Energy Saving Performance Contracting Program Implementation (Text Version)

Below is a text version of the January 21, 2010 Financing Program Support for ARRA Recipients.

Announcer: Matthew Brown

Good afternoon, good morning everybody. This is Matthew Brown, we are beginning another in a series of webinars sponsored by the US Department of Energy addressing various financing issues as they relate to clean energy and we are very pleased today to have the second webinar that addresses energy savings performance contracting.

The first webinar, one week ago on January 14th was an introduction to the topic, this one is a bit of a deeper dive into the energy savings performance contracting topic, we had some terrific responses from the last one and we're very happy that Dale Hahs and Don Gilligan are again joining us as national experts in this area. We will look forward to the next roughly and hour of discussion on this topic.

Pete you want to move the slide ahead?

Next Slide: Welcome

Matthew Brown:

Just a very couple of quick housekeeping issues, all of you as attendees are muted. We typically are having around 200 people or so on the call, so having 200 people unmuted might be a little difficult. However, if you look at the bottom right hand side of your screen you will see a Q&A box and that is where you can ask questions as we go through.

The procedure that we generally found works pretty well just feel free to post your questions as we go through this whole; I go through the presentation and I will moderate at the very end, throwing questions out to Dale to Don; to both of them as is appropriate.

There's a chat window just above that you can, if you have technical difficulties please use that. Finally there's a web link here that shows where the audio as well as the slides are gonna be available for this presentation. If you look there the presentation from January 14th is also there.

The last item I will note at the ____ and I will talk about this again is that this is a part of a series of webinars, we have additional webinars coming up actually one tomorrow on secondary markets for energy efficiency loans and then a number of webinars that will address energy financing programs in a ___ of different states.

Next slide please.

Next Slide: Speakers

Matthew Brown:

We have as I mentioned 2 presenters, Dale Hahs and Don Gilligan; Dale with the Energy Services Coalition, Don with the National Association of Energy Service Companies. These are 2 national experts in the field and very expert in this area. We are very pleased to have them and we are going to begin with Dale's presentation as actually we have one integrated presentation and so with the next slide we'll move over and have Dale being his presentation.

Dale.

Next Slide: Agenda

Dale Hahs:

Thanks Matthew and welcome to our attendees. It's certainly our hope that we can provide the kind of information that will help you along the path of utilizing funding and designing programs that can be most effective. As we look forward at this agenda for today, I'm gonna share with you a little bit about the purpose of our webinar, some objections to energy savings performance contracting, some financing solutions and technical assistance that we know is available for you as you need it. The reminder these webinars are recorded, your questions would be most helpful, we'll be glad to assist you in any way we can following the instructions that Matthew provided.

So as we begin with a purpose of webinar, Pete if you'll move us forward?

Next Slide: Purpose of the Webinar

Dale Hahs:

It's really simple to look at this purpose because in our effort to dive deeper we want to talk about the kind of objections that you folks are dealing with. So for you, you may just feel like you don't have the time, the money or the people to consider these concepts of programmatic design and truly why would you use energy savings performance contracting as one of your financial mechanisms anyway?

Past that we want to make sure that we provide some tools for you to overcome those objections and finally to describe the additional available technical resources. We always want you to know that there's a ______ of folks and resources available to help you.

My role today is to share with you just some of the thinking that supports the differences between purchases and programs. So there are many financial programs to consider. I'm gonna focus my remarks today on energy savings performance contracting.

So let's pose a scenario, you're the benefactor of $250,000 of funds from the American Recovery and Reinvestment Act which we'll call our ARRA just to make sure we have new acronyms in the world. We want to look at some of those typical options and drill down into the kind of thinking that's gone into strategies and plans to date. Some of those might be the studies that need to be accomplished. The purchases of goods and services are buying things directly or these financial programs.

