Brian Yeoman
Director Sustainable Leadership
NAEP
www.NAEPnet.org
Energy Performance Contracting
Acronyms
ECM - Energy Conservation Measure
EE - Energy Efficiency
EPC - Energy Performance Contract
FI - Financial Institution
FIM – Facilities Improvement Measure
ESCO - Energy Services Company
GHG - Greenhouse Gas Emissions
IGA - Investment Grade [energy] Audit
MUSH – Municipal University State and Hospitals
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Why Performance Contracting?
• Opportunity: Buildings generally
account for 40% of emissions
and up to 70% in big cities
• Lifecycle cost: 3/4 of costs of
buildings occur after construction
is complete
• History:Excess energy and
savings are trapped in existing
buildings based upon project
executions
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
One solution yielding multiple benefits
• Wasted energy is wasted money
• Improve the organization’s finances
• Improve occupant comfort and productivity
• Retain wealth in the community
• Improve the value of the real estate asset
• Improve image with real contributions to the
environment
• And, yes, reduce GHG emissions
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Overview
• A turnkey contracting method through Energy Service
Companies (ESCO)(
• Includes an energy audit, a proposal of energy
conservation measures (ECMs), design, construction,
project management, commissioning and performance
measurement
• One guaranteed fixed price (GMP)
• Single provider accountable for all aspects of the
project
• Guarantees of energy savings the project will achieve
o ESCO pays the difference for unrealized amount*
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
An innovative model
• Utilizes energy savings to provide debt service payments
• Alternative financing to making expenditures from a capital
budget
• Performance assured for life of agreement, e.g. up to 20
years
• Measurement and Verification of Results
• Guaranteed Maximum Price (GMP) construction costs
• Large scale projects
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Mental Model for EPC
Energy
Owner
New Bill
Performance
Guarantee
Old Bill
Turnkey Project
Some key questions:
Where is the deal
financed?
Who pays the lender?
Financing term in
years?
Financing
ESCO
Debt Payment
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Lender
Energy Performance Contracting
Typical Scopes of Work
Direct Energy Focus
– Boiler optimization
– Chiller plant
optimization
– Lighting retrofit
– Energy management
systems
– Equipment
modernization
– Windows and roofs
– Laundry
– Motor efficiency
Indirect Energy Focus
– Utilities procurement
– Water conservation
– Service contract
consolidation
– Staffing
– Waste removal
– Re-lamping
– Sub-metering
Building
Tune-up
Lighting
Source: EPA Energy Star
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Heating and
Fan
Load
Cooling System
Reductions System
Upgrade
Energy Performance Contracting
Overview
• Proven contracting model
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Project development costs minimized
Streamlines procurement process
Transparency and integrity assured
High confidence of implementation
• Owners control process
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Owners specify investment priorities
Open-book & guaranteed maximum pricing reduce risk
Gain sharing reduces project costs, maximizes outcomes
Best evidence e.g. that everything is negotiable
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Overview
• Complex
o
o
o
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46 different implementation statutes in the US
Contracts are long, detailed and very pro vendor community
Securing access to initial capital is typically the biggest hurdle
Should not be undertaken by a novice
• Self-financing
o Utilize energy savings to make debt service payments on
project financing
o Performance assured for life of agreement
o Includes gain sharing and savings guarantee
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Overview
• Market size estimated at <$5 billion in the US
o Market is largely Municipal, Universities,States and Hospitals (MUSH)
o Large opportunities in all
• Public sector has utilized ESCOs the most
o Federal Government the largest player
o Most US states have enabling legislation
o Tax exempt borrowing increases scope of investments
o K-12 schools, universities, hospitals, and public housing most active
• Projects vary in size, scope and duration
o Size: $500 thousand to $30 million
o Duration: 3 to 20+ years
o Building controls, heating, cooling, lighting typical components
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Keys to Success
• Alignment of objectives between Owner, Financial
institution and ESCO is essential.
• In the traditional Contracting Approach: success is
measured by project cost and meeting delivery date
• In the Performance Contract Approach: success is
measured by energy savings results and the economic
and environmental derivative
• Traditional Low Bid Contractors must cut costs to win a
job. Then transfers all of the risk to the owner.
• Performance and code issues become the owner’s
responsibility.
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Keys to Success
• A Performance Contractor must eliminate the risk of
“surprise” costs up front to develop a business
proposition the ESCO can guarantee.
