"Mississippi Building Contracts"
WORKSHOP ON ENERGY PERFORMANCE CONTRACTING FOR MISSISSIPPI’S PUBLIC AGENCIES Sponsored by the Mississippi Development Authority-Energy Division History of Energy Performance Contracting (EPC) OTHER TERMS USED TO REFER TO ENERGY PERFORMANCE CONTRACTING n Shared savings n Innovative financing n Guaranteed energy savings n Pay from savings n Positive cash flow financing n Alternative financing for energy projects OLD VERSUS NEW WAY The Old Way The New Way Shared savings - A private Performance contracting - company finances the A private company investment for a share (80- guarantees a level of 90%) of future savings energy savings for an over a specified contract extended contract term term. sufficient to cover all project costs. HISTORY OF ENERGY PERFORMANCE CONTRACTING 1970s - 1986 (Early Era) “NAIVE ENTHUSIASM” n Deal Drivers: n Limited capital to finance public sector energy projects n Rapidly rising electricity rates n Investment and energy tax credits, accelerated depreciation n Unsophisticated contracts exposed ESCOs to significant risks HISTORY OF ENERGY PERFORMANCE CONTRACTING 1987 - 1995 (Middle Era) “ECONOMIC AND ENGINEERING REALITY” n Deal Drivers: n Falling real energy prices n Elimination of tax credits n Limited capital for public sector projects n Due to the economics of the business model, shared savings contracts fall out of favor n Industry shakeout n Utility DSM program incentives help encourage many efficiency investments HISTORY OF ENERGY PERFORMANCE CONTRACTING 1995 - Present (Current Era) “DEREGULATION AND EXPANDING SERVICES” n Deal Drivers: n Low interest rates n Contract terms in excess of 10 years n Emphasis on comprehensive capital improvements n Extensive use of tax-exempt lease financing n Federal market sector opens up in a big way n Declining utility incentives for energy efficiency n Many utilities enter and most exit the ESCO market HISTORICAL PERFORMANCE OF THE ESCO INDUSTRY Results from the National Association of Energy Service Companies (NAESCO) Project Database § 60+ participating companies § ~1500 projects • 76% based on some type of performance contracting arrangement • $ 2.6 billion capital investment for all sectors HISTORICAL PERFORMANCE OF THE ESCO INDUSTRY § 74% institutional projects –27% K-12 schools –16% state/local governments –14% health/hospital –10% universities/colleges –7% federal facilities § 26% commercial, industrial, residential & “other” projects ESCO PROJECTS BY MARKET SECTOR Fi gure 2. ESCO Projects by Market Segment N=794 3% 1% 2% 4% 3% K-12 schools 27% State/local government 5% Health/hospital University/c ollege 8% Federal government Industrial Office-leased 7% Retail-single Site 16% Office-ow ner-occ upied 10% Other Residential 14% Retail-multi-site PROJECT DESCRIPTIONS § 95% of the projects installed lighting or HVAC or both § Project costs typically are in the range of $1-$2 million although trending to larger $ volumes over several phases § 23% median electric savings What is Energy Performance Contracting? WHAT IS ENERGY PERFORMANCE CONTRACTING? n A contract for the acquisition of comprehensive energy efficiency improvements and services with minimal up-front costs n Provided by qualified Energy Service Companies (ESCOs) n Uses the energy and cost savings from the project to pay for the work WHAT IS ENERGY PERFORMANCE CONTRACTING? n Protects the customer by requiring a performance guarantee n Guarantees can be structured to cover all projects costs, including financing, over a specified contract term n Performance contracts can be used to leverage more comprehensive modernization projects STANDARD SERVICES OFFERED BY ESCOS n Investment grade energy audit n Comprehensive project design & engineering n Sources of project financing n Equipment acquisition n Complete project installation and management n Project performance guarantees for the duration of the contract n Savings measurement and verification n Ongoing equipment maintenance services STANDARD SERVICES OFFERED BY ESCOS n Rate negotiation n Commissioning of new equipment n Customer education on building load profile n Project monitoring n Extensive ongoing training for building operators and facility personnel n Access to available incentive programs BENEFITS OF PERFORMANCE CONTRACTING n Replace aging equipment with new equipment n Access to 3rd party financing for needed capital energy improvements n Improved facility energy efficiency and reduced energy costs BENEFITS OF PERFORMANCE CONTRACTING n Reliable and persistent long-term energy saving project performance n Enhanced local economies through the ESCO’s use of local subcontractors n Decreased equipment repairs and lower maintenance costs BENEFITS OF PERFORMANCE CONTRACTING n Freed-up budget dollars to fund other activities n Increased productivity from improved indoor air quality (IAQ) and building comfort conditions BENEFITS OF PERFORMANCE CONTRACTING n Optimized equipment performance through project commissioning n Better overall management and control of facility RISK REDUCTION BENEFITS OF PERFORMANCE CONTRACTING n Contractually guaranteed measured savings reduces the risk of savings erosion over time n Integrated project analysis, design, and construction reduces the risk of lost savings opportunities and schedule delays n Utility savings and performance monitoring reduces the risk of under-funding key maintenance requirements RISK REDUCTION BENEFITS OF PERFORMANCE CONTRACTING n Up-to-date training and knowledge for facility operating personnel reduces the risk of project non-performance n Ability to select services and materials based upon quality and value, rather than on lowest first cost, reduces the risk of inadequate maintenance SAVINGS EROSION OVER TIME IS TYPICAL OF CONVENTIONAL ENERGY PROJECTS 90 80 70 60 Percent of Predicted 50 Savings 40 Achieved 30 20 10 0 Year 1 Year 2 Year 3 Year 4 Year 5 STABLE SAVINGS GUARANTEED OVER TIME IS TYPICAL OF EPC PROJECTS 120 100 Percent of 80 Predicted Savings 60 Achieved 40 20 0 Year 1 Year 2 Year 3 Year 4 Year 5 Guaranteed % Predicted Savings Savings Achieved PERFORMANCE CONTRACTS MAY DELIVER DOUBLE THE VALUE OF CONVENTIONAL CONTRACTS Cumulative Savings Project First Cumulative Cost/Benefit Over 15 Years Costs Net Benefits Ratio Spec & Bid Procurement $1,800,000 $1,000,000 $800,000 1.8 (Minimize First Cost) Performance $3,000,000 $1,100,000 $1,900,000 2.7 Contract Procurement (Maximize Net Benefit) COMPARISON OF CUMULATIVE LONG- TERM ENERGY SAVINGS ACHIEVED OVER 15 YEARS 100 90 80 70 Percent of 60 Predicted 50 Savings Achieved 40 30 20 10 0 Performance Conventional Contract Contract KEY FACTORS AFFECTING THE SAVINGS GUARANTEE n Escalation rates used to calculate utility and operational savings and ongoing services n Quality of the measurement and verification plan n Calculation of annual maintenance, monitoring, and training fees KEY CONTRACT REQUIREMENTS TO DEFINE THE PERFORMANCE GUARANTEE The Energy Services Agreement (ESA) should include: n Contract language and a separate schedule to define and quantify the savings guarantee n A separate contract schedule which contains the unit energy and water baseline consumption data KEY CONTRACT REQUIREMENTS TO DEFINE THE PERFORMANCE GUARANTEE n A separate contract schedule which contains the savings measurement and verification plan n Contract language on material changes that trigger adjustments to the guaranteed savings n Contract language governing annual guarantee reconciliation procedures KEY CONTRACT REQUIREMENTS TO DEFINE THE PERFORMANCE GUARANTEE n A separate schedule which shows the project cash flow summary for the entire term of the contract n The contract language should establish an annual stand-alone savings guarantee CONVENTIONAL BID & SPEC VS. EPC NEGOTIATED PROCUREMENT Conventional Performance Contracts n May take several years n All funds needed for a to secure sufficient comprehensive energy funds to implement project are readily comprehensive energy available projects n High staff costs due to a n Lower staff cost and piecemeal approach to quicker completion of a bidding and managing comprehensive project each separate project CONVENTIONAL BID & SPEC VS. EPC NEGOTIATED PROCUREMENT Conventional Performance Contracts n Multiple contracts with n One contract with single multiple vendors can point accountability for result in conflicting project performance project requirements n Long-term energy n Energy savings are not savings are guaranteed guaranteed by the ESCO CONVENTIONAL BID & SPEC VS. EPC NEGOTIATED PROCUREMENT Conventional Performance Contracts n Guarantees of comfort n Performance contracts and operating standards typically contain explicit are not usually offered comfort and operating by equipment vendors standards n Incremental project n Comprehensive project implementation misses implementation savings design maximizes savings opportunities design opportunities CONVENTIONAL BID & SPEC VS. EPC NEGOTIATED PROCUREMENT Conventional Performance Contracts n Energy projects must n Energy projects are compete for limited funded with utility bill budget resources with savings other improvement projects n No direct incentive for n ESCO compensation is building staff to reduce tied to providing energy energy costs savings over the term of the contract CONVENTIONAL BID & SPEC VS. EPC NEGOTIATED PROCUREMENT Conventional Performance Contracts n Limited staff or lack of n ESCO provides ongoing expertise may put technical expertise to project performance at insure project risk performance n Operations and n Utility bill savings maintenance budgets finance operations and are usually under- maintenance required to funded, resulting in maintain project wasted energy performance Full Life Cycle Cost Analysis of Public Sector Procurement COMMERCIAL AND INSTITUTIONAL ENERGY EFFICIENCY PAYBACK ACCEPTANCE RATE (REVEALED PREFERENCE) Based on 485 Case Studies Reported in Energy User News Project 100% Acceptance 90% Rate 80% 70% 60% 50% 40% 30% 20% 10% Payback 0% (Years) 0 1 2 3 4 5 NEEDED PROCUREMENT INNOVATIONS n Shifting to life cycle economic costs will require a culture change in procurement practices n Maximizing the net life cycle value of the project must displace minimizing the first cost of the project as the decision criterion NEEDED PROCUREMENT INNOVATIONS n Considering the full range of economic impacts on health, productivity, families, the local economy and environment, must complement considerations of equipment costs and utility bill savings n Shift to performance-based service contracts that guarantee results and future value rather than low-price projects that fail to produce long-term value TRADITIONAL LIFE CYCLE COST (LCC) ANALYSIS FACTORS (Net benefit of all major costs and savings over the life of the equipment) n I = Investment n S = Salvage Value n O = Operation Costs n M = Maintenance Costs n E = Energy Costs n R = Replacement Costs LCC = I + S + O + M + E + R REVISED LIFE CYCLE COST (RLCC) ANALYSIS FACTORS n H = Health Costs n EV = Environmental Costs n P = Productivity Costs RLCC = (I + S + O + M + E + R) + (H + EV + P) EXPANDING OUR VISION OF BUILDING COSTS TO PUT PEOPLE FIRST n Life cycle cost analysis for commercial buildings shows that: n 92% of the costs are for personnel n 6% for operations and maintenance; and n Only 2% for the land and building. EXPANDING OUR VISION OF BUILDING COSTS TO PUT PEOPLE FIRST n During conventional procurement and design, most budget scrutiny is focused on building costs. Much less, but some, is focused on operation and maintenance costs. The least scrutiny is paid to, by far, the largest cost (i.e., personnel). ANNUAL COST OF DELAY (COD) Lost opportunity to convert annual utility savings into financing for capital improvements 800000 Cumulative Costs 600000 400000 200000 0 Year 1 Year 2 Year 3 Year 4 Year 5 Years of Delay POTENTIAL LOST SAVINGS FROM DELAYING A GUARANTEED ENERGY SAVINGS PROJECT Comprehensive retrofit project, 1M ft2 bldg. Utility Costs $ 450,000 Maintenance Costs $ 45,000 Productivity Costs $3,833,500 Environmental Costs $ 459,570 Health Treatment Costs Avoided $ 1,880,000 TOTAL $ 6,668,070 www.energystar.gov Bus_financing_cfo_calculator.xls EXAMPLES OF POTENTIAL OPERATIONS AND MAINTENANCE COST SAVINGS n Reductions in internal labor costs n Reductions in outside labor costs n Reductions in scheduled maintenance n Reductions in unscheduled repairs n Reductions in repair parts n Reductions in inventory HIDDEN SAVINGS FROM ENERGY EFFICIENCY n Annual avoided line losses of electrical energy of 8% for metered kWh saved for large commercial valued at 2 cents/kWh n Annual capacity cost savings for 100% of metered incremental kW of demand for generation, transmission and distribution by the