I think if we drilled down into each of these you'll get a sense for why this was put together in this fashion. Folks tell us in the market place that it's hard for them to digest what the rules of thumbs might be that would compel them to do anything in today's world. There's lots to do, some things are harder than others and so we're gonna look at each of these and try to understand some ___.

So let's say you took that 1/4 of a million dollars for your city or county or agency and you decided that you wanted to do engineering studies of facilities, well as a rule of thumb what you might hear is that those studies are somewhere between $1500 and $3000 in value and it will probably take folks about 3 weeks to complete each one, well that means that you'd actually be producing somewhere around 80 to 150 studies. Probably have 15 people for 6 months engaged in this product and what you get back are bound reports that would identify where energy saving opportunities might exist. Now we all know that some of those might move forward and have dramatic results because that awareness can be an effective tool. In other cases the study might just sit on the shelf so either way that might be the impact of that form of application of these funds.

For our next consideration let's just assume that you wanted to do lighting retrofits, so a 1/4 of a million dollars of lighting retrofits using industry rules of thumb and fundamental cost and some assumptions here laid out on this slide would likely get retrofits of about 3,000 for lamp fixtures. Assuming that those would be from T __ or the __ ___ ___ to the _ _ the ___ sources in today's technology have still probably the most likely conversion.

Using average density that means that about 180 thousand square feet of this space which may be a couple of facilities, may be one large room, may just be a couple of floors would be retrofitted. The energy savings look like just about 640,000 kilowatt hours and while there would be some jobs created it's likely about 5 peoples work for 3-4 weeks to complete that lighting retrofit. So there's sample of a purchase of lighting retrofits.

Another option that might be considered is rooftop units, we hear this a lot, we haven't had the money to invest in rooftop units, we recognize that the new technologies are more efficient and frankly up on the roof we'd get bail and wire and chewing gum trying to hold our existing systems together; produces lots of complaints, well this is just a good idea then. Buying $250,000 in rooftops installed, well that's probably about 12-15 ton units just using a set of assumptions here, affects about 54,000 square feet of space, get's you about 73,000 kwh and well that's just a couple of jobs maybe 4-6 people for a couple of weeks. Pretty short term construction but realizing the benefits of the new comforts with that technology, so all great things to do.

Another consideration might be a chore and while this 100-200 ton chore might be ___ and installed for the $250,000 and you'll effect about 60 thousand square feet of space, 120,000kwh, few jobs again, these are short term issues so we might have a little bit more time and people involved if ___ study needed to be conducted, but if it's a one-on-one natural replacement likely the manufacturer represented can assist with that and you'll have a construction project that's a couple of weeks for 4-5 people.

Now, we could also look at the use of a boiler, the application of the purchase of a boiler, same $250,000 probably 2500 in _ _ boiler, about 50,000 square feet of space and this of course is gas savings in this example, not electric savings. But once again a few jobs, 2-4 people, 2-3 weeks in short term construction.

But I don't want to lose sight of the fact that if that's what you really needed was a boiler or a chiller it makes great sense to apply these dollars as needed to affect solutions within your facility or your sight.

Another alternative however is to consider taking that $250,000 and utilizing it as a 20% incentive for an energy savings performance contract. Now this frankly folks is the concept of leveraging. It's saying instead of just buying $250,000 of energy efficient technologies and having them installed, it's using it as a leverage requiring that the balance of the project be made up in utility dollars saved from the energy savings in the new technologies. So if it's a 20% model that we're discussing we're gonna generate $1,250,000 project. And frankly I had the benefit of reaching out and grabbing a project from an organization that had one completed and so this is a bit of a sampling of actual work that was completed in a $1,250,000 of an energy savings performance contract. At a 10 year payback is about a 5% interest rate just to give you some other assumed parameters but herein lies the benefit. 300,000 square feet of lighting of that facility about 250,000 square feet of occupied space getting new energy management systems which must mean that part of the facilities didn't need it. Variable frequency drives, pumps replacement of a 175 ton chiller hot water pump, air and water ___, some roof repair that was required in this work, with an estimated energy savings of about……in dollars here, $150,000 in energy savings and an additional operational savings of $9,000 that repays the borrowed funds that were extended for the energy savings performance contracting model.

