Performance Contracting: Paying for ImprovementsWith Energy Savings

LEONARD E. RIPLEY, PH.D., P.E.FREESE AND NICHOLS, INC.

Typical Project Drivers

• CAPACITY

• COMPLIANCE

• COST

F L O W

Example Scenario

• You’re currently paying $3 million/yr in electrical costs

• Potential energy & operating improvements could yield

$1-1.5 million/yr in savings

• Improvements would cost $10 million

• Simple payback = 7-10 years … looks good!

• But, what if you don’t have $10 million?

A Simple Proposition …

• An outside entity signs a contract to design and make the

improvements, with a guaranteed savings of $1 million/yr

(conservative).

• You take out a loan for $15 million to cover the project’s capital

cost, interest, profit, and contingency and pay it to the outside

entity.

• You repay the loan at $1 million/yr for 15 years.

• If the annual savings fall below the guarantee, the outside entity

makes up the difference.

Performance Contracting

• The outside entity is an Energy Service Company, or “ESCO” and

the finance method is referred to as Performance Contracting,

where the ESCO guarantees the performance of the

improvements.

• Performance Contracting is regulated by federal and by state law:

– In Texas - Local Government Code 302

– Amended by SB 831 ...

• several specific requirements added.

• Maximum allowable payback period is 15-20 years

Key Advantages

• The loan does not count against the City’s indebtedness.

• With the annual savings guaranteed, the City has “zero cost” for

the project.

FNI Funding Seminar: Performance Contracting Slide 6

• If savings are greater than guaranteed,

the City keeps the additional savings.

• Non-energy projects can be added to

the overall project as long as the

overall payback is OK.

But remember Charlie Brown’s Christmas tree ...

Historical Background• Background helps explain current approach of many ESCOs.

• Started in late 1970’s in response to the energy crisis … companies installed equipment for “free” and contracted for a percentage of the savings.

• In the 1990’s energy companies entered the ESCO market in response to deregulation. Smaller players exited or were absorbed by larger ESCOs.

• Major emphasis is still on:

– Lighting & controls

– Electrical motors – efficiency & VFDs

– HVAC upgrades and optimization

– Central plants for city facilities, campuses, etc.

Move into Water/Wastewater

• Major incentives:

– WW treatment consumes 3% of US electrical energy; major energy demand for most cities.

– Many W/WW plants were designed when electrical costs were 3-4¢/kW-hr and they have not been upgraded since then.

– Regulatory pressure … SB5 & SB12.

– Public desire for sustainability & green policy.

• Typical low-hanging fruit:

– Lights, motors, HVAC controls – the “regulars”.

– W/WW pumping.

– WW aeration – blowers, diffusers, DO control; co-generation with digester biogas.

Key Players• Many mergers between historical ESCOS

• Overall categories: equipment-affiliated, utility-affiliated,

construction-affiliated, pure-play

• Major current ESCOs:

AMARESCO Johnson Controls

Siemens Bldg Honeywell

Carrier ConEdison

FPL Services Chevron Energy

• Some ESCOs are more interested than others in expanding beyond

lighting, HVAC, motors, etc.

Project Structure: Typical

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OWNER

CONTRACTORENGINEER

Project Structure: PC / ESCO

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OWNER

CONTRACTORENGINEER

ESCO

Measurement & Verification

Project Implementation

FNI Funding Seminar: Performance Contracting -- Slide 12

Letter of Intent

Feasibility Study

Preliminary Design

Contract w/ Costs

Design / Construct

Challenges in PC Projects

• Engineer is working for the ESCO, not the owner

• Owner must commit to project before seeing construction documents -- owner may not have as much control over the project design

• Financing for performance contracts is not compatible with SRF financing

• Owner has to honor terms for guarantee to be valid (flow, BOD, mixed liquor DO, etc.)

• Probably need to upgrade instrumentation (add SCADA?) for measurement & verification.

Additional Resources

• National Association of Energy Service Companies (NAESCO) –

www.naesco.org

• Energy Services Coalition (EPC) –www.energyservicescoaltion.org

FNI Funding Seminar: Performance Contracting Slide 14

Case Study: Fort Worth Village Creek WWTP

• ESCO: Johnson Controls, Inc.

• Engineers: Freese and Nichols, AECOM, Vic Weir, CDM

• Project elements:

– Aeration improvements

• Replace old ceramic diffusers with membranes

• Add anoxic zones to reduce O2 demand 15-20%

• Automate DO controls to minimize air flow

– Digestion / heat recovery

• Replace lance gas mixers in 6 of 14 digesters

• Co-digest high-strength wastes to boost biogas

• Install HRSG to double turbine energy recovery

– SCADA replacement

Digestion / Heat Recovery

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DIGESTERS

Biogas

Landfill Gas, Natural Gas

TURBINE

Electricity for Blowers

Heat

Digestion / Heat Recovery

FNI Funding Seminar: Performance Contracting -- Slide 17

DIGESTERS

High-Strength Wastes

Biogas

Landfill Gas, Natural Gas

New Mixers

TURBINE

Electricity for Blowers

Heat

HEAT RECOVERY

STEAM GENERATOR (HRSG) & BURNER

Exhaust

Steam

2 Steam-Driven Blowers (Retrofits)

Air to AB’s

JCI Project Status

• Currently in pre-design phase, developing guaranteed max pricing

from contractors

• Expect to start final design late summer

• Expect to start construction late 2009 / early 2010

• Construction duration ~ 18 months

• Current cost estimate: $20-30 million

FNI Funding Seminar: Performance Contracting -- Slide 19

THANK YOU!