How can Eco Bottom Line improve my bottom line
by making my company green?
Eco Bottom Line reviews your energy usage, recommends an energy savings plan for your company, and installs, monitors and maintains that system. Your company pays ONLY a percentage of your actual energy cost savings!
Eco Bottom Line pays for all up front costs associated with the energy reduction and alternative energy technologies we recommend to help your company save money. We, in turn, get paid as a percentage of your energy savings. YOUR COMPANY ACTUALLY MAKES MONEY BY GOING GREEN WITH NO CAPITAL EXPENDITURES. We only get paid if you save money, so you can be assured that the technologies we recommend are effective energy savers.
Eco Bottom Line is an ESCO, or Energy Service Company, which is a business that develops, installs, and arranges financing for projects designed to improve the energy efficiency and maintenance costs for facilities over a five to fifteen year time period. Eco Bottom Line generally acts as project developer for a wide range of tasks and assumes the technical and performance risk associated with the project.
The ESCO industry began in the late 1970’s in response to rising energy prices, and has installed more than $20 billion in projects in the US to date.
A general understanding of Eco Bottom Line's range of services can be derived from the source of their revenues. Eco Bottom Line revenues are largely derived from energy efficiency (73%), renewables (10%), and distributed generation or combined heat and power (6%). The balance of Eco Bottom Line revenues is derived from consulting and planning services.
WHAT ARE THE DISTINGUISHING FEATURES OF ENERGY PERFORMANCE CONTRACTING?
EPC is an innovative form of contracting, developed to overcome the major barriers of delivering cost-effective energy efficiency. One of these barriers is the risk to the client that project generated resource savings may not be sufficient to provide an organization's minimum required return on capital. The key distinguishing feature of energy performance contracting is that, unlike traditional construction or services contracting, Eco Bottom Line takes on project performance risk to guarantee to the owner a minimum level of resource use reduction.
Another distinguishing feature of energy performance contracting (EPC) is that Eco Bottom Line provides a turnkey service. Eco Bottom Line will be the party responsible for designing, implementing, and measuring the results of an EPC project. Eco Bottom Line can make a wide variety of recommendations of possible retrofit measures specific to each client's needs, including energy and water conservation measures, renewable energy systems, operations and maintenance services and training, and distributed energy generation.
Range of possible ESCO services in an EPC project:
Conduct resource efficiency audits to establish a baseline that will serve as the measure upon which the performance guarantee is based and identify resource saving opportunities.
Develop recommendations for the systems and equipment to upgrade or replace, which fall into the following categories:
Lighting upgrades and replacement.
Heating, ventilation, and air conditioning (HVAC) system retrofits including boiler and chiller plant optimization and replacement, temperature control systems, etc.
Building "shell" improvements such as insulation, improved doors, window replacement and window films.
Energy Management Systems.
Water savings devices such as new faucets, toilets and shower heads.
High efficiency motors.
Installation of sub-meters.
Procurement of energy efficient appliances.
Design and write equipment and construction document specifications.
Develop a project budget and provide construction project management services securing and overseeing all subcontractors.
Implement the recommendations.
Supply and install energy generation capacity, including renewable options such as cogeneration/combined heat and power (CHP), biomass boilers, solar heating and power generation, fuel cells, micro-turbines, wind turbines, etc.
Commission or re-commission of newly or previously installed equipment.
Train facilities staff on how to maintain and manage new equipment and systems and/or provide third-party ongoing maintenance of buildings and equipment.
Guarantee the performance of the installed improvements.
Measure and verify the resource savings over the term of the guarantee period.
In many cases, Eco Bottom Line also assists in the arrangement or direct provision of financing to cover project costs, including the utilization of utility, local, state, and federal government incentive programs.
One of the key purposes of an EPC performance guarantee is to ensure that our company has a financial stake in meeting the customer’s expectations about future savings and facility performance. The performance guarantee is the vehicle by which Eco Bottom Line assumes the project's performance risk after our company completes project implementation. Eco Bottom Line's assumption of this risk provides the client with a significant measure of certainty regarding the predictability of cash flows generated from energy savings, which is often used for project financing debt service payments.
Performance-based contracts can take different forms including:
GUARANTEED ENERGY SAVINGS
Eco Bottom Line guarantees that the project will result in a specified reduction in energy use over a set, contracted guarantee term, as measured by kilowatt hours, BTUs and other resource use metrics. If the guaranteed reduction in energy use is not realized as a result of factors pre-determined in the contract to be Eco Bottom Line’s responsibility Eco Bottom Line will pay the client the shortfall amount using utility rate calculations that are also pre-determined in the contract. Note the important distinction that Eco Bottom Line does not typically guarantee a reduction in utility bill charges because Eco Bottom Line cannot control utility rates. At the end of the project guarantee period, the building owner retains the full value of the energy savings.
POWER PURCHASE AGREEMENT (PPA)
Eco Bottom Line owns the assets and sells end-use services (such as heat or electricity) to the customer at agreed upon prices, often with an arrangement that allows for the building owner to purchase the asset at the end of a contract term. This mechanism is often employed for renewable and district energy systems development. Eco Bottom Line usually guarantees a specified minimum level of output for the duration of the contract.
SHARED SAVINGS
Eco Bottom Line and customer share the utility bill savings generated by an EPC project, with the share to each party defined in the EPC contract. Eco Bottom Line’s share of the savings is the only compensation Eco Bottom Line receives for our services and equipment expenditures. Eco Bottom Line typically receives a greater percentage of savings in the early years of a contract, with its percentage decreasing over time.