Now that's over a 1,600,000 kwh saves per year and think about this, if the American Recovery & Reinvestment Act was designed to provide some incentive for us to return essential services, here's what we're really concerned about. Let's get 60 people in the community of the area rotated in and out of this project over a 10 month period of time. Let's put money in their pockets, checks in their account so that they can begin to buy goods and services and pay taxes on them and feel the essential services that are required, we need to get the policemen back and the firemen back, we need those funds for road repairs, that's what will start the economic ball moving again.

So there's an example, if you will, of how these funds might be _____. There are lots of other financial mechanisms and tools that can be used; we thought it important just to share this is a case study of the impact differences between procurement and program development.

Donald's gonna share with you some additional hurdles and some ways that they can be managed.

Donald Gilligan:

Thanks Dale.

The first hurdle that I would like to deal with that is very common for people that are just starting out to try to put together a performance contract or any other kind of large energy efficiency contract is project financing. There's a common misperception that there really isn't any money out there available for these kinds of projects particularly since the bank crisis and the recession started. So I'm gonna walk through some of the available funding sources, how you can get at them and what types of help are available.

If I could get the next slide Matthew?

Next Slide: Available Funding Sources

Donald Gilligan:

Here are some of the funding sources that are available for a typical project. You're probably on this call because you're getting an ARRA grant so that's obviously one funding source. There are utility incentive programs available in almost every state now, there are program in some part of the country which are very well established and have been running for decades that's particularly the northeast and California and Texas. In other parts of the country such as the upper Midwest and the Carolinas Programs are just getting started, some of those programs are very aggressive, they're sort of picking up where some of the California and New England programs are instead of starting from scratch they're trying to get up to speed very quickly. Often there's quite a bit of money in those programs for public buildings and for other types of programs so you need to get in touch there. There's cash, some local governments or state governments have some cash that would typically come from a capital improvement budget so you need to look at that. There's a possibility of getting some bank loans so that's somewhat difficult and we'll talk about that a little bit. There are different types of bonds there are general obligation bonds from the local government or state, there are several types of bonds that were either authorized or funded by ARRA, including qualified energy conservation bonds and Build America bonds. There also leasing deals which can be done, very common to finance energy savings performance contracts with leases and then there are Power Purchase agreements which have become the standard way of financing certain types of projects. These are projects that having measureable energy output so they're usually used for renewable energy projects or for large boiler or powerhouse installations on campuses, may be a hospital campus or a university campus where you can easily measure the output of this new installation.

Next slide please.

Next Slide: Studies

Donald Gilligan:

So once you get somewhat of a grip on the universe of potential funding sources out there most people will then try and decide whether they're going to try and use an ESCO to develop an energy savings performance contract or whether they're going to try and do a project by themselves. One thing you should understand that part of the ESCO's job and part of the ESCO's expertise is to arrange the best possible financing project or a package for your project from all of the available sources that I listed above and maybe some others that might be available in your area. If however you're going to go on a do-it-yourself route then you have to begin to start digging around to put the various pieces together. What we would suggest is you know probably in advance what you're funding from ARRA is going to be that would be devoted to this project or a series of projects. The second thing that you would want to do is tap into existing utility programs or other state lending programs. Many states have programs that are not so well-known which can provide some of the funding for your project. There's a very good website which we've listed here which has a listing by state and actually by utility service territory of many of the programs that are available so that's a good place to start.