local utility valued at $164/kW ENERGY EFFICIENCY DRAMATICALLY REDUCES ENVIRONMENTAL COSTS n Acid rain precursors (SO2, NOX, HF, HCI) n Greenhouse gases (CO2, CH4) n Particulates and ozone n Air toxics n Heavy metals (mercury, cadmium, lead) n Volatile organic compounds n Carbon monoxide (CO) n Water pollution and water consumption Who is a Good EPC Candidate? Characteristics of EPC Candidates Characteristics of Non-candidates EPC CUSTOMERS n Need infrastructure improvements n Realistic financial approach n Looking for energy efficiency help n Best value buyers n Looking for partnership with ESCO n Leadership involved in process n Understand the technical drivers NEED IMPROVEMENTS n Older facility n Critical equipment at end of useful life n High annual utility consumption and cost n High maintenance and/or repair costs n Can’t maintain comfortable environment n Significant cost reduction opportunities n Stable building usage for foreseeable future n Urgency REALISTIC FINANCIAL APPROACH n Understand utility bills, maintenance costs and facility usage patterns n Have target list of improvements n Realistic about internal funding n Savings must pay all project costs? n Other $$ available? n Willing to share knowledge with ESCOs LOOKING FOR HELP n Energy efficiency not in your mission n Looking for technical assistance n Staff not threatened by ESCO n No threat of job elimination n Staff willing to share “Ownership” of energy equipment BEST VALUE BUYERS n Energy performance contracting ≠ low bid n Fully value all costs and savings n Lifetime energy costs n Lifetime maintenance costs n Other utilities (water, sewer, etc.) n Environmental emissions LOOKING FOR PARTNERSHIP n Typical EPC is 10-15 years n ESCO has substantial interest in project performance for length of contract n Cooperative relationship n Not a zero sum game n Both parties seek to minimize energy costs and maximize facility comfort and usefulness LEADERSHIP INVOLVED n EPC is a business transaction, not an engineering exercise n Technical details don’t solve business problems n Keep business and technical discussions in phase n Don’t expect the ESCO to spend $$ on studies if facility can’t make a commitment OTHER SOURCES OF MOTIVATION n Deregulation n Realistic savings expectations n New Technologies n Distributed generation n Third generation lighting/controls n Willingness to use new technologies UNLIKELY CANDIDATES FOR EPC n Cream skimmers n “First cost fixation complex” n Unrealistic savings expectations n No perceived urgency n Leery of long-term debt n Don’t need or want ESCO partnership PRIORITIZING FACILITIES n Size of utility bills n Square footage of buildings n Type/Use of buildings n One building or one campus n North Carolina example n 96 M ft2 -- 12,300 facilities -- >$1 B need n Rate buildings with Portfolio Manager ENERGY STAR: PORTFOLIO MANAGER n Works for most state facilities n Delivers ratings of 1-100 n Easy to use and free n Agencies can confirm ratings n Good motivator n www.energystar.gov/benchmark ENERGY STAR Is 10 MPG high or low for an PORTFOLIO MANAGER automobile? Fuel Efficiency Energy MPG Efficiency 1 - 100 ENERGY STAR: PORTFOLIO MANAGER n Rate n Energy performance baseline n Compare n Within state and against similar facilities n Inform n Energy improvement plan n Track and Measure n Over time PORTFOLIO MANAGER: CHANGES APPROACH n Makes performance data public n Creates momentum for energy- efficiency projects n Moves motivation from operations to “bottom line” PORTFOLIO MANAGER: DATA REQUIRED n Zip Code n Climate and weather normalization n Energy Consumption n 12 consecutive months n Space Type Data n Square footage, hours of operation, data centers, computers, and occupancy CONCLUSION n Evaluate agencies and facilities n Use US EPA benchmarking tools n Be realistic with ESCOs n If an agency or facility is not ready today, it may be ready in the future EPC Procurement and ESCO Selection THE RFQ n Defines the scope of the project n Describes how the procurement process will be conducted n Establishes the project schedule n Defines the evaluation criteria n Experience, Management, Technical, Financial n Highlights special project terms and conditions n Technical & Contractual SETTING A REASONABLE PROJECT SCHEDULE SAMPLE SCHEDULE ACTIVITY TIMEFRAME § Issue RFQ Week 1 § Site Visit (to be arranged) Weeks 3-5 § Proposals due Week 6 § Written proposals reviewed & evaluated Weeks 6-10 § Oral interviews Week 12 § ESCO selection Week 14 § Approval of selected ESCO Week 14 § Audit, project analysis, contract negotiations Weeks 16-29 § Contract presented & signed Week 32 THE RFQ KEY INFORMATION REQUESTED PRELIMINARY TECHNICAL PROPOSAL n Qualifications Project Team Members n Specific Training Provisions n Proposed Project Financing n Annual Report THE RFQ n Preliminary Technical Site Assessment n Energy Baseline Calculation Methodology n Sample Commissioning Plan n Procedure for Calculating Energy and Cost Savings n Sample Maintenance Plan n Sample Savings Measurement and Verification Plan WHY SHOULD QUALIFICATIONS BE YOUR PROCUREMENT FOCUS n Having the necessary range of capabilities is more important than the preliminary technical and cost proposal n Project scope and price can and will be negotiated; not so for qualifications WHY SHOULD QUALIFICATIONS BE YOUR PROCUREMENT FOCUS n Better qualified ESCOs will generally, but not always, present the better preliminary technical proposals n Performance contracts are long-term partnerships, so pick a reliable partner with staying power EVALUATION PROCESS AND METHODOLOGY ASSEMBLE A DIVERSE EVALUATION TEAM n Energy manager n Facilities operating engineer n Administrative/financial managers n Designated project manager n Technical advisor/consultants n Project Engineer n Facilities operating personnel EVALUATION PROCESS AND METHODOLOGY CONDUCT A THREE-PHASE REVIEW § Phase I: Written Submissions § Phase II: Client References § Phase III: Oral Interviews EVALUATION PROCESS AND METHODOLOGY SELECT FINAL ESCO § Based on cumulative rankings of all three phases § Consensus of evaluation team EVALUATION PROCESS AND METHODOLOGY EVALUATION DESIGN FEATURES § Use a comparative process § Weight criteria rankings (A=x3, B=x2) § Have client references conduct actual rankings § Include an “Unable to Rank” scoring category (which has no value) § Charting or graphing of overall phase rankings can be a useful comparative aid EVALUATION PROCESS AND METHODOLOGY Public Sector Energy Performance Contracting Sample Cumulative Evaluation Rankings for Phases I, II & III Written Submissions, Client References & Oral Interviews 300 250 Financial Technical 200 Management Point Totals Experience 150 100 50 0 ESCO 1 ESCO 2 ESCO 3 Energy Service Companies EVALUATION PHILOSOPHY OVERVIEW 1. If you cannot significantly impact project performance via negotiation of this criteria, it becomes a key criteria. 