Eco Bottom Line can also implement design/build projects without a performance guarantee.
These contracts simply pay Eco Bottom Line for providing agreed upon services, but do not reward or penalize Eco Bottom Line for the durability and quality of its work, leaving ongoing performance and operational risk on the shoulders of the client alone (except when product failures are covered under manufacturer warranties).The EPC methodology differs from traditional contracting, the latter being invariably price driven. Performance contracting is results driven, ensuring quality of performance. For this reason, most states have passed laws that allow public entities to base an energy services company selection on criteria other than simply the lowest responsible bid.
GUARANTEED SAVINGS EPC
Public and institutional clients have a strong preference for guaranteed savings; in fact, 86%of performance contracts in the higher education market use this model. The best practices for EPC described in this document are also based upon a guaranteed savings model.
Some advantages of a guaranteed savings EPC include:
EXPERT, INTEGRATEDWHOLE-BUILDINGAPPROACH
In contrast to the soloed, or stove-pipe approach that most specialized contractors use, Eco Bottom Line engineers and project developers think holistically about buildings and energy systems. In addition, Eco Bottom Line projects bring the latest knowledge and access to the most state-of-the art technology and equipment, providing a full range of retrofit options. This holistic approach can result in superior project integration, implementation, and building energy performance, and in a project with a better economic scenario and environmental outcome.
ACCOUNTABILITY & EXPERTISE - Eco Bottom Line AS PROJECT MANAGER
The turnkey services make it easier for the client to manage the project by having a single point of accountability rather than numerous contractors. A single contractor is responsible for providing project development, implementation, maintenance, and monitoring services. Also, because the performance guarantee compels Eco Bottom Line to view the project as a long-term partnership with the client, Eco Bottom Line will look to improve the project's performance. In the best cases, Eco Bottom Line bring continuous improvement during the guarantee period that would ordinarily not occur.
BLENDING PAYBACKS
An important characteristic of EPCs is Eco Bottom Line's ability to bundle multiple Facility Improvement Measures (FIMs) into one project. Some FIMs have short paybacks, meaning that the installation cost is paid back within just a few years by energy cost savings, while others have much longer paybacks. Many longer payback FIMs, when considered in isolation, are expensive to install, requiring prohibitively long lending terms. EPC uses the energy savings of items with short paybacks to help subsidize the cost of other items, blending the cash flows of the different FIMs. For example, a lighting retrofit might pay back in less than two years while a boiler system upgrade might have a payback of 15 years. With EPCs, the energy savings from the lighting retrofit help to pay for the cost of the boiler replacement, leading to a blended payback of less than 15 years for the entire project. This blending of paybacks in an integrated project is one of the principle value adds inherent in a comprehensive approach to a retrofit project.
MEASUREMENT AND VERIFICATION (M&V)
To ensure ongoing equipment performance and assess compliance with the performance guarantee, Eco Bottom Line typically conducts regular measurement and verification of energy savings and submit their monthly analysis' results and annual reports to the building owner. The cost of the M&V services is capitalized into the overall project cost. M&V activities include ensuring that installed equipment is performing to specifications, and performing calculations of the project's actual energy savings. Ongoing M&V of resource savings helps protect an owner from savings degradation as a result of deteriorating or failing equipment performance.
THE PERFORMANCE GUARANTEE
EPC TOOLKIT FOR HIGHER EDUCATION
An energy performance contract (EPC)’s performance guarantee is a contractual commitment by the Energy Services Company (ESCO) to the client that project implementation will result in a specified reduction in energy and water use over a set period of years. In many EPCs the energy use savings, when translated into dollars based on existing and projected utility rates, will be sufficient to offset annual debt service on the project financing. If in a given year the guaranteed reduction in energy use is not achieved due to an ESCO attributable performance failure, the ESCO will reimburse the owner the resulting dollar savings shortfall.
While the concept may appear straightforward, guarantees include a number of moving parts, all of which must be synchronized and clearly defined in the contract language.
WHAT IS THE SAVINGS AMOUNT?
The starting point in establishing any guaranteed savings amount is establishing the baseline of resource use in the project’s targeted facilities. This baseline is the measure against which post-project implementation resource use will be evaluated. To establish a baseline, Eco Bottom Line require at least twelve consecutive months of resources use data, and preferably 24 or 36 consecutive months. (The additional years of data allow for greater predictability of future resource use, with additional data helpful in smoothing dramatic fluctuations in resource use that result from extreme weather and aberrations in facility use.) The baseline makes note not only of energy and water use data, but also of the operating conditions under which the resource use took place. The conditions during the months from which the baseline data is taken include:
Type of use for each building in the project (e.g., office, residential/dormitory, laboratory, • athletic/gymnasium, cafeteria/cooking, health care, etc.);
Weather conditions during the baseline data period, with a particular observance of “weather days,” or days when the locale experienced extremely hot and/or humid or extremely cold days relative to local norms;
Number of occupants;
Typical hours of operation; and
Utility rates and any existing energy and water procurement contracts.
Note that these types of factors are not within the control of Eco Bottom Line, and thus are identified so that Eco Bottom Line can call out in the performance guarantee, situations where it will not be held accountable (or take credit) for resource consumption rates that are different from those Eco Bottom Line projects in the guarantee.