Once you get your ARRA funding and you have some notion of your utility funding you're gonna have to supplement the balance of the project with some custom project financing to make the whole thing work. So here are some people that could help you with different sources of money. If you have some questions about the availability or the amount of ARRA funding the state energy office in both states is the administrator of the state energy program so you'd want to check with them about the availability of grants through the state energy program. In municipalities which get direct grants there is a local grant administrator who is administering the energy efficiency and conservation block grant program. Now that local administrator is going to vary a lot from local government to local government because unlike the states, most local governments do not have a established energy offices, so you may have to dig around a little bit in your local government to figure out who actually is administering those funds and understand from that person what the rules and procedures are in that program.

In terms of the utility incentives once you get a bit of an idea from the website that we suggested the next step is really to get in touch with your account rep. Most local governments are big enough customers that they will have an assigned account rep that you may or may not know but you should try and get in touch with that account rep as soon as possible understand exactly what kinds of programs might be applicable to the project you're thinking about and understand how you apply. Some programs have application rules which in effective allow you to reserve a certain amount of money for your project, some utility programs are oversubscribed each year so it's important to understand what the application deadlines are. You may have to push your process ahead a little bit in order to meet those deadlines and make sure that you get some money from the program.

In terms of cash that may be available you need to talk with your agency budget officer or the executive budget or finance officer, by executive we mean the Mayor or the county executive or maybe even the state treasurer if you're a state government agency to understand exactly what budget cash may be available and what the rules are or what the procedures are for accessing that cash.

For loans from a local bank you would again go through the finance officer and the finance officer would probably try and make contact with what we're calling a depository bank and that means the bank that the city or local government does business with so there's probably a bank or a couple of banks where the local government tax receipts are deposited and that's the place to start cause you already have an established business relationship with them, they may process the payroll, they may do a lot of things and so you have that relationship, that's where to start to try and get a loan.

In terms of bond programs states have all different kinds of bond programs which may be available depending on what type of building you have or what type of agency you are so there're some state programs which help local governments/local school districts build or substantially renovate buildings. There are other types of programs that help hospitals or other types of non-profit facilities with their building and renovation programs so you need to poke around a little bit the executive officer or the agency finance officer should be able to help you with that.

With leases you may be looking at again the depository bank that you're government agency uses or a specialized lender and we'll show you some of those in the next slide or the other possibility is that the state or local government may have a leasing facility already established. So some of the bigger state governments or local governments have a leasing, what amounts to a leasing pool that agencies can access or sometimes local governments can access to lease office equipment and lease automobiles or other types of capital equipment and in some cases these leasing programs are especially set up to do energy project financing as well as copying machines. In other cases you may have to push the envelope a bit to get this program to provide some money for your project.

And then finally with a Power Purchase Agreement the sources of those are ESCO's or specialized lenders. There really isn't a whole lot of that kind of product available from local banks or even regional banks.

Next slide please.

Next Slide: Assembling the Pieces

Donald Gilligan:

So here's a graphic, it's just a example of what a project might look like when you put together 3 or 4 different funding sources so in this project we're saying, well maybe the ARRA grant produces 25% of the money that you need, you've got a utility program that produces 20%, you've got a loan or lease that's negotiated with a bank or lending agency that produces a good chunk of the money; and then perhaps there's a budget allocation available from the government agency capital equipment budget. All of this gets wired together to produce the entire amount of capital that you would need for the project that you're contemplating.

Next slide please.

Next Slide: Specialized Financiers

Donald Gilligan:

In terms of the specialized financiers that we've made reference to a couple of times in discussing this, there're two good sources for this. One is the energystar.gov site that's a sight that's maintained by the US Environmental Protection Administration. They have some detailed projects on; excuse me, detailed papers on energy project finance. They also have a large list of companies that say they provide financial services, unfortunately those companies range from people who are consultants, there are some ESCO's on that list as well as some regular banks so you have to kind of pick through that list carefully and it's a little difficult to navigate if you're not familiar with the field but there is a list of 70 or 75 companies on this EPA energy star website. A second source for specialized financial programs is the US Department of Energy website that's called the solutions center website and this is, we are this webinar is coming to you in effective from this solution center website. This is the address of the website; there is a tremendous amount of information there about different types of project financing; what's good for what type of project and then we would highly recommend that you look through that careful.