2. There are no perfect ESCOs, but some have far greater capability, experience, and consistent quality performance than others. EVALUATION PHILOSOPHY OVERVIEW 3. Since performance capability is distributed on a normal distribution curve, out of your respondents, no more than a third will probably be the top performers, a third reasonable performers, and perhaps a third with significant relative weakness on some criteria. 4. You are comparing the ESCOs to each other on specific criteria primarily and secondarily to a set of standards. How does this ESCO compare to the best ESCO for that criteria? EVALUATION PHILOSOPHY OVERVIEW 5. The goal of the evaluation process is to pick the best ESCO to provide services for your specific project. 6. Evaluation should focus on differences that distinguishes them in their technical capability to perform. EVALUATION PHILOSOPHY OVERVIEW 7. There are a lot of specific points of comparison, so be sure to keep written records of your notes on each ESCO. 8. Don’t let a glossy format distract you from the technical content of their qualifications. EVALUATION PHILOSOPHY OVERVIEW 9. Client references are critical; they are your only independent consumer report type of data on ESCO performance. 10. Learning by doing is the best evaluation training approach. ESCO EVALUATION: Non-Negotiable Criteria Experience § Technical qualifications and experience of ESCO’s personnel § Experience with implementing energy savings § Quality of project history and documented savings performance of past projects § Quality of customer service on past projects § Reliability of equipment performance on past projects § Quality of technical skills on past projects ESCO EVALUATION: Non-Negotiable Criteria Project Management § Ability to effectively manage past project construction § Ability to manage equipment repairs, regular service, and emergencies effectively on past projects § Quality of ESCO’s communication skills ESCO EVALUATION: Non-Negotiable Criteria Technical § Comprehensiveness of technical approach to past projects § Ability to plan and complete all schedule phases of past projects § Quality of operations and maintenance services on past projects ESCO EVALUATION: Non-Negotiable Criteria Financial § Financial soundness and stability of the ESCO § Demonstrated ability to provide or arrange project financing on past projects ESCO EVALUATION: Negotiable Criteria Project Management § Comprehensiveness of maintenance, monitoring, and measurement and verification services § Proposed O&M strategies ESCO EVALUATION: Negotiable Criteria Technical § Quality of investment grade technical energy auditing § Quality of approach to project commissioning § Quality of approach to calculating baseline energy consumption § Quality of approach to savings measurement and verification § Quality of provisions for training facility staff § Quality of customer savings reporting ESCO EVALUATION: Negotiable Criteria Financial § Reasonableness of financial assumptions for the proposed project § Details of proposed financing arrangement WHAT DATA WILL HELP YOU EVALUATE ESCOs n Request detailed project performance data on their past projects and client references n Request detailed information on the project management and technical experience of key staff n Request a sample detailed energy audit for a similar project they completed WHAT DATA WILL HELP YOU EVALUATE ESCOs n Request a sample customer savings report and a sample bid specification for a specific energy efficiency measure likely to be part of your project n Request audited financial statements and the firm’s financial ratings n Are they accredited by NAESCO? WHAT DATA WILL HELP YOU EVALUATE ESCOs n Utility bill reconstruction should be used to value savings and not average costs n Clearly calculated and documented materials and maintenance savings WHAT DATA WILL HELP YOU EVALUATE ESCOs n Reasonable escalation rates need to be provided by the agency to value future savings for cash flow analysis ENERGY PERFORMANCE CONTRACTING PROJECT IMPLEMENTATION Ongoing performance Ongoing performance monitoring Identify/select site Identify/select site monitoring Audit contract Audit contract Audit contract executed; ESCO Audit contract executed; ESCO Project maintenance, Notify MDA-ED of negotiated; conducts technical Project maintenance, measurement & Notify issue RFQ intent to MDA-ED of negotiated; conducts technical audit measurement & intent to issue RFQ audit verification, and facility personnel and facility verification,training personnel training MDA-ED responds in Select ESCO Guaranteed savings MDA-ED responds in Select ESCO Audit results Guaranteed savings writing to entity's Audit results timeframe begins writing to entity's reviewed and timeframe begins request to issue RFQ reviewed and request to issue RFQ approved approved Construction completed; Construction completed; equipment/systems Conduct evaluation: equipment/systems Conduct evaluation: Phase I: Written Proposals commissioning; agency Prepare RFQ Phase I: Written Proposals Phase II: Client References commissioning; project accepts/approves agency Prepare RFQ Phase II: Client References accepts/approves project Phase II: Oral Interviews Phase II: Oral Interviews Energy services Energy services agreement agreement negotiated; then negotiated; then reviewed and reviewed and approved by approved by Construction begins; ESCO MDA-ED Construction begins; ESCO performs construction MDA-ED performs construction Advertise/issue RFQ Receive ESCO management Advertise/issue RFQ Receive ESCO responses management responses Project Financing PROJECT FINANCING CONSIDERATIONS § Size of project investment § Length of financing term § Interest rate § Creditworthiness of the agency and ESCO § Length of construction period PROJECT FINANCING CONSIDERATIONS § Construction financing options/interest