Brady Blog- Trends and Talk

Confused about Performance Contracting?

Sunday, February 21, 2016

Confused about Performance Contracting? Don't let common myths mislead you about the real benefits of implementing a Performance Contract. While a Performance Contract will result in significant energy savings without additional appropriation of tax dollars, it is a construction project. Choosing an experienced professional can make your project implementation successful. Energy Savings

“Performance contracting sounds too good to be true”

Performance Contracting (PC), when executed by a reputable firm will save money and significantly enhance the indoor environmental quality of your facilities. PC is the only contracting vehicle available that can be guaranteed to deliver both energy efficiency and badly needed mechanical infrastructure with no additional county appropriations, bond issuance, or county tax increase required.

“We don’t have any funds for projects like this”

Each governmental unit in North Carolina is allowed to borrow the funds directly from a finance institution as enabled by NC G.S.: 142-64. This is a major advantage of PC; no additional state, local appropriations or private dollars are required. The Energy Services Company (ESCO) you choose  will assist in arranging the project’s financing that will be paid back with the guaranteed energy savings realized from the new systems and equipment. The Performance Contract and the finance agreement terms are customized to meet your needs and finance terms usually range from 10 to 15 years.

“We can’t afford to risk losing any money”

The customer is the real winner since a performance contract guarantees the amount of the project’s energy savings. The ESCO will write a check for any energy savings shortfalls as defined in the contract.

“We don’t know how to get started”

Energy Service Companies can assist in getting organized for the RFP process. You may also contact the North Carolina Department of Environmental Quality Utility Savings Initiative for additional assistance.

“What we really need is some new, modern, efficient equipment”

New, efficient equipment is one of the main benefits provided by PC. Any new equipment that is provided as part of the project is paid for over time with the guaranteed energy savings, not additional state or county appropriations. Often this is equipment that the customer could not afford to purchase due to lack of capital funds.

“Our maintenance staff can do all this work. We don’t need to hire an outside contractor and borrow the money”

Most in-house staffs don’t have the time or money to properly implement a comprehensive energy efficiency systems retrofit. Additionally, delaying the decision to implement a Performance Contract almost always costs more than any construction savings that might be realized by executing an in-house program. The cost of project delay is usually much higher than the cost of financing. None of the wasted energy dollars spent during a project delay can be recovered once they are spent.

“Energy service companies do not keep their promises”

Selecting an experienced professional is an important aspect of a PC. Their associates will spend hundreds of hours preparing estimates and proposals that are based on sound engineering and industry best practices. In the unlikely event that the annual guaranteed energy savings are not achieved, the ESCO will write a check for the difference per the terms of the contract.

“Energy service companies keep too much of the savings”

Some energy savings contracts consist of very basic “behavior modification” training and other methods. These programs claim to be “risk free” as fees are not paid to the vendor unless savings are achieved. These vendors then keep up to 40% of their calculated savings and the customers are locked in to a contract for up to four years. This can cost the customer hundreds of thousands or even millions of dollars! Under a Performance Contract, the customer keeps 100% of the savings which are used to invest in the new equipment provided under the Performance Contract.

“Does the State of North Carolina support the PC process?”

Over the past several sessions, the North Carolina legislature has shown its strong support for PC by raising the cap on loans for state government Performance Contracts from zero to $50 million to $100 million and then to the current $500 million limit. Today’s PC is better and more refined than those contracts from several years ago. The PC process has undergone significant improvements and delivers real tangible and verifiable savings to state and local governmental units across North Carolina. All PC requires a performance guarantee and can only be delivered by NC Pre-Certified Energy Service Companies (ESCOs). Not only are the public Performance Contracts in NC guaranteed, these guarantees must be backed by financial instruments that are “investment grade” and all Performance Contracts are approved by the North Carolina Local Government Commission.

Funding Facility Improvements With Future Energy Savings

Tuesday, August 18, 2015

The United States is the home to millions of commercial and industrial businesses. Each year one of the largest operating expenses for these businesses is their energy spend. It is estimated that nearly 30% of the energy spend is used inefficiently or unnecessarily. 1

So what options do businesses have to address their energy waste and improve their facilities? How would an owner evaluate all of the choices for facility improvements and select the projects that would be the best fit for their needs? How do they improve their facilities if improvements are not in the annual capital budget?

One option is to consider a Performance Contract. A Performance Contract allows a building owner to use future energy and operational savings to finance infrastructure improvement projects.

New, energy saving equipment for free sounds too good to be true, right? Let’s explore it a little further.

A Performance Contract is a performance-based procurement and financing method in which an Energy Service Company (ESCO) takes on project performance risks and provides a single source turnkey solution to address the customer’s energy and facility improvement needs.

