Partnering with Energy Services Contractors

By Skander Spies, Energy Analyst and Mitch Dec, Senior Energy Analyst, GLUMAC

One opportunity for owners and operators to evaluate and finance efficiency measures is through a performance contract with an Energy Services Company (ESCO). In a Performance Contract, the ESCO is held financially accountable for realizing energy savings on the campus in exchange for a portion of the energy cost savings realized by the facility.

Contract Basics
In principle, a Performance Contract is a useful and effective method of reducing energy use in existing buildings. A Performance Contract can take a variety of forms depending on the ESCO, but the central idea is that the contract provider assumes some level of risk associated with the cost of upgrading the facility and expected savings in exchange for some share of the realized cost savings once the project is complete. Performance Contracts can allow a financially limited agency to address more of their needs when they lack access to additional funds for capital improvement projects. In addition, ESCOs can provide specialized knowledge and staff focused on energy efficiency retrofits, freeing existing staff from implementing changes.

Technical Requirements
Getting an accurate picture of the existing energy consumption within a building is essential to the integrity of an ESCO. Start by determining where and how energy is being consumed throughout the facility. Energy models can be helpful in estimating how energy is used in the existing building, what improvements are likely to be effective, and how to determine which upgrades are most cost effective.

Challenges
ESCOs can offer great value to clients that lack capital funding to implement energy efficiency improvements. However, owners and owner representatives should evaluate if a Performance Contract is the best choice for their needs. The following items are worth considering before entering into an agreement with an ESCO:

  • What provisions are required on the owner's behalf in order to get the energy savings guaranteed? These requirements are similar to that of a product warranty, such as additional maintenance or using the product in a specific manner.
  • What type of information is available for both the owner and ESCO to fully understand the existing building energy use? The less documentation or referenced information provided about the way the building operates, the more difficult it is to achieve anticipated savings.
  • It is important that both the owner and the ESCO do not assume the building operates in relationship to occupancy. Systems may run even when there is little or no occupancy.
  • Identify who receives the benefit of the energy cost savings associated with the ESCO model. In some cases, the ESCO receives their return on their capital provided to the owner through the energy saved over a given period of time. Therefore, the owner may not see a reduction to their bottom line budget until the ESCO term is completed. Newer models are often allowing for "shared savings" to allow the owner to see a budget reduction immediately.
  • During the ESCO project, adding new equipment or responding to unexpected findings may need to be reviewed by the ESCO provided to confirm that it does not negate any of the previously contracted terms.

 

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