The Pros and Cons of EnergyThe Pros and Cons of EnergyPerformance Contracting forPerformance Contracting for

MunicipalitiesMunicipalities

Steve MorganClean Energy Solutions

January 22, 2010

Massachusetts Municipal Management AssociationAnnual Conference, Hynes Convention Ctr

What is a Performance Contract?

Capital Improvements Project, which substitutesprivate dollars for Comp Grant dollars

Energy-related Improvements replace DHW, HVAC,Controls, Refrigerators, Lighting, Toilets

Loan debt service payments retired over up to20 years from savings

ESCO guarantees savings are sufficient to repaydebt

Requires a third party to guarantee savings, overseeinstallation of measures, provide annual services

Where does Energy PerformanceContracting Fit in a Community’s

Energy Strategy?• A supplement to Grant programs• To pay for capital improvements where

grant funds insufficient• Strong leveraging instrument• Requires sophistication, time to manage• Appropriate for municipal buildings, large

NPOs

Benefits of PerformanceContracting

• Replace aging equipment with newequipment

• Access to 3rd party financing for neededcapital energy improvements

• Improved facility energy efficiency andreduced energy costs

Benefits of Performance Contracting(continued)

• Reliable and persistent long-term energy savingproject performance

• Enhanced local economies through the ESCO’suse of local subcontractors

• Decreased equipment repairs and lowermaintenance costs

Benefits of Performance Contracting(continued)

• Freed-up budget dollars to fundother activities

• Increased productivity fromimproved indoor air quality (IAQ)and building comfort conditions

Benefits of Performance Contracting(continued)

• Optimized equipment performance throughproject commissioning

• Better overall management and control offacility

• Accesses all available utility incentives, ARRAgrants and incorporates into larger project

Risk Reduction Benefits ofPerformance Contracting

• Contractually guaranteed measured savings reducesthe risk of savings erosion over time

• Integrated project analysis, design, and constructionreduces the risk of lost savings opportunities andschedule delays

• Utility savings and performance monitoring reducesthe risk of under-funding key maintenancerequirements

Risk Reduction Benefits of PerformanceContracting (continued)

• Up-to-date training and knowledge forfacility operating personnel reducesthe risk of project non-performance

• Ability to select services and materials based uponquality and value, rather than on lowest first cost,reduces the risk of inadequate maintenance

Typical MeasuresTypical Measures

Lighting

Added Insulation

Water conservation

Domestic hot water

Chiller replacement

Controls

Refrigerators

Furnace and Boiler Replacements

Window Replacements

Energy Management Systems

Savings Erosion Over Time is Typicalof Conventional Energy Projects

0

10

20

30

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50

60

70

80

90

Percent of

Predicted

Savings

Achieved

Year 1 Year 2 Year 3 Year 4 Year 5

Stable Savings Guaranteed Over Time isTypical of Projects

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100

120

Percent of

Predicted

Savings

Achieved

Year 1 Year 2 Year 3 Year 4 Year 5

Guaranteed

Savings

% Predicted

Savings Achieved

Performance Contracts May Deliver Doublethe Value of Conventional Contracts

Benefit/Cumulative Savings Project First Cumulative CostOver 10 Years Costs Net Benefits Ratio

Spec & BidProcurement $1,200,000 $600,000 $600,000 2.00(Minimize FirstCost)

Performance $2,000,000 $660,000 $1,340,000 3.03ContractProcurement(Maximize NetBenefit)

Comparison of Cumulative Long-TermEnergy Savings Achieved Over Ten Years

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10

20

30

40

50

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70

80

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Percent of

Predicted

Savings

Achieved

Performance

Contract

Conventional

Contract

Conventional Bid and Spec EPCNegotiated Procurement

Conventional

• May take several years tosecure sufficient funds toimplement comprehensiveenergy projects

• High staff costs due to apiecemeal approach tobidding and managing eachseparate project

Performance Contracts

• All funds needed for acomprehensive energy projectare readily available

• Lower staff cost and quickercompletion of a comprehensiveproject

Conventional Bid and Spec EPCNegotiated Procurement (continued)

Conventional

• Multiple contracts withmultiple vendors can result inconflicting projectrequirements

• Energy savings are notguaranteed

Performance Contracts

• One contract with single pointaccountability for projectperformance

• Long-term energy savings areguaranteed by the ESCO

Conventional Bid and Spec EPCNegotiated Procurement (continued)

Conventional

• Guarantees of comfort andoperating standards are notusually offered by equipmentvendors

• Incremental projectimplementation misses savingsdesign opportunities

Performance Contracts

• Performance contracts typicallycontain explicit comfort andoperating standards

• Comprehensive projectimplementation maximizessavings design opportunities

Conventional Bid and Spec EPCNegotiated Procurement (continued)

Conventional

• Energy projects must competefor limited budget resourceswith other improvementprojects

• No direct incentive for buildingstaff to reduce energy costs

Performance Contracts

• Energy projects are funded withutility bill savings

• ESCO compensation is tied toproviding energy savings overthe term of the contract

Conventional Bid and Spec EPCNegotiated Procurement (continued)

Conventional

• Limited staff or lack of expertisemay put project performance atrisk

• Operations and maintenancebudgets are usually under-funded, resulting in wastedenergy

Performance Contracts

• ESCO provides ongoingtechnical expertise to insureproject performance

• Utility bill savings financeoperations and maintenancerequired to maintain projectperformance

Limitations of EPC

• Requires Facility Minimum of $500k generally toattract ESCO attention

• Not cost-effective for addressing single measureunless financing unavailable otherwise

• Requires some sophistication in ProjectManagement, Oversight– Guarantees– Fees– M&V Issues

Managing an EPC

• Attorney should Review Energy ServicesAgreement

• Oversight requires one day per week duringconstruction

• Some towns may desire consultant toreview engineering, costs

• Anticipate “Soft Costs” of 35-45% ofProject Total

Conclusion

• EPC Makes Sense for most Towns with 10-15,000 population

• Opportunities for Aggregation with othertowns, school system, housing authorityworth exploration (although differentcontracts)

• EPCs evolving into Hybrid CustomerContribution/Energy Savings Agreement