NAEPnet

1. Brian Yeoman Director Sustainable Leadership NAEP www.NAEPnet.org

2. Energy Performance Contracting ECM - Energy Conservation Measure EE - Energy Efficiency EPC - Energy Performance Contract FI - Financial Institution FIM – Facilities Improvement Measure ESCO - Energy Services Company GHG - Greenhouse Gas Emissions IGA - Investment Grade [energy] Audit MUSH – Municipal University State and Hospitals Acronyms

3. Energy Performance Contracting Why Performance Contracting? Opportunity: Buildings generally account for 40% of emissions and up to 70% in big cities Lifecycle cost: 3/4 of costs of buildings occur after construction is complete History:Excess energy and savings are trapped in existing buildings based upon project executions

4. Energy Performance Contracting One solution yielding multiple benefits Wasted energy is wasted money Improve the organization’s finances Improve occupant comfort and productivity Retain wealth in the community Improve the value of the real estate asset Improve image with real contributions to the environment And, yes, reduce GHG emissions

5. Energy Performance Contracting Overview A turnkey contracting method through Energy Service Companies (ESCO)( Includes an energy audit, a proposal of energy conservation measures (ECMs), design, construction, project management, commissioning and performance measurement One guaranteed fixed price (GMP) Single provider accountable for all aspects of the project Guarantees of energy savings the project will achieve • ESCO pays the difference for unrealized amount*

6. Energy Performance Contracting An innovative model Utilizes energy savings to provide debt service payments Alternative financing to making expenditures from a capital budget Performance assured for life of agreement, e.g. up to 20 years Measurement and Verification of Results Guaranteed Maximum Price (GMP) construction costs Large scale projects

7. Energy Performance Contracting Mental Model for EPC Owner Energy Some key questions: Where is the deal financed? Who pays the lender? Financing term in years? New Bill Old Bill Turnkey Project Performance Guarantee Energy Bill Savings Financing ESCO Lender Debt Payment

8. Heating and Cooling System Upgrade Fan System Load Reductions Building Tune-up Lighting Source: EPA Energy Star Energy Performance Contracting Typical Scopes of Work Direct Energy Focus • Boiler optimization • Chiller plant optimization • Lighting retrofit • Energy management systems • Equipment modernization • Windows and roofs • Laundry • Motor efficiency • Indirect Energy Focus • Utilities procurement • Water conservation • Service contract consolidation • Staffing • Waste removal • Re-lamping • Sub-metering

9. Energy Performance Contracting Overview Proven contracting model • Project development costs minimized • Streamlines procurement process • Transparency and integrity assured • High confidence of implementation Owners control process • Owners specify investment priorities • Open-book & guaranteed maximum pricing reduce risk • Gain sharing reduces project costs, maximizes outcomes • Best evidence e.g. that everything is negotiable

10. Energy Performance Contracting Overview Complex • 46 different implementation statutes in the US • Contracts are long, detailed and very pro vendor community • Securing access to initial capital is typically the biggest hurdle • Should not be undertaken by a novice Self-financing • Utilize energy savings to make debt service payments on project financing • Performance assured for life of agreement • Includes gain sharing and savings guarantee

11. Energy Performance Contracting Overview Market size estimated at <$5 billion in the US • Market is largely Municipal, Universities,States and Hospitals (MUSH) • Large opportunities in all Public sector has utilized ESCOs the most • Federal Government the largest player • Most US states have enabling legislation • Tax exempt borrowing increases scope of investments • K-12 schools, universities, hospitals, and public housing most active Projects vary in size, scope and duration • Size: $500 thousand to $30 million • Duration: 3 to 20+ years • Building controls, heating, cooling, lighting typical components

12. Energy Performance Contracting Keys to Success Alignment of objectives between Owner, Financial institution and ESCO is essential. In the traditional Contracting Approach: success is measured by project cost and meeting delivery date In the Performance Contract Approach: success is measured by energy savings results and the economic and environmental derivative Traditional Low Bid Contractors must cut costs to win a job. Then transfers all of the risk to the owner. Performance and code issues become the owner’s responsibility.

13. Energy Performance Contracting Keys to Success A Performance Contractor must eliminate the risk of “surprise” costs up front to develop a business proposition the ESCO can guarantee. The better the contractor can determine the costs up front-- the lower the risk. The more risk they are willing to take-- the bigger the project. The lower the cost to implement-- the more the ESCO can include. The owner passes cost and performance management risk to the ESCO making it a self regulating approach.