Eco Bottom Line establishes the baseline when conducting the Investment Grade Audit (IGA). The performance guarantee then defines the quantified reduction in energy and water use (in kilowatt/hours (kWhs), BTUs, gallons, etc.) from this baseline. The dollar value of the energy cost savings attributable to the Facility Improvement Measures (FIMs) will then be calculated. Normally, this will be expressed as an annual amount, guaranteed for each year of the performance guarantee term. For example, Eco Bottom Line may guarantee that the reduced resource use will reach a level that would be equivalent to $1,000,000 in annual utility bill savings for each year within a 15-year performance guarantee term, equating to a total absolute savings of $15,000,000. Utility bill savings are totaled from all pertinent utility bills. Using our example, the $1,000,000 in savings may be obtained through a combination of savings in categories such as electricity, gas, and water consumption in a specified set of buildings and other facilities. For each category of resource use, Eco Bottom Line will specify pricing rates that will be used for the calculations throughout the entire guarantee term.
These rates are multiplied by the actual units of energy or water savings for each category of resource use to project total and annual cost savings that will result from the project.
All the members of the client project team need to understand clearly several basic business issues related to the savings calculation. First, because utility rates used in the guarantee calculations are specified in the contract, performance guarantees do not protect the owner against utility rate increases or decreases (increases can be seen as good for the client because each unit of resources saved results in more dollar savings; decreases can harm the ability to payback project financing, unless the client’s budget managers have the discipline to set aside such savings enjoyed from the utility rate decreases as a source of debt service payments). Throughout the guarantee term, the owner will continue, of course, to pay for its energy use at rates charged by the utility companies. However, if the guaranteed savings do not fully materialize, Eco Bottom Line’s performance guarantee payment will be calculated using the rates specified in the EPC. Also, given the time value of money, a $1,000,000 guaranteed amount in Year 1 of the guarantee term will mean more to the owner than a $1,000,000 guaranteed amount in Year 15. The owner should therefore consider whether the guarantee amount (as well as energy rates) should be adjusted by a price escalation specified in the contract over the term of the guarantee to account for rate increases and the time value of money.
HOW ARE ENERGY SAVINGS CALCULATED?
As mentioned above, resource savings during a performance contract term are measured against the resource use baseline and Eco Bottom Line-created projections of energy use (defined in the contract) for each year the guarantee is in effect.
These projections are based on Eco Bottom Line’s expert estimations of the changes in resource use resulting from project implementation. The contract also calls out the types of operating conditions over which it has no control and thus for which it will not be held accountable. For each year during the performance guarantee period, Eco Bottom Line calculates adjustments to an individual year’s baseline resource use by using various formulae to account for changes in weather and facility use. These “adjusted baseline conditions” are then used to estimate what the level of energy consumption would have been within an individual guarantee year, had no FIMs been implemented. This process allows Eco Bottom Line to pinpoint with great precision what change in energy consumption at the facility can be attributable to its work, and what changes are due to other factors.
In other words, Year 10’s “adjusted baseline” consumption is an estimate of what the building’s energy use would have been that year if weather and building occupancy were equal to the baseline projection for Year 10, and if no FIMs had been implemented. This “baseline adjustment” process is important as it determines how owners and Eco Bottom Line will decide whether Eco Bottom Line owes a guarantee payment if resource savings are below the guaranteed level. After the “adjusted baseline consumption” for Year 10 is determined, the “actual energy consumption” is calculated. The energy units saved are equivalent to the adjusted baseline consumption minus the actual consumption during the guarantee year (Year 10 in this case), as the equation below illustrates:
Adjusted Baseline Consumption (Year X) – Actual Energy Consumption (Year X) = Energy Use Savings (Year X)
If resource savings prove to be below promised levels, then Eco Bottom Line calculates the monetary savings shortfall. The energy units saved are then multiplied by the rates set forth in the contract to determine the annual utility cost savings amount. The equation below illustrates this process:
Energy Cost Savings (Year X) = Energy Use Savings (Year X) x Projected Utility Rates
It is helpful to illustrate this entire process through a hypothetical example. The following case will help illuminate the concepts behind each step in the process above.
Say that today, a building’s energy consumption is 100 kWhs. After performing the IGA, Eco Bottom Line calculates “baseline” energy consumption to be 200 kWhs 10 years from now (“Year 10” of the analysis.) Eco Bottom Line guarantees that it can reduce energy use by 150 kWhs in Year 10 under an EPC, making for a new consumption projection of 50 kWhs for that year. Eco Bottom Line then multiplies this projected reduction of 150 kWhs by the projected utility rates specified in the EPC for that period to make a projection (and potentially a guarantee) of cost savings in that year. When year 10 arrives, however, the utility bill is higher than the guaranteed level, and the client wants to know if Eco Bottom Line owes them a guarantee payment. Upon close inspection, it is determined that the increased cost is not due to unforeseen rate increases, but results from an increase in the building’s energy use. Year 10’s actual energy use is 75 kWhs. Eco Bottom Line analyzes the year’s weather conditions, building occupancy and use data, and other information about the facility and discovers that a severe heat wave caused demand for air conditioning in the building to increase above what Eco Bottom Line had predicted in the baseline calculations. The HVAC system is now more efficient than it used to be, but absolute usage of the system went beyond expected levels because of the heat wave. Eco Bottom Line then enters the actual weather data into the model used to develop the original baseline energy use projection for Year 10, and develops an “adjusted baseline consumption” for the year, finding it to be 225 kWhs, or 25 kWhs above the original baseline calculation. This figure represents what the energy use in the building would have been without any EPC, after factoring the building’s abnormally high use of air conditioning in Year 10 due to the heat wave.
