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A USER’S GUIDE TO ENERGY INCENTIVES

DECEMBER 2015

Kevin A. GoldsteinPresident, HVSEnergy & Sustainability

Sonia VasquezAnalyst, HVS Energy & Sustainability

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Financial incentives and rebates available from utility providers and municipalities can significantly improve the economics of Return on Investment (ROI) projects. This article provides practical guidance on how to identify and secure incentives.

Introduction

TherearemanytypesofincentivesavailabletoimprovetheeconomicsofutilityefficiencyROIprojects.Theseincludecashincentivesandrebates,taxincentives,regulatoryincentives(e.g.expeditedconstructionpermitting),andothernovelmechanisms. Forthepurposesofthisarticle,weprimarilyfocusonthecashincentivesandrebates,aswellasprocessesthathotelownersandoperatorscanconsidertooptimizeincentivevaluesandmitigateprojectfinancialrisk.Cashincentivesandrebatesaretypicallyofferedbyutilitiesinordertoenhanceprojecteconomicstothepointwherebuildingownerswillconsiderexecutionofenergyefficiencyprojects,whichmayotherwisebeoffthetable.Mostequipmentrebatesareofferedonastandardizedbasis,whilecashincentivescantaketheformofbothstandardandcustomizedofferings.

Types of Incentives

Standardincentives,sometimesreferredtoas“prescriptive”innature,areavailableinfixedamountsbasedonpredeterminedenergysavingscalculations.Afairlytypicalexampleofastandardincentivewouldbe$5.00perlampforeachincandescentlampreplacedwithanLEDequivalent.Standardincentivesaretypicallypublishedannuallybyautilityortheutility’sthird-partyincentiveprogrammanager.Tosecureastandardincentive,theapplicantisusuallyrequiredtosubmitasimpleapplicationformthatidentifiestheparticularequipmenttobereplaced.Insomecircumstances,theutilitymayrequireapre-orpost-installationwalkthroughtoverifythattheenergy-efficientequipmenthasbeeninstalledinaccordancewithprogramrequirements.Customincentives,ontheotherhand,typicallyrequirepreparationandsubmittalofmuchmoredetailed

engineering-gradecalculationsthatconfirmaproject’santicipatedcost/benefit.Customincentiveapplicationsarereviewedbytheutility’sin-houseengineersorthird-partyengineers,andtheincentiveawardistypicallymadeonaper-unitofenergysavedbasis.Thevalueofcustomincentivesvariesmarketbymarket,butinsomemunicipalitiesanincentiveonthecustomtrackcanoffsetupto50%ofaproject’sconstructioncost.

Forexample,ifanenergyefficiencyprojectismodeledtosave10,000kilowatthours(kWh)ofelectricity,itcouldbeeligibleforacustomincentiveof$0.10perkWhsaved(or$1,000total).Insomecases,customincentivesmayrequiremoredetailedmonitoringandverificationtoconfirmthattheprojectisperformingaccordingtoexpectation,andtheincentivepaymentmaybetiedintoactualprojectperformanceovertime.

Availability of Incentives in Individual Markets

Theincentivesthatareavailabletohotelownersandoperatorsvarywidelymarketbymarket.Insomecircumstances,energyincentivesareestablishedatthestatelevelbythePublicUtilitiesCommissionandallocatedlocallybyindividualutilities,whereasinothermarketstheindividualutilitiesthemselvesestablishtheirownincentiveprograms.Basedonourownexperienceinsourcingutilityincentives,HVShasfoundthatthebestwaytoidentifyutilityincentivesisusuallythroughweb-basedresearchbasedongeographyandutilityserviceproviders.Oftentimes,asimpleInternetsearchfor“[CityName]EnergyIncentives”willrevealkeyofferingsinacertainmarket.Theutility’swebsitesthemselves(aswellasconversationswithyourutilityaccountmanager)arealsogoodplacestosearchforincentiveofferingsandvaluesschedules.Tables1and2onthefollowingpageprovideasnapshotsummaryofthevarioustypesofstandardandcustomincentivesavailableinarepresentativesamplingofU.S.cities.Theselistsofincentivesshouldbeviewedaspreliminaryinnature,giventhatincentiveprogramschangefrequentlybasedonutilitymandatesandavailabilityoffunding.However,thesetablesdoclearlyindicatethatutilityincentiveofferingsvarywidelybylocation.