The energy services coalition which is the organization that Dale represents has a list of about 10 providers of finance for performance contracting projects. Now that's not a universal list that's not a every provider in the country but it is a good starting point entity and these are people who have said and have given commitment letters to the energy services coalition that they are open for business, that they are ready to accept and fund projects and we give you this information not to recommend any of these specific companies but simply to say that when people say there isn't any money out there, they're wrong. There is money out there, there are very, you go to this list you'll see that there're some very substantial companies on that list. They have lots of money available to lend to these types of projects.

Ok. Next slide please.

Next Slide: Time Required to Get Started

Donald Gilligan:

So that's an overview of how you might solve the objection that financing is not available. A second objection which came up in several questions in our webinar a week ago is the difficulty it takes to get a performance contracting project or any kind of complex comprehensive energy efficiency launched. As one of the participants in our webinar said it took more time to convince the executive and agency to participate then it took actually to do the project.

This is not an uncommon objection, it's not an uncommon problem, it is however solvable, just like we believed the financing program is solvable.

If you go to the next slide.

Next Slide: Core Team Meeting

Donald Gilligan:

In our webinar last week Dale presented what we think is the way to overcome this problem. What we suggest is that you start off the effort to launch the project with what Dale has called a core team meeting. The purpose is to get everybody in the room who has to participate in the project as it develops to get them to understand what performance contracting or complex energy projects are about. All of the pieces that go into making those projects work, identify from each of the participants what the barriers and hurdles are from their particular view point and then to get commitment from the major players that they will participate in and support the development and implementation of this project.

We've made a list of the people that we would suggest participate in the project development and implementation and therefore in _ startup meeting as you can see it really stands the ___ of the local government or agency and it's very important that you get these people in the room, that you get their commitment and that you get their objections on the table.

The next slide.

Next Slide: Meeting Agenda

Donald Gilligan:

We've suggested a meeting agenda; don't have to walk through that in detail and the next slide we've suggested ways for you to go through this meeting so that you can get the results that you want. Now this is a summary of a much more detailed presentation of this topic that we did in the meeting in the webinar last week, if you're interested in the more detailed presentation which really walks through the meeting step by step you can go to the website, the solution center website which is ____ a couple of slides back and download the presentation to review at your own; in your own timeframe or listen to it online. You're looking for the webinar from the 14 of January which is the first webinar on Performance Contracted.

So this is a solvable problem and to give you an example of how fast these programs and projects can actually go. The State of Pennsylvania is in the process of doing 27 projects with total value of more than $200 million. They're taking them all the way from implementation to construction in about a year. So it's very fast effort intense effort but it's their way of using some of the funding that's available; the stimulus funding and other sources of funding and getting people back to work, while they're improving the energy efficiency at their facilities quite dramatically. So it is possible if you follow the example of people that have been successful doing this to build a program that does have everybody's support and to really accelerate the implementation of the projects.

Next slide please.

Next Slide: Managing Your Meeting

Donald Gilligan:

The finally barrier that I'd like to address is the how you staff a performance contracting project. Again we're drawing this from some of the questions and comments we got in the last webinar last week. The typical objection is that whoever is trying to lead this project effort is fully employed right now, they don't have maybe the staff resources or the time themselves to take on this very large additional project effort. So where do they get the resources, the expertise to develop a project and to get it implemented? But we think that there are several available sources people who are willing to go to work on these types of projects.

Next slide please.

Next Slide: Staffing the ESPC Project

Donald Gilligan:

So one source that you can rely on for getting sort of high level and very soon hands-on technical assistance is the US Department of Energy, through this solution center and related technical assistance efforts. A second source of staffing that you can access is construction services, construction resources that might be available in your state or local government that are currently not fully utilized. Third is unemployed private industry construction people, and we'll walk through each of these in a little bit more detail.