14. Energy Performance Contracting What the Owner will need to do Review capital plans Define support Identify energy & deferred maintenance opportunities Review capital plans Define support service requirements Identify opportunities for grants and rebates Arrange financing Prepare communications & awareness plan Finalize contract document Arrange financing routine service requirements Identify opportunities for grants and rebates Prepare communications & awareness plan Finalize contract documents

15. Energy Performance Contracting Process Flow Feasibility Assessment • Low-level audit reviewing twelve months of utility bills and facility data to determine project potential Workshop • Information session to discuss findings of feasibility and possible projects Preliminary Audit • Selected areas will be more formally audited Detailed Audit Contract • Investment grade audit focused on agreed-to parameters (eg. scope of work, reference criteria, expectations) culminating in a proposal for implementation

16. Energy Performance Contracting Process Flow Independent Third party Review • Use dissociated professional engineers and Certified Energy Managers to confirm that the scope is the scope and that the estimates are rationale Installation Contract • Final approval of project and any financing requirements Performance Assurance • Monitoring of the system throughout the contract term • Use a widely accepted standard to protect the institution

17. Harmonization • Credit check • Investment criteria • EE/Carbon goals • Qualified measures • Performance guarantee • “Walk-away” compensation fee for audit PerformanceContract Selection Investment Grade Audit InitialOwnerCommitment ESCO Pre-qualification • Conformance • Qualitative evaluation • Energy engineering • Investment proposal • Service proposal • Financial stability • Technical expertise • Resource mobilization • Testimonials from previous clients Procurement Process Overview: How it Works RFP Investment • Qualifications • Scope of work • Project pricing • Cost reduction incentive • Walk-through • “Pre-study” audit • Loan underwriting • Equity participation • Gain sharing

18. Harmonization • Credit check • Investment criteria • EE/Carbon goals InitialOwnerCommitment Initial Owner Commitment Create a Work team Work plan Define Program Criteria Needs assessment Technical & operational goals Financial objectives Energy efficiency and carbon emission reduction goals Contractual requirements Administrative processes Decision and approval processes

19. Harmonization • Credit check • Investment criteria • Harmonization • Credit check • Investment criteria • Harmonization • Credit check • Investment criteria InitialOwnerCommitment InitialOwnerCommitment InitialOwnerCommitment InitialOwnerCommitment InitialOwnerCommitment ESCO Pre-qualification ESCO Pre-qualification ESCO Pre-qualification • Financial stability • Technical expertise • Resource mobilization • Financial stability • Technical expertise • Resource mobilization • Financial stability • Technical expertise • Resource mobilization • Testimonials from previous clients ESCO Pre-qualification • Harmonization • Credit check • Investment criteria

20. Energy Performance Contracting Insist upon Best Practices Transparent Pricing Proposer absorbs their sales & marketing costs Project budget estimates, ECM’s subject to multiple reviews Bracketed negotiation, approval not unreasonably withheld Customer can withhold approval for individual ECM’s Walk-away fee equal to no more than 250% audit cost pe square foot (prorated) Walk-away fees paid by customer, not financed Available through The American College and University President’s Climate Challenge (ACUPCC) and the Clinton Foundation

21. Energy Performance Contracting Insist upon Best Practices Implementation Gain Sharing On approval, project implementation cost is guaranteed (GMP) On completion, implementation savings is computed in energy units by contract and then by extension dollars What is guaranteed is reduced energy units not dollars Over realized savings shared Implementation savings do not affect performance guarantee Operations and Maintenance savings are not typically included

22. Harmonization • Credit check • Investment criteria • Harmonization • Credit check • Investment criteria RFQ or RFP InitialOwnerCommitment InitialOwnerCommitment ESCO Pre-qualification ESCO Pre-qualification • Financial stability • Technical expertise • Resource mobilization • Financial stability • Technical expertise • Resource mobilization • Qualifications • Scope of work • Project pricing • Cost reduction incentive The Solicitation ESCO Pre-qualification ESCO Pre-qualification ESCO Pre-qualification • Financial stability • Technical expertise • Resource mobilization

23. Harmonization • Credit check • Investment criteria • Harmonization • Credit check • Investment criteria Selection InitialOwnerCommitment InitialOwnerCommitment RFQ or RFP ESCO Pre-qualification ESCO Pre-qualification • Financial stability • Technical expertise • Resource mobilization • Financial stability • Technical expertise • Resource mobilization • Conformance • Qualitative evaluation • Qualifications • Scope of work • Transparent pricing • Cost-reduction incentive Selection and Award