• The better the contractor can determine the costs up
front-- the lower the risk. The more risk they are willing
to take-- the bigger the project. The lower the cost to
implement-- the more the ESCO can include.
• The owner passes cost and performance management
risk to the ESCO making it a self regulating approach.
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
What the Owner will need to do
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Review capital plans
Define support
Identify energy & deferred maintenance opportunities
Review capital plans
Define support service requirements
Identify opportunities for grants and rebates
Arrange financing
Prepare communications & awareness plan
Finalize contract document
Arrange financing routine service requirements
Identify opportunities for grants and rebates
Prepare communications & awareness plan
Finalize contract documents
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Process Flow
• Feasibility Assessment
o Low-level audit reviewing twelve months of utility bills and
facility data to determine project potential
• Workshop
o Information session to discuss findings of feasibility and
possible projects
• Preliminary Audit
o Selected areas will be more formally audited
• Detailed Audit Contract
o Investment grade audit focused on agreed-to parameters
(eg. scope of work, reference criteria, expectations)
culminating in a proposal for implementation
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Process Flow
• Independent Third party Review
o Use dissociated professional engineers and Certified
Energy Managers to confirm that the scope is the scope
and that the estimates are rationale
• Installation Contract
o Final approval of project and any financing requirements
• Performance Assurance
o Monitoring of the system throughout the contract term
o Use a widely accepted standard to protect the institution
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Procurement Process Overview: How it Works
• Qualified measures
Initial
Owner
Commitment
• Harmonization
• Credit check
Performance
Contract
• Investment
criteria
• EE/Carbon goals
ESCO Prequalification
• Financial stability
• Technical expertise
• Resource
mobilization
• Testimonials from
previous clients
RFP
• Qualifications
• Scope of work
• Project pricing
• Cost reduction
incentive
• Walk-through
• “Pre-study” audit
• Performance guarantee
• “Walk-away” compensation
fee for audit
Investment
Grade
Audit
Investment
• Conformance • Energy
engineering
• Qualitative
• Loan
underwriting
Selection
evaluation
• Investment
proposal
• Equity
participation
• Service
proposal
• Gain sharing
Initial Owner Commitment
Initial
Owner
Commitment
• Harmonization
• Credit check
• Investment
criteria
• EE/Carbon goals
Create a Work team
Work plan
Define Program Criteria
Needs assessment
Technical & operational goals
Financial objectives
Energy efficiency and carbon
emission reduction goals
Contractual requirements
Administrative processes
Decision and approval processes
ESCO Pre-qualification
Initial
Owner
Commitment
• Harmonization
• Credit check
• Investment
criteria
ESCO Prequalification
• Financial stability
• Technical expertise
• Resource
mobilization
• Testimonials from
previous clients
Energy Performance Contracting
Insist upon Best Practices
Transparent Pricing
•
Proposer absorbs their sales & marketing costs
•
Project budget estimates, ECM’s subject to multiple reviews
•
Bracketed negotiation, approval not unreasonably withheld
•
Customer can withhold approval for individual ECM’s
•
Walk-away fee equal to no more than 250% audit cost pe square foot
(prorated)
•
Walk-away fees paid by customer, not financed
•
Available through The American College and University President’s
Climate Challenge (ACUPCC) and the Clinton Foundation
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Insist upon Best Practices
Implementation Gain Sharing
• On approval, project implementation cost is guaranteed
(GMP)
• On completion, implementation savings is computed in
energy units by contract and then by extension dollars
• What is guaranteed is reduced energy units not dollars
• Over realized savings shared
• Implementation savings do not affect performance guarantee
• Operations and Maintenance savings are not typically
included
Facilities Institute
July 9 - 12, 2012
Houston, Texas
The Solicitation
Initial
Owner
Commitment
• Harmonization
• Credit check
• Investment
criteria
ESCO Prequalification
• Financial stability
• Technical expertise
• Resource
mobilization
RFQ or
RFP
• Qualifications
• Scope of work
• Project pricing
• Cost reduction
incentive
Selection and Award
Initial
Owner
Commitment
• Harmonization
• Credit check
• Investment
criteria
ESCO Prequalification
• Financial stability
• Technical expertise
• Resource
mobilization
RFQ or
RFP
Selection
• Qualifications • Conformance
• Scope of work • Qualitative
evaluation
• Transparent
pricing
• Cost-reduction
incentive
Energy Performance Contracting
Show me the money!