rate § Percentage of projected savings which are guaranteed § Buy-out schedule/prepayment terms § Required security interest/project collateral PROJECT FINANCING CONSIDERATIONS § Project bonding requirements § Preferred project repayment schedule (e.g., monthly, quarterly, annually) § Ability to time the debt repayment schedule to coincide with the guarantee period FINANCING EPC PROJECTS THROUGH TAX-EXEMPT LEASING n Property is fully amortized over the lease term typically with a levelized repayment schedule n Full cost of project can be financed including design and engineering fees and equipment installation n Considered off budget financing and does not constitute a long term debt obligation FINANCING EPC PROJECTS THROUGH TAX-EXEMPT LEASING n Does not encumber future budgets or reduce capacity to borrow for other purposes for which leasing is not an option n Lease payments are considered a current expense subject to appropriation (non- appropriations clauses are standard) n Equipment leasing is standard practice commonly used with performance contracts FINANCING EPC PROJECTS THROUGH TAX-EXEMPT LEASING n Does not require legislative or voter approval n Leasing allows for more flexibility in the financial structure of the project and transactions can be arranged quickly n Tax-exempt leases do not require a credit rating, credit insurance or reserve fund balances, all of which can increase financing costs. Documentation is simple and straightforward Developing and Negotiating Reasonable Contracts OVERVIEW OF CONTRACT DOCUMENTS § Technical Energy Audit Contract § Final Contract: Negotiating the Technical Schedules KEY PROVISIONS OF THE ENERGY AUDIT § Requires ESCO to collect general facility information and inventory existing systems and equipment § Requires a comprehensive analysis of utility consumption reconciled by end use to within 5% for electricity, fossil fuels and water KEY PROVISIONS OF THE ENERGY AUDIT § For uncertain loads and/or usage, spot measurements and short-term monitoring are encouraged to establish accurate utility baselines § Requires accurate marginal utility rates for calculating savings KEY PROVISIONS OF THE ENERGY AUDIT § Requires agency to assign escalation rates for utilities and annual fees § Requires disclosure of all calculation methods § Requires preliminary plans for project commissioning and savings measurement and verification KEY PROVISIONS OF THE ENERGY AUDIT § Requires calculations supporting commodity and maintenance savings § Requires estimates of any environmental costs and benefits § Requires detailed estimates of project costs and fees KEY PROVISIONS OF THE ENERGY AUDIT § Requires the presentation of information in two volumes: § Volume 1: Contract schedules required for the Energy Services Agreement § Volume 2: List of Energy Conservation Measures (ECMs) with comprehensive and detailed supporting documentation ENERGY SERVICES AGREEMENT: KEY CONTRACT SCHEDULES § Referred to throughout the main body of the contract § Contain the specific details of the project KEY CONTRACT SCHEDULES § Equipment to be Installed § Specifies newly installed equipment § Energy Savings Guarantee § Describes all provisions and conditions of the savings guarantee § Compensation to Company § Addresses amount and frequency of payments for ongoing services KEY CONTRACT SCHEDULES § The Premises § Contains basic information about condition of premises at time of contract execution § Calculation of Baseline/Benchmarks § Contains methodologies and supporting documentation used to calculate base year KEY CONTRACT SCHEDULES § Financing Agreement § Includes project financing agreement and amortization and payment schedule § Company Maintenance Responsibilities § Includes ESCO”s specific operation and maintenance responsibilities and timetable and schedule KEY CONTRACT SCHEDULES § Schedule H: Customer Maintenance Responsibilities § Includes the agency’s operation and maintenance responsibilities § ECM Operating Parameters and Standards of Comfort and Service § Contains explicit standards of comfort and levels of service and operating schedules KEY CONTRACT SCHEDULES § Company Training Responsibilities § Includes description of ESCO’s facility staff training program and fees § Project Installation Schedule § Contains timetables and milestones for project construction/installation KEY CONTRACT SCHEDULES § Current and Known Future Capital Projects at the Premises § Includes information about the implementation of current or planned facility capital projects § Pre-Installation Equipment Inventory § Contains inventory of existing equipment KEY CONTRACT SCHEDULES § Methods of Savings Measurement and Verification § Includes description of savings measurement, monitoring, calculation and modeling procedures used to verify and compute savings § System Start-Up and Commissioning of ECMs § Includes specific performance testing procedures used to start up and commission the equipment and systems KEY CONTRACT SCHEDULES § Alternative Dispute Resolution (ADR) § Contains methods for resolving disputes or claims relating to construction or the contract, wherein the parties agree to exercise good faith efforts (e.g., mediation, dispute resolution board) and to only use litigation as a last resort KEY CONTRACT SCHEDULES § Insurance and Bonds § Includes evidence of required types of insurance and bonds for all phases of the project § Warranties § Contains all manufacturers' equipment warranties, specifications, and procedures for invoking warranty provisions KEY CONTRACT SCHEDULES § Proposed Final Project Cost and Proposed Final Project Cash Flow Analysis § Includes spreadsheet of the project’s expected financial performance for entire contract term § Should include project cost breakdowns OPTIONAL CONTRACT SCHEDULES § Pre-existing Service Contracts § Contains information regarding the scope and cost of pre-existing equipment service contracts § Facility Maintenance Checklist § Provided by ESCO to track agency’s compliance with specified maintenance procedures OPTIONAL CONTRACT SCHEDULES § Facility Changes Checklist § Provided by ESCO for notifying agency when energy use changes occur (e.g., occupancy, new equipment acquisition, hours of use); submitted on monthly or quarterly basis Project Management and Implementation Issues Quality control at every step delivers superior results PROJECT MANAGEMENT