24. Energy Performance Contracting Show me the money! Remember that all of the savings dollars are inferred It is actual utility savings times your negotiated agreed to rate for each utility unit cost That means if in the course of the contract you do not buy the utility right you do not get a windfall savings contractually There is an annual reconciliation process and each sub project or tranche has its own reporting year

25. Mental Model for EPC Owner Energy Some key questions: Where is the deal financed? Who pays the lender? Financing term in years? New Bill Old Bill Performance Guarantee Energy Bill Savings Turnkey Project Financing ESCO Lender Debt Payment

26. EPC: Cash Flows

27. EPC: Cash Flows Customer Savings Paid to debt service for financing energy/operating costs

28. EPC: Cash Flows Paid to debt service for financing New, reduced energy/operating costs achieved from EPC improvements

29. Energy Performance Contracting Security in EPC Lending Customer’s financial condition drives lending terms • Public sector borrowers can “non-appropriate” • Tax exempt leasing is most commonly used lending vehicle Value of equipment is not important as collateral • Essentiality of use is important • Lenders do not look to equipment as collateral Strong performance guarantee minimizes “add-on” capital costs attributable to performance risk • Usually no right of set-off (except in federal) • Strong ESCO (operationally and financially) improves credit of customer

30. Energy Performance Contracting Project Design • Cash Flow Neutrality (or better) • No Price Changes/Surprises • Streamlined Process & Timeline • Unambiguous Accountability • Appropriate Flexibility in Design & Project Mix • Unambiguous Performance Selecting an ESCo • Overall Reputation – These are high-profile, complex projects • Reliability – This is a long-term partnership • Relationships • Value Created • Value Delivered Review Key Success Factors

31. Energy Performance Contracting Review Benefits from EPC For Owner: Guaranteed Cash Flows Guaranteed Maximum Price (GMP)-no change orders Guaranteed Results and Performance Single Source Accountability Fast Track construction Appropriate flexibility in design & project mix Improvements are based on best ‘life cycle cost’ not lowest bid, resulting in higher efficiency equipment Owner has input in equipment selection

32. Review It is a true Win – Win ! Energy Performance Contracting Promises delivered • Reduced Operating Expense • Upgraded/Renewed Aging Infrastructure • Improved Comfort and Facility Performance • Reduced Operating and Capital Budget • Inject money in local businesses • Demonstrates social responsibility Building owners SAVE money and energy • ESPC market grows – Banks, ESCOs, Product suppliers increase business Lower GHG emissions More jobs

33. How to Begin? Energy Performance Contracting Define the Institution’s goals regarding energy performance • Percent reduction in energy use • Percent reduction in energy expenditures • Near-term savings required to provide immediate cash flow improvements? • Percent reduction in building generated GHG’s • Determine maximum payback period • Determine operational constraints • Do the students need to have uninterrupted classroom experience; i.e., must work be done at nights, on weekends, during holiday periods? • Historic preservation

34. Beginning Part II Energy Performance Contracting Prioritize the goals • Which are the most critical? • What is the balance - the point of equilibrium - among competing goals? Inventory of all owned buildings Understand the energy performance of buildings • Electric, gas and water data • Per year/per monthper square foot • Age of buildings • Age of major equipment in buildings • Energy control systems in buildings

35. Beginning Part III Energy Performance Contracting • Develop strategy paper that describes the procurement process • Who needs to do what at each step of the process • Identify and name a project manager and project team members • E.g.: the project manager, legal, finance, procurement process expert, operations and maintenance managers, and energy manager

36. Energy Performance Contracting Lessons Learned A variety of goals are motivating different building owners • Climate change mitigation/ACUPCC • Near-term cash flow improvements, long-term asset value improvement • Marketing/public image • Energy efficiency and the green agenda • Recruitment and Retention

37. Energy Performance Contracting Lessons Learned Each owner is learning to create a procurement process for their legal, political, and procedural context • RFQ or RFP? • Formal vs. Informal? • ESCO’s are being flexible A variety of financing solutions being explored • Self-financed • ESCOs themselves • Assisted by electric utility • Exploring tax-exempt public revenue bonds

38. Energy Performance Contracting Thank You !!! Questions Comments Concerns Remember that you too can do great things!