The “savings” below this adjusted baseline calculation is 225 kWh – 75 KWh = 150 kWhs. Because the original guarantee was based on a projected reduction of 150 kWhs in Year 10 (200 kWh – 50 kWh), Eco Bottom Line does not owe a guarantee payment to the building owner. The increase in energy consumption above the guaranteed level, and the resulting increase in utility costs, was due to a factor beyond Eco Bottom Line’s control. Although Year 10’s energy costs are not what the building owner and Eco Bottom Line anticipated, they are certainly lower than what the building owner would have paid had it not been for the EPC project from ten years earlier. The procedures and formulae for all of the steps in the energy savings calculation process must be clearly defined in the EPC. The owner is also strongly advised to include within the EPC some examples of the calculations using hypothetical data, so there is no ambiguity surrounding how the formulae apply to actual numbers.
HOW ARE MODIFICATIONS TO THE BUILDING AND ITS USE ADDRESSED?
Over the life of the performance guarantee term, the owner may take any number of actions that impact the building’s resource use. A new wing may be added, plug loads may increase because of the installation of additional office equipment, the owner may seek to occupy the building for longer hours, or the owner may initiate its own FIMs post-EPC implementation, independent of those provided by Eco Bottom Line. The formulae included in the EPC will include a provision to account for these “causes for adjustment” in the resource savings calculations. The owner should ensure specific – as opposed to overly broad – language in the “causes for adjustment” clauses in the contract. The more specific the language, the less likely that there will be disputes between the client and Eco Bottom Line in regards to the calculations used to determine the impacts of such factors on resource savings.
WHO PERFORMS THE RESOURCE AND COST SAVINGS CALCULATIONS?
The simple answer to who performs the savings calculations is Eco Bottom Line. The owner must make pertinent utility bills readily available to Eco Bottom Line for these purposes. The EPC should include a process for client review and concurrence with the calculations, and a clear process for dispute resolution if the parties disagree.
RECONCILING SHORTFALLS – FLEXIBILITY IN GUARANTEE PAYMENTS
The EPC should address the treatment of savings in excess of the annual guaranteed amount. In some EPCs, a client’s “excess” savings from one year can be used to offset Eco Bottom Line-attributable shortfalls in subsequent years. Similarly, when a shortfall occurs, Eco Bottom Line may request that the shortfall be redressed by using excess savings from future years. Such “carry-over” provisions offer Eco Bottom Line some flexibility in managing their cash flows. To illustrate: if we take our earlier example, and assume that savings one year amounts to only $500,000 instead of the guaranteed $1,000,000, and that the institution received 100% up-front financing with debt service amounting to $1,000,000 per year, allowing Eco Bottom Line to make-up their shortfall in subsequent years’ excess savings will mean that the institution has to find $500,000 from another source to meet its immediate-term financial obligations. Conversely, if
Eco Bottom Line offers to use previous savings surpluses to pay down a current shortfall, the building owner must ensure that the excess savings have not been appropriated to another part of the client’s budget, or a similar dilemma will arise.
WHAT IS THE GUARANTEE TERM?
The number of years in the guarantee will typically be identical to the term of the debt taken on to finance the project. In some states, the guarantee term for public sector projects is limited to a specified maximum number of years for certain classes of clients – such as cities, school districts, and public colleges and universities. Beyond determining the number of years, the EPC also needs to specify when the guarantee term begins and how each year within the guarantee term is defined. Normally, the guarantee term will commence on the first day of the first utility billing period following the commissioning of all installed FIMs. The owner may want to consider specifying a date by which the performance guarantee term will commence, even if the FIMs have not been completed and accepted, to ensure that Eco Bottom Line has a contractual motivation to complete the FIMs on schedule.
Alternatively, the owner may wish to align the annual guarantee term with its fiscal year. In such a case, the EPC will need to address the treatment of the months between the final completion of the FIMs and the start of the owner’s fiscal year and adjust the calculations in the EPC accordingly.
DO I REALLY NEED A GUARANTEE?
To determine whether a performance guarantee is necessary, public entity clients must determine whether a performance guarantee is required by law and if not, whether the performance guarantee helps the client achieve its business objectives. When legally permissible, clients may forgo the protections provided in a performance guarantee, presumably to save the additional costs to an EPC project that come with the guarantee, and thus reduce the project’s payback period.
The benefits of eliminating performance guarantee costs must be compared to the exposure to the financial risk of experiencing insufficient utility bill savings to meet project finance debt service obligations. Insufficient savings result in a cash-negative project (i.e., a project that actually increases resource use related operating expenses) for those years when there is a savings shortfall.
Indeed, such “savings degradation” can impose greater costs to the institution over time than any cost that would have been associated with a performance guarantee – costs that would have been fully covered by energy savings anyway.
Before deciding to proceed without a performance guarantee, therefore, a customer must be very confident that it can provide effective ongoing maintenance of installed equipment on its own, and must also be willing to fully assume the financial and operational risks of a shortfall in projected savings. The institution should have a very capable facilities staff with extensive experience in engineering, and up-to-date training in maintaining and optimizing the performance of complex buildings systems. It is also advisable that one consider forgoing a guarantee only for relatively proven, simple, low-capital cost, short payback FIMs for which the fixed costs of a guarantee – namely the M&V costs – would be a small percentage of overall project costs. Lighting equipment FIMs could fit this description.