ISSUES n Scope of Work n Project Price n Schedule n Construction Coordination n Acceptance of Completed Work n Payment Schedule n Maintenance n M&V Requirements MANAGEMENT PROBLEMS n Inadequate definition of agency’s project goals § Time and staff constraints limit the options considered or result in poor choices § Short payback investment criteria rejects EPC project returns which are much higher than other investment options § A/E firms with an advisory relationship to decision-makers do not often understand EPC MANAGEMENT PROBLEMS § Inadequate access to key decision- makers § Decision-makers don’t understand project technical and economic data § Decision-makers are not accountable for efficient building performance SCOPE OF WORK n Base designs on accurate existing conditions data n Design projects to minimize life cycle costs n Simplify equipment and materials inventory requirements by standardizing design choices n Consider long term operations and maintenance SCOPE OF WORK n Pay careful attention to sizing equipment correctly n Consider interactions between equipment to maximize system performance and efficiency n Is the scope of work clear and detailed enough? Don’t think that vagueness favors you PROJECT DEVELOPMENT ERRORS n Poor data collection practices and/or constrained economic analysis produces limited or inappropriate solutions n Inappropriate analysis or modeling tools n Insufficient technical audit staff involvement in the design process n Lack of understanding of the interactions between building systems n Failure to field test unfamiliar technologies PROJECT PRICE n Fixed Price or Cost Plus n Management fees n Share of savings below budget n Is ESCO Motivated to Maximize Savings? n Contingencies n Method for adjustments CONSTRUCTION COORDINATION n Who is the owner’s representative? n Scope of their authority n Change Order procedure n Access issues n Need guides or escorts? Costs? n Security considerations n Safety considerations CONSTRUCTION COORDINATION n Focus on the review and approval process n Coordinate early with other construction projects to avoid confusion and delays n Keep WRITTEN records of scope changes n Monitor construction progress regularly n Spot check installations to catch quality issues MAINTENANCE n Allocate tasks based on cost and capability n Item-by-item listing n Does the responsible party have the required resources? n Money in the project budget and/or third party contracts n Comprehensive training on new equipment is critical § Demand high quality O&M manuals § Require adequate project commissioning n Continuously commission equipment based on monitoring M&V REQUIREMENTS n Who is the owner’s representative? n Qualified enough for the job? n Is the M&V methodology clear? n Who understands and validates it? n Does it account for facility changes? M&V REQUIREMENTS n Maintain a good data management system for tracking utility data and other building system data n Design the measurement and verification system to provide rapid feedback on project performance n Include dispute resolution procedures M&V STANDARDS n Project performance standards should be defined by the contract and schedules n Standards should provide clear methods for measuring results and calculating savings n Standards should be fair, efficient, technically sound, transparent, constructive, and consistent with standard industry practices Measurement and Verification of Energy Savings WHAT IS MEASUREMENT AND VERIFICATION (M&V)? M&V is a measurement procedure involving on-site data collection on the performance of building energy consuming equipment according to an approved measurement plan BENEFITS OF M&V n Gives the end user greater confidence in their investment n Gives lessor confidence in lease payment n Gives ESCOs a feedback mechanism on their quality of engineering n Maximizes persistence of utility consumption and cost savings BENEFITS OF M&V n Reduces operations and maintenance costs (e.g., automatic dial-up alarms) n Reduces utility and equipment performance data collection and analysis costs (e.g., utility rate analysis and load profiling n Provides benchmarking data for cost reductions in similar buildings BENEFITS OF M&V n Improves equipment reliability and optimizes system performance (e.g., load management) n Provides valuable management information for building cost accounting and budget forecasting n Provides timely project performance feedback and accountability n Provides the data required for savings or baseline adjustments FACTORS AFFECTING RELIABILITY AND PERSISTENCE OF ENERGY SAVINGS n Designer’s understanding of how choices impact savings n Match of technology to application at site n Quality of installation of the technology n Effective commissioning of ECMs FACTORS AFFECTING RELIABILITY AND PERSISTENCE OF ENERGY SAVINGS n System optimization for changes in the operating schedule of the environment n Effective maintenance n Monitoring savings results over time SOURCES OF MONITORING DATA n Utility bills n Existing utility meter readings n Weather data synchronized with metered energy data n Logs of building operation and maintenance data n Reports on building equipment changes from maintenance staff n Special metering and periodic benchmark measurements MONITORING ENERGY SAVINGS PERFORMANCE n Collect building data before the audit for baseline data n For large energy loads, hourly monitoring is useful n Periodic written reports on savings performance are essential MONITORING ENERGY SAVINGS PERFORMANCE n Monitoring personnel should be provided adequate training to interpret the data collected n Monitoring data should be provided in easy to understand graphic formats n A standard monitoring report format which emphasizes comparisons with performance targets is a good approach MONITORING ENERGY SAVINGS PERFORMANCE n Monitoring provides incentives for optimizing operations and maintenance, and documenting system performance results. Everyone is more careful when they know results are monitored n Building operators need timely and focused performance data which allows them to rapidly identify and correct system performance problems MONITORING ENERGY SAVINGS PERFORMANCE n Continuous and effective monitoring is the key to creating persistent savings n Collecting relevant data from building operators and occupants is essential to effective monitoring n Do not assume