated separately for life-cycle cost- effectiveness (Simpson, 2004).

5. PV’s lengthy payback term: Government officials, ESCO representatives, or both may refuse to incorporate PV in performance contracts because of its lengthy payback time. Many ESCO industry representatives and clients view PV as a niche technology whose value does not offset its impact on overall contract term (Hall, 2003). As a result, other technologies with shorter-term payback technologies are often prioritized over PV (MacIntosh, 2003).

6. Decision maker reluctance: As Hughes et al. (2003) report, some institutional decision makers are fundamentally wary of performance contracting and prefer to rely on direct appropriations. Others are hesitant to enter into lengthy financing terms because existing debt may affect a facility’s ability to borrow new funds (Anderson et al. 1999).

7. Lack of inter-industry collaboration: For PV industry stakeholders, performance contracting represents a potential vehicle for their products and services. For some ESCOs, however, PV represents a technology that increases contract transaction costs without providing much perceived value to the company. When such perceptions are prevalent, the inter-industry partnerships necessary for PV performance contracts can be difficult to establish (Dominick, 2003).

While these barriers may not easily be resolved, there are a number of policy options that could mitigate their effects. The first four barriers, for example, could be lowered through regulatory directives or legislation. The remaining three barriers could be targeted by a combination of training, information dissemination, and incentives. To encourage facilities, ESCOs, and PV firms to proactively develop projects, for example, government could establish a low-interest loan fund that specifically targets PV in performance contracts (Stronberg & Singh, 1998).