Energy Saving Performance Contracts (ESPCs) are agreements between an energy service company (ESCO) and a customer, such as a government agency, a developer, building owner or a privately owned organisation, where the ESCO implements energy efficiency improvements or renewable energy installations, or both, in the customer’s facilities. The agreement and project are governed by energy savings, reflecting in reduction in utility expenditures. They are also guided by payback periods and returns on investments.
The concept of ESPCs is not novel. In the 1970s and 1980s, the concept emerged through the “Shared Savings” model, in which the ESCO typically installs the improvements (energy conservation measures or ECMs) at the facility at its expense, giving the customer the advantage of entailing no upfront costs for the upgrades. The ESCO gets paid a proportion of the energy bill savings that ensue over the years of the contract, with the customer retaining the other portion. In the late 1980s, when the energy prices fell in the United States, many deals fell short of their expected savings, jeopardising not only the ESCOs’ returns but also their credit. As such, the main risk of Energy Price fell on the ESCOs solely. As the deals fell short, the importance of how to effectively and fairly assess ESPCs became a pressing need, to ensure the continuity of the ESCO model and the benefits of the ESPCs.
In addition to the risk relating to energy prices, a flaw evident in the early days of ESPCs had to do with the changes that customers commission in their facilities that may drive up – or down – energy usage. This further exemplified the importance of the assessment of ESPCs and which, in effect, led to the emergence of the concept of Measurement and Verification (M&V). The U.S. Department of Energy initiated collaboration with the industry in 1994 to establish a unified method for evaluating and validating efficiency investments, with the goal of surmounting the hindrances to energy efficiency. This led to the issuance of the North American Measurement and Verification Protocol (NEMVP), in 1996, which eventually evolved into the International Performance Measurement and Verification Protocol (IPMVP), in 1997. The IPMVP continues to evolve over the years to suit the industry advances and needs.
In addition to the M&V protocols and guidelines, a new ESCO model emerged, in which the upfront costs of the energy retrofit are paid by the customer, while the ESCO commits to a given amount of energy saving through performance guarantees. This model is what is known as “Guaranteed Savings”.
To further mitigate risks associated with Energy Saving Performance (ESP) projects and prevent conflicts, the IPMVP recommends the involvement of independent verifiers to review savings and validate measurements. Further, if conflicts do arise, they can help resolve them through expert arbitration and advice. According to the protocol, the independent verifiers should typically be engineering consultants with experience and knowledge in ECMs, M&V and energy performance contracting.
As long-term consultants in the field, we have been called on several times to act as technical experts to solve disagreements and disputes between customers and ESCOs in ESP projects. We’ve seen several common causes of conflicts to resolve. These include:
1) Saving calculations disagreements, be they due to calculation methods or accuracy,
2) Project implementation issues and dissatisfied customers,
3) Performance issues due to maintenance issues and failures, and
4) Contractual issues, especially when the project has not commenced in line with the internationally adopted protocols with clear M&V plans and following a code-compliant detailed energy audit.
Needless to say, involving expert energy consultants at the commencement of a project helps eliminate the risk and hefty costs associated with those conflicts, by virtue of acting as independent agents to protect the customer as well as the ESCO. The ultimate goal should be delivering a successful project with minimum risk and maximised project savings by helping both parties in preparing a robust M&V plan, signing an attainable contract with fair division of risk and costs, and by properly performing M&V activities. The role extends to constantly educating the Project Owners on the process and moderating the best approach for retrofit.
The appointment of the experts helps Project Owners gain access to:
- Insight on local requirements, international protocols, best industry practices, previous experience, lessons learnt, etc.,
- Adequately developed requests for proposals (RFPs) and proper management during the tendering stage,
- Systematic and established evaluation matrices to select the best-suited ESCO for the project specifics,
- Expert advice on commercial, legal and contractual terms, including contract preparation and negotiations,
- Assurances of no exaggerated savings, and optimised project CapEx and OpEx,
- Improved data management,
- Improved synergies in maintenance, ECMs, metering, etc.,
- Site supervision and management, ensuring proper design installation and commissioning, and
- Verification of ESCO’s periodic and yearly reports to verify savings, in line with the M&V plan
In addition to the benefits seen by project owners, an unbiased and experienced consultant will also help the ESCOs with:
- Client advisory and education to make retrofit projects more likely to occur and in line with the best practices to protect ESCOs’ rights,
- Fairness advocacy by supporting a fair payment structure,
- Moderating client requirements and handling key concerns,
- Data management by gathering relevant data and conducting preliminary assessments to ensure data is adequate, correct and usable,
- Conflict resolution by advising on the best approach for when conflicts arise,
- Supporting with peer reviews of their submissions, and
- Discussing and exploring opportunities to identify the best approach that can maximise their chances of selection with the best offer to the Project Owners.
The projects are the biggest winners, with improved risk management through early identification and resolution; timely delivery; vetted results; and structured, systematic and well-controlled project flow.
Having an experienced consultant or a client representative with in-depth technical, commercial and legal expertise is essential for the success of the ESP model in projects. Theoretical experience alone does not suffice, as a wide array of experiences is accumulated through the actual implementation and completion of such projects. A combination of a capable ESCO and an experienced consultant will ensure the alleviation of risks associated with legal disputes and will deliver successful and beneficial energy saving projects for clients.
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