utility metering is accurate MONITORING PROCESS DOCUMENTATION n Daily and hourly consumption pattern data allows building operators to spot operational problems n Require documentation of calculations to support material change adjustments to savings and/or baselines n Document the periodic savings report schedule, review and approval process MONITORING PROCESS DOCUMENTATION n Report consumption and cost savings in units/dollars and percentage of target savings in both graph and numeric format n Explanation of variances from predicted savings performance n Clearly identify data sources, time periods, utility cost data, report author and contact data LESSONS LEARNED IN LIGHTING M & V n Lighting system KW can vary with fixture and ballast type n Pre-retrofit condition often consists of a variety of ballasts n Pre-retrofit condition is often more efficient than engineering estimates LESSONS LEARNED IN LIGHTING M & V n Post-retrofit condition is often less efficient than engineering estimates n Even with good documentation getting fixture counts more accurate than ± 3% may be impractical in large facilities WHY MEASURE INDIVIDUAL END-USE EQUIPMENT n Isolates affected end-use from total building meter n Quantifies parameters for engineering calculations and simulation models (e.g., temperatures, run times, control settings) n Provides equipment operation diagnostic data n Corrects catalog data estimates which can vary by application, design, quality of installation, and control FACTORS AFFECTING THE COST AND APPROPRIATE LEVEL OF M&V EFFORT n Value of projected ECM savings n Complexity of ECM n Total number of ECMs n Number of interactive ECMs n Uncertainty of savings n Risk allocation for achieving savings n Other value produced by M&V data n Availability and capability of an EMS M&V PLAN OUTLINE n What will be measured, calculated, simulated, or estimated and by whom n Time intervals for measurements or calculations n Annual costs for M&V n Description of any measurement devices, equations, computer models, assumptions, and data requirements M&V PLAN OUTLINE n How measurement devices or computer models will be calibrated and the frequency of calibration n How measurement or calculated data will be used to verify savings and sample calculations n Sample periodic savings report showing all data, calculations and summary results DEFINING A QUALITY BASE YEAR IS KEY TO MAXIMIZING PROJECT VALUE n Base year is the mutually agreed upon pre- retrofit annual utility consumption and cost for your building or a specific energy using system n It provides the basis for the technical and economic analysis of potential energy conservation measures (i.e., investment-grade audit) n It also provides the basis for measuring and/or calculating the value of future energy savings (i.e., monitoring project performance) FACTORS TO CONSIDER WHEN ESTABLISHING THE BASE YEAR UTILITY CONSUMPTION n Changes in building equipment, structures, schedule, occupancy, or control setpoints n Recent operations and maintenance work impacts on energy consumption n Mild or severe weather conditions during base year period FACTORS TO CONSIDER WHEN ESTABLISHING THE BASE YEAR UTILITY CONSUMPTION n Changes in utility rates n Adequate, accurate documentation or measurement of current equipment operating conditions, sizes, loads, and schedules n Existing lighting levels, ventilation rates, temperature, and humidity and proposed changes to the current service levels CHALLENGES TO CALCULATING AN ACCURATE BASE YEAR n Data analysis fails to account for periods during which equipment was broken or malfunctioning n Consumption data are inaccurate or missing due to utility metering, billing, or data entry errors n Run hours of equipment ≠ operating hours of building CHALLENGES TO CALCULATING AN ACCURATE BASE YEAR n Run hours of equipment ≠ facility staff estimates n Thermal loads may not be simply proportional to weather due to occupant load n Actual annual equipment loads ≠ full load rating nameplate (e.g., average motor operates at 60% of full load rating) STANDARD M & V PROTOCOL AND TECHNICAL FOUNDATION GUIDELINES n International Performance Measurement and Verification Protocol (IPMVP), go to: http://www.evo-world.org/ n American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) guideline 14 (covers IPMVP options B, C, and D in more technical detail), go to: http://www.ashrae.org IPMVP M & V OPTIONS § Option A - Measured capacity, stipulated consumption n Option B - Measured capacity, measured consumption by end use n Option C - Whole facility analysis or main meter measurement n Option D - Calibrated simulation M & V OPTIONS: COST VERSUS ACCURACY Approximate Cost M&V Accuracy as % of Options (% Error) Construction Cost A 20% 1 - 5% B 10 - 20% 3 - 10% C 5 - 10% with daily/ 3 - 10% hourly data 20% with 1 - 3% monthly data D 5 - 10% 3 - 10% SAVINGS VERIFICATION CHALLENGES n Lack of detailed engineering calculations n Missing data on equipment and operations n Poorly defined savings measurement methods n Lack of standardized data formats for calculations and reporting n Difficulty of monitoring the impacts of facility changes on ECM performance SAVINGS VERIFICATION GUIDELINES § Timely method of measuring savings that is acceptable to client and ESCO n Measurement methods should be clearly defined n Measurement procedures should be cost effective n Value of measurements are a function of the dollars at risk PERFORMANCE MEASUREMENT STANDARDS n Cost effective measurement produces data with a value greater than the cost of measurement n Methodology for measurement must produce consistent results no matter who uses the procedure n Performance measurement must produce timely results PERFORMANCE MEASUREMENT STANDARDS n Results must be reasonably accurate n A pre-existing procedure for resolving disputes over measurement should be defined in the contract Project Commissioning WHAT IS PROJECT COMMISSIONING? A systematic process to document, test and verify that the design, installation, operating and maintenance procedures perform as designed and meet the owner’s needs Effective commissioning by ESCOs is essential to achieving the IAQ objectives of energy performance contracting projects WHAT IS PROJECT COMMISSIONING? Commissioning of energy measures is crucial to ensure that energy savings are achieved. Most performance problems with measures can