For any questions please send as an e-mail to info@EcoBottomLine.com.
Eco Bottom Line pays for all up front costs associated with the energy reduction and alternative energy technologies we recommend to help your company save money. We, in turn, get paid as a percentage of your energy savings. YOUR COMPANY ACTUALLY MAKES MONEY BY GOING GREEN WITH NO CAPITAL EXPENDITURES. We only get paid if you save money, so you can be assured that the technologies we recommend are effective energy savers.
Eco Bottom Line is an ESCO, or Energy Service Company, which is a business that develops, installs, and arranges financing for projects designed to improve the energy efficiency and maintenance costs for facilities over a five to fifteen year time period. Eco Bottom Line generally acts as project developer for a wide range of tasks and assumes the technical and performance risk associated with the project.
The ESCO industry began in the late 1970’s in response to rising energy prices, and has installed more than $20 billion in projects in the US to date.
A general understanding of Eco Bottom Line's range of services can be derived from the source of their revenues. Eco Bottom Line revenues are largely derived from energy efficiency (73%), renewables (10%), and distributed generation or combined heat and power (6%). The balance of Eco Bottom Line revenues is derived from consulting and planning services.
WHAT ARE THE DISTINGUISHING FEATURES OF ENERGY PERFORMANCE CONTRACTING?
EPC is an innovative form of contracting, developed to overcome the major barriers of delivering cost-effective energy efficiency. One of these barriers is the risk to the client that project generated resource savings may not be sufficient to provide an organization's minimum required return on capital. The key distinguishing feature of energy performance contracting is that, unlike traditional construction or services contracting, Eco Bottom Line takes on project performance risk to guarantee to the owner a minimum level of resource use reduction.
Another distinguishing feature of energy performance contracting (EPC) is that Eco Bottom Line provides a turnkey service. Eco Bottom Line will be the party responsible for designing, implementing, and measuring the results of an EPC project. Eco Bottom Line can make a wide variety of recommendations of possible retrofit measures specific to each client's needs, including energy and water conservation measures, renewable energy systems, operations and maintenance services and training, and distributed energy generation.
Range of possible ESCO services in an EPC project:
Conduct resource efficiency audits to establish a baseline that will serve as the measure upon which the performance guarantee is based and identify resource saving opportunities.
Develop recommendations for the systems and equipment to upgrade or replace, which fall into the following categories:
Lighting upgrades and replacement.
Heating, ventilation, and air conditioning (HVAC) system retrofits including boiler and chiller plant optimization and replacement, temperature control systems, etc.
Building "shell" improvements such as insulation, improved doors, window replacement and window films.
Energy Management Systems.
Water savings devices such as new faucets, toilets and shower heads.
High efficiency motors.
Installation of sub-meters.
Procurement of energy efficient appliances.
Design and write equipment and construction document specifications.
Develop a project budget and provide construction project management services securing and overseeing all subcontractors.
Implement the recommendations.
Supply and install energy generation capacity, including renewable options such as cogeneration/combined heat and power (CHP), biomass boilers, solar heating and power generation, fuel cells, micro-turbines, wind turbines, etc.
Commission or re-commission of newly or previously installed equipment.
Train facilities staff on how to maintain and manage new equipment and systems and/or provide third-party ongoing maintenance of buildings and equipment.
Guarantee the performance of the installed improvements.
Measure and verify the resource savings over the term of the guarantee period.
In many cases, Eco Bottom Line also assists in the arrangement or direct provision of financing to cover project costs, including the utilization of utility, local, state, and federal government incentive programs.
One of the key purposes of an EPC performance guarantee is to ensure that our company has a financial stake in meeting the customer’s expectations about future savings and facility performance. The performance guarantee is the vehicle by which Eco Bottom Line assumes the project's performance risk after our company completes project implementation. Eco Bottom Line's assumption of this risk provides the client with a significant measure of certainty regarding the predictability of cash flows generated from energy savings, which is often used for project financing debt service payments.
Performance-based contracts can take different forms including:
GUARANTEED ENERGY SAVINGS
Eco Bottom Line guarantees that the project will result in a specified reduction in energy use over a set, contracted guarantee term, as measured by kilowatt hours, BTUs and other resource use metrics. If the guaranteed reduction in energy use is not realized as a result of factors pre-determined in the contract to be Eco Bottom Line’s responsibility Eco Bottom Line will pay the client the shortfall amount using utility rate calculations that are also pre-determined in the contract. Note the important distinction that Eco Bottom Line does not typically guarantee a reduction in utility bill charges because Eco Bottom Line cannot control utility rates. At the end of the project guarantee period, the building owner retains the full value of the energy savings.
POWER PURCHASE AGREEMENT (PPA)
Eco Bottom Line owns the assets and sells end-use services (such as heat or electricity) to the customer at agreed upon prices, often with an arrangement that allows for the building owner to purchase the asset at the end of a contract term. This mechanism is often employed for renewable and district energy systems development. Eco Bottom Line usually guarantees a specified minimum level of output for the duration of the contract.
SHARED SAVINGS
Eco Bottom Line and customer share the utility bill savings generated by an EPC project, with the share to each party defined in the EPC contract. Eco Bottom Line’s share of the savings is the only compensation Eco Bottom Line receives for our services and equipment expenditures. Eco Bottom Line typically receives a greater percentage of savings in the early years of a contract, with its percentage decreasing over time.