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TABLE 1: SUMMARY OF PUBLISHED ELECTRICITY INCENTIVESIN SELECTEDU.S.CITIES

TABLE 2: SUMMARY OF PUBLISHED NATURAL GAS AND WATER INCENTIVESIN SELECTED U.S. CITIES

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Typical Incentive Impact to Project EconomicsUtilityincentivestypicallyreduceprojectcostsby10%–25%(equivalenttoimprovingthesimplepaybackperiodbyapproximately1–2years).Thisaccomplishestheutility’sintentofbringingmorepotentialprojectstothetableforownerswhomayhavestrictinvestmentthresholds.Todocumenttheimpactofvaryingincentiveamountsonprojecteconomics,HVSpreparedanabbreviatedanalysisofafairlycommonretrofittokitchenventilationequipment–theinstallationofdemandresponsiveventilation(DRV)controls.ADRVsystemreducesexhaustandmakeupairfanspeedwhencookingisatlowerlevels,savingbothelectricalenergyandminimizinglossofconditionedairfromthekitchenspace.Thisisacapitalintensiveprojectwheretheeconomicscanbesignificantlyimprovedinmarketswithgenerouslocalincentives.Toprovideacomparativereviewofthefinancialimpactofincentives,HVSevaluatedanidenticalprojectinseven municipalities with available standardprescriptiveDRVincentives.Tosupportaside-by-sidecomparison,weheldprojectcostandsavingsconstantineachoftheexamples,whilemodifyingtheincentiveamountandlocalelectricityrateforeachcity.

Acrossthesevencities,theavailableincentiverangedfrom$1,500to$22,500,whichimprovedtheprojectsimplepaybackperiodby0.2to3.1years.SeeTable3belowfortheestimatedpaybackperiods,bymarket.Thissimpleanalysisconfirmsthatenergyincentivescanimproveprojecteconomicsanywherefromamodesttoasignificantextent.Sinceenergyefficiencyprojectstendtohavenumerousinputvariables,HVSnearlyalwaysrecommendssite-specificunderwritingratherthanusingindustry-standardsforpaybackperiods.

TABLE 3:SUMMARY STANDARD PRESCRIPTIVEINCENTIVE IMPACT ON PROJECT ROI FOR KITCHEN DEMAND RESPONSIVE VENTILATION

A demand-responsive ventilation system can reduce energy consumption during times when cooking is not actively

underway. Published incentives in various markets can improve the simple payback period by up to three (3) years.

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Who Secures the Incentives?

Thereareseveraldifferentmethodstosecureenergyincentives.Thebestapproachisusuallyasset-specificandisdictatedbythelocalincentiveprogramrequirement,aswellasowner/operatorpreferenceregardingwhowillundertaketheactualadministrativework.Potentialmethodstoconsiderinclude:

Hotelowner/operatorsecurestheincentive.Themoststraightforwardmannerisforahoteloperator(orowner)toapplyforincentivesdirectlywiththeutility.However,thisapproachassumesthathotelpersonnelhaveadequatetimeandtechnicalexpertisetoidentifyROIopportunitiesandaccompanyingincentives,aswellasfollowapplicationprotocolsestablishedbytheutility.

Usean HVAC/MEPcontractor.Inmanymunicipalities,contractorsarefamiliarwiththelocalutilities’applicationproceduresandprotocolsandcanmanagetheincentiveprocess.Insomelocations,contractorsarepre-vettedbytheutilityfortheircapabilitiestohandletheadministrativeaspectsoftheincentiveawardprocess.

Useathirdpartyenergyefficiencyfirmfundedbytheutility.Insomemunicipalities,utilitiescontractwiththird-partyenergyefficiencyfirmstoadministerenergyincentiveprograms.Inthesesituations,thethird-partyfirmsaretypicallycompensateddirectlybytheutilityandprovidefreesupporttoconfirmprojecteligibilityandstreamlinethesubmittalofapplicationpaperwork.

Useanenergyconsultant.Therearealsospecializedenergyconsultantsthatarewillingtoprovidemanagementandadministrationoftheincentivesprocess,inmanycasesforacontingencyfeebasedonthevalueoftheincentive(s)secured.

Eachoftheapproachesoutlinedabovehasverydistinctadvantagesanddisadvantages whichcanimpactprojectsintheidenfication,underwriting,design,andexecutionphases.SeeTable4forasummaryofeachoftheseapproaches.

TABLE 4:ADVANTAGES AND DISADVANTAGES OF USING VARIOUS PARTIES TO ADMINISTER THE INCENTIVE PROCESS

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The best approach to secure energy and water incentivesusually varies asset by asset and should be determined based on the strength of in-house resources, as wellasand the requirements of the local incentive program.

