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Performance Contracting How To
OTHER PARTS OF THIS ARTICLEPt. 1: CCI Partners with ESCOs on Performance ContractingPt. 2: This PagePt. 3: Innovation: Tax Lien Financing
Generally a project begins with an audit, which takes about five months, says Nobles. During the audit, the ESCO determines what needs to be done, how much it will cost, and what the energy savings will be. A contract is then signed, and implementation goes forward. The monitoring phase, in which energy savings are realized and counted, varies from project to project.
"As with most [energy efficiency] projects, engineering tends to be the easy part," says Shon Anderson, vice president of sales for the energy solutions group for Schneider Electric, one of the ESCOs working with CCI. The hard part, in working with multiple city departments, is bringing department heads together and getting them aligned around a vision of what is possible and then prioritizing tasks.
"People are the biggest challenge," Anderson says. Getting the job done, he says, requires "coalition building and facilitating dialogue, and working through a diverse community of stakeholders." For example, a police facility operating 24 hours a day can't get a lot of savings from shutting the facility down, whereas a library can shut down parts of a building when they are not in use. Engineers should have a different mindset for each type of building when creating efficiencies.
Another challenge is overcoming the three- or four-year payback threshold, because a longer project timeline will garner more significant savings. Often, significant energy gains can be had simply by more aggressive management and tuning of what is already in operation. "Sometimes it is a matter of retrocommissioning a system in place," says Anderson.
But projects with a longer timeline — measured in both how long the work takes and how long it takes to realize energy savings — can bring substantial long-term energy gains. A good example is HVAC upgrades, which Anderson says are a major opportunity.
"We try to sign customers on for the longer view," says Mike Taylor, vice president of the Honeywell Clinton Climate Initiative partnership team, by providing the savings guarantee.
ESCOs under the CCI umbrella agree to follow certain processes outlined by the Clinton Foundation. "We agree to follow up and to resource the opportunities in cities where we agreed we'd have a presence," says Taylor. "We agree to use CCI's product suppliers when better pricing is available."
Performance contracting has been a practice in the United States for about 30 years, but still only a fraction of entities that manage or own building stock are using it as a vehicle to become more energy efficient, says Schuur.
One reason is that building owners don't understand the concept of performance contracting. "CCI has helped educate customers on the process, on how funding works, on how to choose a partner, and on how an audit works," says Nobles. "Typically it is a year-long sales cycle, with about half of that time spent in educating the client about how the process works."
One reason that education is so important is that financing is a complex matter, even though the building owner typically doesn't provide the upfront funding for the project.
ESCOs remove the risk in financing an energy retrofit, says Taylor, by providing the savings guarantee. A common misperception, says Taylor, is that the ESCO finances the project. In fact, the ESCO is usually in a triangular relationship with the building owner and the bank or other lending institution, although a building owner can also pay cash up front and still enter into a performance contract. When a loan is involved, ESCOs use their established relationships with finance companies and banks to smooth the financing process, Taylor says.
There are a number of ways in which retrofit projects are paid for. According to Schuur, in the U.S. the projects are almost always paid for up front, either by the owner or through third-party financing. Subsequently the energy savings are used to pay back the cost of the retrofit. And of course, under the performance-contracting model, the ESCO agrees to reimburse the owner or entity if it does not deliver on the projected energy savings.
Most typically in the public sector, the entity doing the retrofit will take a loan. Other models involve service companies or financial firms that front the money. Power-purchase agreements, such as those developed for solar PV projects, are also used, says Schuur. With this model, a project developer (not an ESCO) makes an agreement with building owners in which the owners pay for power rather than installation costs. The developer may take a management role and may then subcontract to an ESCO.
An important part of a performance contract is a provision to measure the amount of energy saved. That can be trickier than it sounds. Unusually warm or cold weather, for example, will affect the amount of energy consumed. So may changes in use of a space. The International Performance Measurement and Verification Protocol (IPMVP) provides a consistent, reliable way to determine energy savings from upgrades. Facility managers should make sure the ESCO uses one of the options in IPMVP as the basis for measuring and verifying savings from a performance contract.
Performance Contracting How To