Eco Bottom Line can also implement design/build projects without a performance guarantee.
These contracts simply pay Eco Bottom Line for providing agreed upon services, but do not reward or penalize Eco Bottom Line for the durability and quality of its work, leaving ongoing performance and operational risk on the shoulders of the client alone (except when product failures are covered under manufacturer warranties).The EPC methodology differs from traditional contracting, the latter being invariably price driven. Performance contracting is results driven, ensuring quality of performance. For this reason, most states have passed laws that allow public entities to base an energy services company selection on criteria other than simply the lowest responsible bid.
GUARANTEED SAVINGS EPC
Public and institutional clients have a strong preference for guaranteed savings; in fact, 86%of performance contracts in the higher education market use this model. The best practices for EPC described in this document are also based upon a guaranteed savings model.
Some advantages of a guaranteed savings EPC include:
EXPERT, INTEGRATEDWHOLE-BUILDINGAPPROACH
In contrast to the soloed, or stove-pipe approach that most specialized contractors use, Eco Bottom Line engineers and project developers think holistically about buildings and energy systems. In addition, Eco Bottom Line projects bring the latest knowledge and access to the most state-of-the art technology and equipment, providing a full range of retrofit options. This holistic approach can result in superior project integration, implementation, and building energy performance, and in a project with a better economic scenario and environmental outcome.
ACCOUNTABILITY & EXPERTISE - Eco Bottom Line AS PROJECT MANAGER
The turnkey services make it easier for the client to manage the project by having a single point of accountability rather than numerous contractors. A single contractor is responsible for providing project development, implementation, maintenance, and monitoring services. Also, because the performance guarantee compels Eco Bottom Line to view the project as a long-term partnership with the client, Eco Bottom Line will look to improve the project's performance. In the best cases, Eco Bottom Line bring continuous improvement during the guarantee period that would ordinarily not occur.
BLENDING PAYBACKS
An important characteristic of EPCs is Eco Bottom Line's ability to bundle multiple Facility Improvement Measures (FIMs) into one project. Some FIMs have short paybacks, meaning that the installation cost is paid back within just a few years by energy cost savings, while others have much longer paybacks. Many longer payback FIMs, when considered in isolation, are expensive to install, requiring prohibitively long lending terms. EPC uses the energy savings of items with short paybacks to help subsidize the cost of other items, blending the cash flows of the different FIMs. For example, a lighting retrofit might pay back in less than two years while a boiler system upgrade might have a payback of 15 years. With EPCs, the energy savings from the lighting retrofit help to pay for the cost of the boiler replacement, leading to a blended payback of less than 15 years for the entire project. This blending of paybacks in an integrated project is one of the principle value adds inherent in a comprehensive approach to a retrofit project.
MEASUREMENT AND VERIFICATION (M&V)
To ensure ongoing equipment performance and assess compliance with the performance guarantee, Eco Bottom Line typically conducts regular measurement and verification of energy savings and submit their monthly analysis' results and annual reports to the building owner. The cost of the M&V services is capitalized into the overall project cost. M&V activities include ensuring that installed equipment is performing to specifications, and performing calculations of the project's actual energy savings. Ongoing M&V of resource savings helps protect an owner from savings degradation as a result of deteriorating or failing equipment performance.
THE PERFORMANCE GUARANTEE
EPC TOOLKIT FOR HIGHER EDUCATION
An energy performance contract (EPC)’s performance guarantee is a contractual commitment by the Energy Services Company (ESCO) to the client that project implementation will result in a specified reduction in energy and water use over a set period of years. In many EPCs the energy use savings, when translated into dollars based on existing and projected utility rates, will be sufficient to offset annual debt service on the project financing. If in a given year the guaranteed reduction in energy use is not achieved due to an ESCO attributable performance failure, the ESCO will reimburse the owner the resulting dollar savings shortfall.
While the concept may appear straightforward, guarantees include a number of moving parts, all of which must be synchronized and clearly defined in the contract language.
WHAT IS THE SAVINGS AMOUNT?
The starting point in establishing any guaranteed savings amount is establishing the baseline of resource use in the project’s targeted facilities. This baseline is the measure against which post-project implementation resource use will be evaluated. To establish a baseline, Eco Bottom Line require at least twelve consecutive months of resources use data, and preferably 24 or 36 consecutive months. (The additional years of data allow for greater predictability of future resource use, with additional data helpful in smoothing dramatic fluctuations in resource use that result from extreme weather and aberrations in facility use.) The baseline makes note not only of energy and water use data, but also of the operating conditions under which the resource use took place. The conditions during the months from which the baseline data is taken include:
Type of use for each building in the project (e.g., office, residential/dormitory, laboratory, • athletic/gymnasium, cafeteria/cooking, health care, etc.);
Weather conditions during the baseline data period, with a particular observance of “weather days,” or days when the locale experienced extremely hot and/or humid or extremely cold days relative to local norms;
Number of occupants;
Typical hours of operation; and
Utility rates and any existing energy and water procurement contracts.
Note that these types of factors are not within the control of Eco Bottom Line, and thus are identified so that Eco Bottom Line can call out in the performance guarantee, situations where it will not be held accountable (or take credit) for resource consumption rates that are different from those Eco Bottom Line projects in the guarantee.