What is Incentive Risk?

Regardlessofwhichpartyischosentosecureincentives,ownersandoperatorsshouldbeawarethatthereissomelevelofriskinherentintheincentivesprocess–primarilythattheincentivemaynotbeawardedintheamountinitiallyestimatedaspartofprojectunderwriting.Untiltheincentiveisconfirmedinwritingwiththeutility,thisriskisnearlyalwayspresent.Inmanycircumstances,contractorsarewillingtoassumesomeoralloftheincentiverisk.HVSisnotopposedtothis,asitcanbenefitboththecontractor(throughincreasedtransactions)andowner/operator(throughreducedunderwritingtime).However,wearetypicallymoresupportiveofthisapproachforstandardprescriptiveincentives,sincetheincentivevaluecanbeeasilyestimatedandunderstoodbyallparties.Weencourageownersandoperatorstoaskforcopiesofthefinalizedincentivepaperwork,toensurethattheappropriateshareoftheincentiveduetothehotelisdistributedaccordingly.

Are Incentives Available for Project Soft Costs?

Insomelocations,incentivesareindeedavailabletocoveralloraportionofprojectsoftcostsincludingenergyauditingandengineeringanalysis.Ifthelocalutilityincentiveprogramrequiresthatthehotelusea

pre-selected engineeringfirminordertosecuresoft-cost incentives, werecommend that hotelowners and operatorsshouldexerciseamoderatelevelofcautionaheadofproceeding.Webelieveitisimperativethattheprojectengineeringteamshouldbe highly experienced,familiarwithhospitality,

andcapableofdevisingaprojectwhichconformstotheowner’sinvestmentgoals.Iftheutilitycanprovideanengineeringorprojectmanagementfirmcapableofthisatnocosttotheowner,thenbyallmeansproceed.

Alternatively,ifthehotelisfreetoselecttheirownMEPorprojectmanagementconsultant,wenotethatsubsidizedengineeringstudiesmayrequiremoredetailedanalysisthanwouldtypicallyberequiredtoachievea“go”or“no-go”decisionforaparticularproject.Thissoftcostistypicallypassedontothehotelbytheengineeringconsultingfirm.

So,althoughanengineeringevaluationmaybeeligiblefora50%cost-sharefromtheutility,thestudyitselfmayrequireanadditional25%oftimeandefforttocomplywithincentiveprogramadministrativeandtechnicalrequirements,thereforereducingtheowner’sactualoutofpocketcashoutlaybyapproximately33%(whichwouldbelessthanthe50%initiallycontemplated).

Spotlight on an Incentive Agency:Energy Trust of Oregon

HVSworkswithhotelownersandoperatorsinmanydiversemarkets,andwehaveexperiencesecuringenergyincentivesacrossavarietyoflocations.

Whileweenjoyahighlyproductiverelationshipwithnumerousutilitiesthroughoutthecountry,wealwayslookforwardtoworkingwithEnergyTrustofOregon–whowehavefoundtohaveoneofthemostaccessibleandbusiness-friendlyincentiveprogramsin existenceforenergyefficiencyprojectslocatedinOregonandsouthwestWashington.

IfyouareahotelowneroroperatorinOregonorsouthwestWashington,wewouldencourageyoutoreachouttoEnergyTrustofOregontolearnmore:

http://www.energytrust.org/BringUsIn

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HOW TO SECURE OPTIMAL INCENTIVES?

Identify the correct party to manage the incentives process

Be aggressive in exploring options to optimize the value of incentives

Confirm administrative requirements in writing with the utility ahead of proceeding

Follow normal construction contracting protocols for larger value capital projects