This contracting method is a good fit for facilities with aging infrastructures and little money for capital improvements. Performance Contracting has been successfully used to upgrade schools facilities, college campuses, and government buildings in North Carolina and across the United States.

The scope of a Performance Contract will vary by owner and facility needs. The projects can include lighting upgrades, upgrades to the HVAC and control systems, and other building envelope improvements.

The selected ESCO will assist with a wide range of needs, including the energy audit, design engineering, arranging project financing, construction management, commissioning, operations and maintenance of new technologies, and verification of energy savings.

The National Association of Energy Service Companies (NAESCO) is a trade association that sponsors an accreditation program for ESCOs. Each company must undergo a strict review process by an independent selection committee before becoming an accredited organization. Accredited organizations include DMJM Harris, BCS, Honeywell International, TAC / Tour Andover Controls Energy Solutions, Trane, and Water & Energy Savings Corporation.

Projects in North Carolina include the North Carolina Museum of Art, Wayne County Public Schools, and the University of North Carolina at Greensboro. These projects alone have a guaranteed annual savings of almost 2 million dollars.

Interested in pursuing a Performance Contact? Here are the steps you would take to start a project.

Sources:(1)U.S. Environmental Protection Agency, ENERGY STAR program. "Useful Facts and Figures." No date referenced. 1 June 2007

Steps in the Performance Contracting Process

Friday, August 14, 2015

Are you considering a Performance Contract? Want to learn more about the steps involved? Let's review the steps of this process. 

Step 1 Determine Need: The first step is to perform a preliminary audit of the buildings to benchmark and screen for savings and needs opportunities. Are the utility costs more than $1.50/sq. ft? Is the energy bill more than $500,000 per year? If so, it may be time to take a deeper look at the facilities.

Step 2 Assemble Team: Pull together a diverse project team including associates with technical expertise, facility operations and maintenance staff, associates with procurement, budget, and legal experience.

Step 3 Define Project: The next step is to define the project and prepare a preliminary scope of work. Typical needed items include a facility profile including an occupancy and building schedule, building envelope specifications, and a preliminary proposed scope of work. The scope of work could include lighting, HVAC and water conservation projects, operations and maintenance considerations, proposed measurement of energy and load shedding, and the requirements for new technology implementation and financial considerations.

Step 4 Prequalification: North Carolina State Energy Office has developed a list of prequalified ESCOs that are authorized to develop and deliver Guaranteed Performance Contracts to governmental units in North Carolina. Each ESCO has successfully completed a process that certifies their qualifications for these types of projects.

Step 5 Request for Proposal (RFP): At this stage in the Performance Contracting Process, the project team will work together to prepare the Request for Proposal (RFP). This process includes the formal communications of intent, actual preparation of the official RFP, issuing the request for proposal publicly, a facility site visit, and sharing of information and selection criteria with ESCOs.

Step 6 Proposal Evaluation: The project team will need to evaluate each ESCO proposal based on the evaluation criteria established prior to starting the proposal process. A thorough review of the ESCO’s expertise and support capabilities should be completed during this step of the process.

After a review of the proposals, the project team should conduct reference interviews to support claims made by each ESCO. Once completed, the short-listed ESCOs should each perform an oral presentation to the project team. An informal Q&A session typically follows to clarify any outstanding questions.

Once these steps are completed the highest ranked ESCO will be selected based on the overall evaluation scoring, presentations, and question and answer session. The selected ESCO then prepares preliminary costs and savings and proceeds with an Investment Grade Audit (IGA) scope, cost, and timeline negotiations.

Step 7: Selection of the ESCO Technical Audit and Project Development: After the ESCO is selected it is time to proceed with the Investment Grade Audit (IGA). The IGA report leads to the Energy Services Agreement (ESA), which is the final scope of work that includes engineering, equipment costs, installation, commissioning, warranty, and potentially annual maintenance. The IGA report also includes the financial basis for justifying the economics of the Performance Contract. It will serve as the basis for energy cost savings for the Performance Contract and the guaranteed results. This phase typically ranges anywhere from six weeks to three months.

Step 8: Negotiations: During this stage, the owner and ESCO risks and responsibilities are defined and detailed in the ESA contract language. The contract will often be reviewed by legal counsel, a third-party engineer, and others as appropriate per governmental unit requirements.

Step 9: Measurement and Verification Stage: Measurement and Verification Services (M&V) continue on after the project’s construction work is complete. Energy savings are measured and verified by the ESCO and often times by an independent third party. The M&V stage ensures that the energy saving conservation measures (ECMs) are preforming per the guarantee and the M&V plan as described in the ESA. If the guaranteed energy savings are below the guaranteed amount any year during the contract term, the ESCO is responsible for reimbursement of the savings shortfall on an annual basis. This is one of the benefits of a Performance Contract.