Eco Bottom Line establishes the baseline when conducting the Investment Grade Audit (IGA). The performance guarantee then defines the quantified reduction in energy and water use (in kilowatt/hours (kWhs), BTUs, gallons, etc.) from this baseline. The dollar value of the energy cost savings attributable to the Facility Improvement Measures (FIMs) will then be calculated. Normally, this will be expressed as an annual amount, guaranteed for each year of the performance guarantee term. For example, Eco Bottom Line may guarantee that the reduced resource use will reach a level that would be equivalent to $1,000,000 in annual utility bill savings for each year within a 15-year performance guarantee term, equating to a total absolute savings of $15,000,000. Utility bill savings are totaled from all pertinent utility bills. Using our example, the $1,000,000 in savings may be obtained through a combination of savings in categories such as electricity, gas, and water consumption in a specified set of buildings and other facilities. For each category of resource use, Eco Bottom Line will specify pricing rates that will be used for the calculations throughout the entire guarantee term.
These rates are multiplied by the actual units of energy or water savings for each category of resource use to project total and annual cost savings that will result from the project.
All the members of the client project team need to understand clearly several basic business issues related to the savings calculation. First, because utility rates used in the guarantee calculations are specified in the contract, performance guarantees do not protect the owner against utility rate increases or decreases (increases can be seen as good for the client because each unit of resources saved results in more dollar savings; decreases can harm the ability to payback project financing, unless the client’s budget managers have the discipline to set aside such savings enjoyed from the utility rate decreases as a source of debt service payments). Throughout the guarantee term, the owner will continue, of course, to pay for its energy use at rates charged by the utility companies. However, if the guaranteed savings do not fully materialize, Eco Bottom Line’s performance guarantee payment will be calculated using the rates specified in the EPC. Also, given the time value of money, a $1,000,000 guaranteed amount in Year 1 of the guarantee term will mean more to the owner than a $1,000,000 guaranteed amount in Year 15. The owner should therefore consider whether the guarantee amount (as well as energy rates) should be adjusted by a price escalation specified in the contract over the term of the guarantee to account for rate increases and the time value of money.
HOW ARE ENERGY SAVINGS CALCULATED?
As mentioned above, resource savings during a performance contract term are measured against the resource use baseline and Eco Bottom Line-created projections of energy use (defined in the contract) for each year the guarantee is in effect.
These projections are based on Eco Bottom Line’s expert estimations of the changes in resource use resulting from project implementation. The contract also calls out the types of operating conditions over which it has no control and thus for which it will not be held accountable. For each year during the performance guarantee period, Eco Bottom Line calculates adjustments to an individual year’s baseline resource use by using various formulae to account for changes in weather and facility use. These “adjusted baseline conditions” are then used to estimate what the level of energy consumption would have been within an individual guarantee year, had no FIMs been implemented. This process allows Eco Bottom Line to pinpoint with great precision what change in energy consumption at the facility can be attributable to its work, and what changes are due to other factors.
In other words, Year 10’s “adjusted baseline” consumption is an estimate of what the building’s energy use would have been that year if weather and building occupancy were equal to the baseline projection for Year 10, and if no FIMs had been implemented. This “baseline adjustment” process is important as it determines how owners and Eco Bottom Line will decide whether Eco Bottom Line owes a guarantee payment if resource savings are below the guaranteed level. After the “adjusted baseline consumption” for Year 10 is determined, the “actual energy consumption” is calculated. The energy units saved are equivalent to the adjusted baseline consumption minus the actual consumption during the guarantee year (Year 10 in this case), as the equation below illustrates:
Adjusted Baseline Consumption (Year X) – Actual Energy Consumption (Year X) = Energy Use Savings (Year X)
If resource savings prove to be below promised levels, then Eco Bottom Line calculates the monetary savings shortfall. The energy units saved are then multiplied by the rates set forth in the contract to determine the annual utility cost savings amount. The equation below illustrates this process:
Energy Cost Savings (Year X) = Energy Use Savings (Year X) x Projected Utility Rates
It is helpful to illustrate this entire process through a hypothetical example. The following case will help illuminate the concepts behind each step in the process above.
Say that today, a building’s energy consumption is 100 kWhs. After performing the IGA, Eco Bottom Line calculates “baseline” energy consumption to be 200 kWhs 10 years from now (“Year 10” of the analysis.) Eco Bottom Line guarantees that it can reduce energy use by 150 kWhs in Year 10 under an EPC, making for a new consumption projection of 50 kWhs for that year. Eco Bottom Line then multiplies this projected reduction of 150 kWhs by the projected utility rates specified in the EPC for that period to make a projection (and potentially a guarantee) of cost savings in that year. When year 10 arrives, however, the utility bill is higher than the guaranteed level, and the client wants to know if Eco Bottom Line owes them a guarantee payment. Upon close inspection, it is determined that the increased cost is not due to unforeseen rate increases, but results from an increase in the building’s energy use. Year 10’s actual energy use is 75 kWhs. Eco Bottom Line analyzes the year’s weather conditions, building occupancy and use data, and other information about the facility and discovers that a severe heat wave caused demand for air conditioning in the building to increase above what Eco Bottom Line had predicted in the baseline calculations. The HVAC system is now more efficient than it used to be, but absolute usage of the system went beyond expected levels because of the heat wave. Eco Bottom Line then enters the actual weather data into the model used to develop the original baseline energy use projection for Year 10, and develops an “adjusted baseline consumption” for the year, finding it to be 225 kWhs, or 25 kWhs above the original baseline calculation. This figure represents what the energy use in the building would have been without any EPC, after factoring the building’s abnormally high use of air conditioning in Year 10 due to the heat wave.