be caught and corrected with proper commissioning BENEFITS OF COMMISSIONING n Results in proper quantities of air and water delivered to heating and cooling equipment for optimum savings, operation, control and comfort n Verifies controls calibration and measures accuracy so that individual system components will work together as a “tuned” system to maximize savings BENEFITS OF COMMISSIONING n Helps train building operators to understand the system capabilities, limitations, operating characteristics, and procedures, and provides the knowledge to accurately troubleshoot n Provides the documentation of a self- sustaining training program for new personnel, thus reducing the risks to savings that result from staff turnover BENEFITS OF COMMISSIONING n Identifies aspects of a systems design or installation that may be responsible for unsatisfactory savings performance n Ensures complete and orderly systems documentation. This is done by recording the correct start-up, shut- down, seasonal change over, adjustment, regulation, and data logging procedures BENEFITS OF COMMISSIONING n Helps ESCOs and owners achieve guaranteed savings since commissioning verifies proper building equipment installation and performance n Extended equipment life due to proper design and operation n Provides a healthy building by improving indoor air quality FREQUENCY OF ACHIEVING COMMISSIONING BENEFITS n Fix system design problems 95% n Improve system performance 95% n Avoid capital costs 90% n Reduce operating costs 80% n Improve quality of design 40% TYPICAL FINDINGS IN NON- COMMISSIONED EXISTING BUILDINGS § Energy management control systems have been disabled and now serve only as “timeclocks” (if even that) § Dirty filters reduce air flow and impair air quality § Dirty coils reduce heating and cooling efficiency TYPICAL FINDINGS IN NON- COMMISSIONED EXISTING BUILDINGS § Outside air louvers are covered (debris, dirt, leaves, etc.) § Installations and changes are poorly documented § Major air flow problems TYPICAL FINDINGS IN NON- COMMISSIONED EXISTING BUILDINGS § VAV system delivering excess or insufficient air flow § EMS incorrectly reporting HVAC system performance § Leaking duct work. Proper installation and sealing of duct systems can cut leakage rates from 15% or more down to close to 1%. TYPICAL FINDINGS IN NON- COMMISSIONED EXISTING BUILDINGS § Energy performance penalties of 10% to 35% due to minor control and HVAC equipment problems § Sensor calibration, location, and malfunction problems COMMISSIONING MAJOR EQUIPMENT SYSTEMS n Identify equipment which requires commissioning n Identify specific test procedures n Develop pre-commissioning checklists n Conduct functional performance testing n Report commissioning results QUESTIONS WHICH SHOULD BE ANSWERED BY COMMISSIONING § Is the design adequate for the required task? § Was the required equipment installed properly? § Are control sensors and other control hardware properly calibrated? § Are control setpoints appropriate for the task? QUESTIONS WHICH SHOULD BE ANSWERED BY COMMISSIONING § Does the control system operate as intended? § Does the equipment respond to control signals properly? DID YOU DO “MUST COMMISSION” RETROFITS § Lighting control (daylighting, occupancy sensors) § Energy management control systems/strategies § Pneumatic equipment § HVAC-related plant equipment § Air-distribution systems DOES YOUR COMMISSIONING PLAN INCLUDE: n Scope or level of commissioning n Commissioning schedule n Team member responsibilities n Communication, reporting and management protocols DOES YOUR COMMISSIONING PLAN INCLUDE: n Documentation requirements n Detailed scope of testing n Detailed scope of monitoring n Recommended training format IDEAL COMMISSIONING TYPICAL ESCO PROCEDURES COMMISSIONING (Customer requirements are specified in the contract) PRACTICE n Commissioning plan guidelines are specific and n Commissioning plans are detailed general outlines n Commissioning begins during the pre-design n Commissioning begins phase with the design during or after construction intent narrative as part of equipment startup n Full building performance commissioning (including n Commissioning focused lighting systems, water primarily on EMS and equipment, operations and mechanical systems maintenance procedures) IDEAL COMMISSIONING TYPICAL ESCO PROCEDURES COMMISSIONING PRACTICE n HVAC commissioning n HVAC commissioning is should ensure often limited to testing, operational performance adjusting, and balancing meets energy efficiency to meet design and contractual environmental quality specifications standards (e.g., IAQ) • Diagnostic tests to spot problems • Functional tests to reveal causes of problems IDEAL COMMISSIONING TYPICAL ESCO PROCEDURES COMMISSIONING PRACTICE n Continuous project n Commissioning is commissioning to complete once the owner optimize system accepts the project performance over the long term(e.g. EMS) and maximize savings n Owner and ESCO may n Adequate budget for under-invest in design and optimal design and commissioning and fail to commissioning process maximize savings IDEAL COMMISSIONING TYPICAL ESCO PROCEDURES COMMISSIONING PRACTICE n Documentation of the n Documentation of the process and results can be commissioning process uneven and results is complete and user friendly n Sometimes responsibility n Clear assignment of is spread between responsibility and subcontractors and authority for the technicians without commissioning process adequate communication and schedule or coordination of the schedule Draft Commissioning project Plan Outline Construction Documentation Commissioning - Owners’ Information Scoping Meeting - Design Intent Docs Final Commissioning Project Plan O&M Commissioning Functional Pre-functional Test Tasks Performance Test Checklist Forms Pre-functional Tests Forms Functional Performance Testing Pass Fail Functional Perf. Compliance Forms Approval Form Report Repairs Training COMMISSIONING Final Report on FLOWCHART Commissioning Work COST VS. QUALITY Concern COST /SCHEDULE QUALIT Y Design Construction Operation T he forces that drive the project team often contradict the goal of high- quality construction. TYPICAL TIME ALLOCATION FOR COMMISSIONING n 10% Design review n 20% Installation inspection n 35% Performance verification n 25% Validating appropriateness of corrective actions n 10% Operation and maintenance training