• Remember that all of the savings dollars are inferred
• It is actual utility savings times your negotiated
agreed to rate for each utility unit cost
• That means if in the course of the contract you do not
buy the utility right you do not get a windfall savings
contractually
• There is an annual reconciliation process and each
sub project or tranche has its own reporting year
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Mental Model for EPC
Energy
Owner
New Bill
Performance
Guarantee
Old Bill
Turnkey Project
Some key questions:
Where is the deal
financed?
Who pays the lender?
Financing term in
years?
Financing
ESCO
Debt Payment
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Lender
EPC: Cash Flows
EPC: Cash Flows
Customer Savings
Paid to debt service for financing
energy/operating costs
EPC: Cash Flows
Paid to debt service for financing
New, reduced energy/operating costs achieved from EPC
improvements
Energy Performance Contracting
Security in EPC Lending
• Customer’s financial condition drives lending terms
o Public sector borrowers can “non-appropriate”
o Tax exempt leasing is most commonly used lending vehicle
• Value of equipment is not important as collateral
o Essentiality of use is important
o Lenders do not look to equipment as collateral
• Strong performance guarantee minimizes “add-on” capital
costs attributable to performance risk
o Usually no right of set-off (except in federal)
o Strong ESCO (operationally and financially) improves credit of
customer
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Review Key Success Factors
• Project Design
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Cash Flow Neutrality (or better)
No Price Changes/Surprises
Streamlined Process & Timeline
Unambiguous Accountability
Appropriate Flexibility in Design & Project Mix
Unambiguous Performance
• Selecting an ESCo
o Overall Reputation – These are high-profile, complex
projects
o Reliability – This is a long-term partnership
o Relationships
o Value Created
o Value Delivered
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Review Benefits from EPC
For Owner:
• Guaranteed Cash Flows
• Guaranteed Maximum Price (GMP)-no change
orders
• Guaranteed Results and Performance
• Single Source Accountability
• Fast Track construction
• Appropriate flexibility in design & project mix
• Improvements are based on best ‘life cycle cost’ not
lowest bid, resulting in higher efficiency equipment
• Owner has input in equipment selection
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Review It is a true Win – Win !
• Promises delivered
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Reduced Operating Expense
Upgraded/Renewed Aging Infrastructure
Improved Comfort and Facility Performance
Reduced Operating and Capital Budget
Inject money in local businesses
Demonstrates social responsibility
• Building owners SAVE money and energy
o ESPC market grows – Banks, ESCOs, Product suppliers increase
business
• Lower GHG emissions
• More jobs
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
How to Begin?
•
Define the Institution’s goals regarding energy performance
o Percent reduction in energy use
o Percent reduction in energy expenditures
o Near-term savings required to provide immediate cash flow
improvements?
o Percent reduction in building generated GHG’s
o Determine maximum payback period
o Determine operational constraints
o Do the students need to have uninterrupted classroom
experience; i.e., must work be done at nights, on weekends,
during holiday periods?
o Historic preservation
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Beginning Part II
• Prioritize the goals
o Which are the most critical?
o What is the balance - the point of equilibrium - among
competing goals?
• Inventory of all owned buildings
• Understand the energy performance of buildings
o Electric, gas and water data
o Per year/per monthper square foot
o Age of buildings
o Age of major equipment in buildings
o Energy control systems in buildings
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Beginning Part III
•Develop strategy paper that describes the procurement
process
•
Who needs to do what at each step of the
process
Identify and name a project manager and project team
members
•E.g.: the project manager, legal, finance, procurement
process expert, operations and maintenance managers,
and energy manager
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Lessons Learned
• A variety of goals are motivating different building
owners
o Climate change mitigation/ACUPCC
o Near-term cash flow improvements, long-term
asset value improvement
o Marketing/public image
o Energy efficiency and the green agenda
o Recruitment and Retention
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Lessons Learned
• Each owner is learning to create a procurement process for
their legal, political, and procedural context
o RFQ or RFP?
o Formal vs. Informal?
o ESCO’s are being flexible
• A variety of financing solutions being explored
o Self-financed
o ESCOs themselves
o Assisted by electric utility
o Exploring tax-exempt public revenue bonds
Facilities Institute
July 9 - 12, 2012
Houston, Texas
Energy Performance Contracting
Thank You !!!
• Questions
• Comments
• Concerns
Remember that you too can do great things!
Facilities Institute
July 9 - 12, 2012
Houston, Texas