The “savings” below this adjusted baseline calculation is 225 kWh – 75 KWh = 150 kWhs. Because the original guarantee was based on a projected reduction of 150 kWhs in Year 10 (200 kWh – 50 kWh), Eco Bottom Line does not owe a guarantee payment to the building owner. The increase in energy consumption above the guaranteed level, and the resulting increase in utility costs, was due to a factor beyond Eco Bottom Line’s control. Although Year 10’s energy costs are not what the building owner and Eco Bottom Line anticipated, they are certainly lower than what the building owner would have paid had it not been for the EPC project from ten years earlier. The procedures and formulae for all of the steps in the energy savings calculation process must be clearly defined in the EPC. The owner is also strongly advised to include within the EPC some examples of the calculations using hypothetical data, so there is no ambiguity surrounding how the formulae apply to actual numbers.
HOW ARE MODIFICATIONS TO THE BUILDING AND ITS USE ADDRESSED?
Over the life of the performance guarantee term, the owner may take any number of actions that impact the building’s resource use. A new wing may be added, plug loads may increase because of the installation of additional office equipment, the owner may seek to occupy the building for longer hours, or the owner may initiate its own FIMs post-EPC implementation, independent of those provided by Eco Bottom Line. The formulae included in the EPC will include a provision to account for these “causes for adjustment” in the resource savings calculations. The owner should ensure specific – as opposed to overly broad – language in the “causes for adjustment” clauses in the contract. The more specific the language, the less likely that there will be disputes between the client and Eco Bottom Line in regards to the calculations used to determine the impacts of such factors on resource savings.
WHO PERFORMS THE RESOURCE AND COST SAVINGS CALCULATIONS?
The simple answer to who performs the savings calculations is Eco Bottom Line. The owner must make pertinent utility bills readily available to Eco Bottom Line for these purposes. The EPC should include a process for client review and concurrence with the calculations, and a clear process for dispute resolution if the parties disagree.
RECONCILING SHORTFALLS – FLEXIBILITY IN GUARANTEE PAYMENTS
The EPC should address the treatment of savings in excess of the annual guaranteed amount. In some EPCs, a client’s “excess” savings from one year can be used to offset Eco Bottom Line-attributable shortfalls in subsequent years. Similarly, when a shortfall occurs, Eco Bottom Line may request that the shortfall be redressed by using excess savings from future years. Such “carry-over” provisions offer Eco Bottom Line some flexibility in managing their cash flows. To illustrate: if we take our earlier example, and assume that savings one year amounts to only $500,000 instead of the guaranteed $1,000,000, and that the institution received 100% up-front financing with debt service amounting to $1,000,000 per year, allowing Eco Bottom Line to make-up their shortfall in subsequent years’ excess savings will mean that the institution has to find $500,000 from another source to meet its immediate-term financial obligations. Conversely, if
Eco Bottom Line offers to use previous savings surpluses to pay down a current shortfall, the building owner must ensure that the excess savings have not been appropriated to another part of the client’s budget, or a similar dilemma will arise.
WHAT IS THE GUARANTEE TERM?
The number of years in the guarantee will typically be identical to the term of the debt taken on to finance the project. In some states, the guarantee term for public sector projects is limited to a specified maximum number of years for certain classes of clients – such as cities, school districts, and public colleges and universities. Beyond determining the number of years, the EPC also needs to specify when the guarantee term begins and how each year within the guarantee term is defined. Normally, the guarantee term will commence on the first day of the first utility billing period following the commissioning of all installed FIMs. The owner may want to consider specifying a date by which the performance guarantee term will commence, even if the FIMs have not been completed and accepted, to ensure that Eco Bottom Line has a contractual motivation to complete the FIMs on schedule.
Alternatively, the owner may wish to align the annual guarantee term with its fiscal year. In such a case, the EPC will need to address the treatment of the months between the final completion of the FIMs and the start of the owner’s fiscal year and adjust the calculations in the EPC accordingly.
DO I REALLY NEED A GUARANTEE?
To determine whether a performance guarantee is necessary, public entity clients must determine whether a performance guarantee is required by law and if not, whether the performance guarantee helps the client achieve its business objectives. When legally permissible, clients may forgo the protections provided in a performance guarantee, presumably to save the additional costs to an EPC project that come with the guarantee, and thus reduce the project’s payback period.
The benefits of eliminating performance guarantee costs must be compared to the exposure to the financial risk of experiencing insufficient utility bill savings to meet project finance debt service obligations. Insufficient savings result in a cash-negative project (i.e., a project that actually increases resource use related operating expenses) for those years when there is a savings shortfall.
Indeed, such “savings degradation” can impose greater costs to the institution over time than any cost that would have been associated with a performance guarantee – costs that would have been fully covered by energy savings anyway.
Before deciding to proceed without a performance guarantee, therefore, a customer must be very confident that it can provide effective ongoing maintenance of installed equipment on its own, and must also be willing to fully assume the financial and operational risks of a shortfall in projected savings. The institution should have a very capable facilities staff with extensive experience in engineering, and up-to-date training in maintaining and optimizing the performance of complex buildings systems. It is also advisable that one consider forgoing a guarantee only for relatively proven, simple, low-capital cost, short payback FIMs for which the fixed costs of a guarantee – namely the M&V costs – would be a small percentage of overall project costs. Lighting equipment FIMs could fit this description.
For any questions please send as an e-mail to info@EcoBottomLine.com.
