INTRO TEXT it sounded almost too good to be true, the way the young man speaking before Newton’s board of aldermen described how improvements to crumbling firehouses and neglected school buildings could basically pay for themselves. The source of the fiscal magic? Performance contracting.

Under a performance contract, clients use savings on utility bills to finance efficiency improvements made through lighting, HVAC, or low-flow water fixtures. The contract is made with an energy service company, or ESCO, which specializes in finding efficiency measures, procures the equipment, makes the upgrades, and supervises maintenance. By law, ESCOs in Massachusetts must guarantee savings on bills, and compensate clients if these savings do not materialize.

Performance contracting is something that universities and the Department of Defense have been using since 2001. But until recently, utility company rebates made it easier and cheaper for many towns and cities to make energy improvements with existing resources. Now that these rebates are being phased out, performance contracts are more attractive, and ESCOs are scouting cash-starved municipalities as clients.

“Cities and schools are our number one target,” notes Tyler Gill, the sales representative for Ameresco who wowed Newton’s aldermen last summer. “They have the smallest [amount of] capital available for energy and water efficiency projects.”

As of November, the Barnstable School Department and the cities of Quincy, Somerville, and Springfield had signed or were close to signing contracts with ESCOs. Peabody and Salem are also investigating performance contracting. But the town of Belmont was the first to explore the idea, for both environmental and capital improvement benefits.

Last April, the town completed the construction phase of a $1.7 million, 10-year performance contract with Noresco, a Westborough–based firm. In seven school buildings and five other town structures, Noresco replaced 21,000 light bulbs and 8,000 fluorescent-light ballasts; upgraded 475 plumbing fixtures; and installed three energy management systems, three boiler controllers, a pool cover, and other equipment. The town is projected to save $202,000 annually from the upgrades, with most of the savings funding the improvements themselves.

Performance contracting looks like a particularly good deal when electricity or water prices rise. When negotiating their contract, Belmont’s project committee estimated that the cost of electricity would rise about 3 percent. But the town-owned Belmont Municipal Light Co. is now projecting electricity costs to rise 50 percent to 80 percent over the next two years. Electricity use in the energy-upgraded schools is headed down by 18 percent, based on early estimates, so rising rates make those savings worth more. “It makes us look great,” says Jenny Fallon, the project committee chair.

Belmont is financing its energy-improvement contract through a tax-exempt lease arrangement, as roughly 90 percent of Framingham–based Ameresco’s municipal clients do, according to Gill. Springfield, on the other hand, will pay for its improvements with municipal bonds. Here’s how the numbers look: Springfield will get $15 million worth of work done by Siemens Technologies. The city will realize $1.15 million in savings the first year, according to Stephen Lisauskas, deputy executive director of the Finance Control Board overseeing the troubled city’s books for the state. With no rate hikes, the city will save $23 million over the course of the contract, enough to pay off the $15 million in principal plus roughly $7 million in interest, for an overall gain of at least $1 million—$2.3 million if prices rise 1 percent per year over the period.

Performance contracting also allows municipal officials to tap the expertise of energy efficiency experts. “If energy conservation was your main function, you wouldn’t need ESCOs at all,” says Eileen McHugh, program coordinator at the state’s Division of Energy Resources, who advises municipalities on energy services companies. But cities and towns looking to make their buildings more energy-efficient need help figuring out what to do, she says.

“This can be a very complicated process,” says McHugh. “Which energy improvements make sense is very individual to each town and city.”

Still, Newton is not yet ready to take the performance contracting plunge. “This is not for everyone,” says Jeremy Solomon, spokesman for Mayor David Cohen. “The end goal of energy efficiency for our buildings is unquestioned. How we get there is undecided.”

Andreae Downs is a freelance writer in Newton.