Our Recommendations for Securing Optimal Incentives

Basedonourexperienceinsecuringincentivesinmanymunicipalities,HVSprovidesthefollowingguidanceforhotelownersandoperatorstoconsiderasyounegotiatetheoccasionallycomplexincentiveprocess:Carefullyidentifythe partytoadministertheincentiveprocess.Thehotel’sgoalshouldbetoputasmuchoftheincentiveaspossibleintotheowner’spocketinordertoprovidethemostfavorableprojecteconomics.Ifathird-partyisgoingtoadministertheincentives,thentheowner/operatorshouldattempttonegotiateanhourly,lumpsum,orcontingency-basedfeethatisfairandreasonablebasedontheamountofworkrequiredtosecuretheincentive,aswellaswhichpartyisassumingtheincentiverisk.Exploreoptionstomaximizeincentives.Thehotelcanconsiderbundlingprojectstogether,exploringthecustomizedincentivetrackratherthanthestandardprescriptivetrack,andalsoaskingtheirutilityifthereareanybonusincentivesavailable(typicalforendoftheyear,whenutilityincentiveprogramsmayneedtooffloadsurplusincentivefunds).Confirmadministrativeprocessinwritingwiththeutility.Justbecauseanincentiveispublishedonawebsitedoesnotmeanthatfundingisactuallyavailable,orthataparticularprojectiseligibleforfunding.HVSstronglyrecommendsthathotelownersandoperatorsshouldreceivewrittenconfirmationofincentivesaheadofgreen-lightinganROIprojecttomoveforward.Usenormalconstructionbiddingandcontractingprotocolsforlargercapitalintensiveprojects.Inourexperience,incentivesusuallytakeagoodprojectandmakeitbetter,butonlyrarelytakeabadprojectandturnitintoagoodone.Withthisinmind,hotelownersandoperatorsshouldprioritizehavingtherightprojectdevisedbytherighttechnicalservicesfirmandinstalledbytherightcontractoroverjustsecuringanincentive–especiallywhenthereisalargeamountofcapitalatrisk.

Closing Thoughts

TherebatesandcashincentivesprovidedbynumerousutilitiescanenhancetheeconomicsofenergyefficiencyROIprojects–insomecasessignificantly.

HotelownersandoperatorsshouldconsidertheimpactofincentiveswithintheirROIprojectidentificationandunderwriting process,inordertohaveasolidunderstandingofthehighestandbestuseofcapitalforaparticularasset.Westronglyencouragehotelierstobecomefamiliarwithlocalincentiveprogramsandtoexecuteinformedrelationshipswithyourconsultantsandcontractorsinordertooptimizethebenefitavailabletoyou.HVSEnergy&Sustainability providesOwner’sRepresentation,ProjectManagement,andUtilityBenchmarkingservicesrelatingtoawiderangeofutilityefficiencyprojectsincludinglarge-scaleHVACandMEPretrofits.Inadditiontosuccessfullyidentifying,underwriting,anddeliveringnumerousbackofthehouseequipmentreplacements,wehavesecuredoverUS$1Minutilityincentivesforourclientsinrecentyears.

Althoughtheincentiveprocesscanoccasionallybecomplextonavigate,webelievethathotelownersandoperatorswhofundenergyefficiencyprojectswithoutadedicatedfocusonsecuringincentivesareleavingcashonthetable.

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About HVSHVS the world’s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries, celebrates its 35th anniversary this year. Established in 1980, the company performs more than 4,500+ assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a worldwide network of 35 offices staffed by more than 500 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry.

Superior Results through Unrivalled Hospitality Intelligence.Everywhere.

HVS ENERGY & SUSTAINABILITYhelps hotel owners and operators reduce their operating expenses through diligent facility management and informed, strategic investment into building equipment. HVS’ pioneering approach in this area is financially driven, owner and investor facing, and hospitality specific. With a firm foundation in engineering, HVS provides our clients with a single resource to identify, underwrite, design, and deliver a wide range of ROI and capital projects involving building equipment including HVAC and MEP systems.

About the AuthorsKevinA.Goldstein isthePresidentofHVSEnergy&Sustainability.Inadditiontooverseeingthepractice,Kevinhas provided owner’srepresentationandprojectmanagement services tonumerous hotel owners,

operators,developers,andotherclients.PriortojoiningHVS,KevinwastheDirectorofDevelopmentforadesign/builddevelopmentfirmwhereheledmultidisciplinaryteamsresponsibleforprojectfeasibility,investmentstructuring,masterplanning,A&Edesign,entitlements,andconstruction.Contact:kgoldstein@hvs.com/+1305343-9004

SoniaE.VasquezisanAnalystwith HVS Energy &Sustainability.Soniaprovidesproject administration andresearchsupportacrossabroadspectrumofutilityefficiencyprojects. Sonia has abackgroundinarchitecture,

withadegreefromUniversidadCatolica,Nicaragua.ShehasexpertiseinbothInteriorDesignandProjectManagement.PriortojoiningHVS,SoniaworkedatRichhwoodasadesignmanager,wheresheoversawthedesignandconstructionofamanufacturingfacility.Contact:svasquez@hvs.com/+1786521-8251