Next slide please.

Next Slide: Resources and Staffing

Donald Gilligan:

In terms of technical assistance resources and this is some of these resources are available now, some of them will be available very shortly but the Department of Energy through its technical assistance programs and which, most of which you can access through the solution center website is available to answer questions and provide technical assistance. We've provided the email address for Bret Kadison who is responsible for fielding particularly financing questions and getting them out to the experts who can get you answers very quickly. There is, as we've mentioned before, the resource portal; the solution center portal which gives you access to a large and a constantly growing library of documents and other resources to help you structure the financing for your project. There are, there will be by the end of, we think by the end of the first quarter of 2010 a very competent technical assistance capability available from the Department of Energy, there's a RFP that was issued in December and we believe that the department will make awards and get this technical service into the field very shortly and that technical service will be able to provide phone consultations, hands-on assistance if you need somebody to come and sit with you for a day or two, all kinds of webinars and training resources to really get these projects moving.

There is also a large set of resources, documents and presentations that are available on the energy services coalition website that I think mentioned earlier so you don't have to in putting together your project you don't have to start from scratch to invent solicitations for ESCO's, specifications for energy audits, templates for contracts, all of that documentation is available on the energy services coalition website, these are not, these are documents which have been used very successfully in lots of projects and many states across the country so again you don't have to start from scratch, use the tools which are available.

Next slide please.

Next Slide: Underutilized Staff

Donald Gilligan:

So once you got a handle on the available tools and resources you still need people. So the next 2 slides will deal with where you might find people to help staff your project to get it developed and implemented.

As most people know the construction industry is really down in the dumps. That goes for state and local government construction as well as private industry construction. So there may be within reach in your state or local government construction staff that are not fully utilized, that could be a construction services or architectural services department. These groups have different names in different government organizations; they could be within the landlord agency, the general services administration office of general services. Again lots of different names but there's a group somewhere in your government that's running the buildings, they often have construction people. Public works department or again similar names might have people who are skilled construction people who are used to developing and implementing complex projects but because of the financial situation today they don't really have new construction projects on the table. So you can, if you can involve these people in your projects, you get a kind of win-win situation. You relieve the burden on your staff or on yourself and you help pay for the salaries of some of these people who may be looking at layoffs.

Finally by bringing them into the project you may lessen the resistance to the project. If you go back to the slide, a few slides back, the startup meeting you'll see that some of these people that some of the agencies that we've listed on this slide are people that we suggest getting into your startup meeting because they are people who can often have objections to the kind of project you're trying to put together. Well guess what? If you're paying all or part of their salary or you're proposing to do that, then their objections may be diminished or may vanish. When you think about paying salaries think about the fact that the salary of the management of people that we are talking about, can come out of the project cost. If it's a big project, it's very standard for the management people salary to come out of the project.

Next slide please.

Next Slide: Unemployed Project Mgrs.

Donald Gilligan:

The other source of staffing for a project is the private construction industry. As you probably know the unemployment in the construction industry is much worse than in industries across the board. Nationally it appears to be in the range of 20-25%, it may be double that in some areas depending on the local construction market. So there are lots of high quality people available, project managers, construction managers, people who function as clerks of the works which is a very common type of person that you might hire if you're doing a large project or set of projects in your locality, as well as architecture engineers. So they're available on the market today, the other thing to remember about these people is that they don't expect in many cases full time permanent jobs. The construction industry even in the best of times is a project by project industry. So a construction manager, a project manager is used to being hired on a project. Now that project if it's a great big building might be 2-3 years long, if it's a smaller building it might be 6-8 months. They would certainly like to work for a company or work for a city government that had a never ending stream of projects but the reality of the business is it's really project to project so you're not, when you're going out and telling people, we can only guarantee you a 6 month job or a year job or an 18 month job on this project or set of projects, you're not telling them something strange. You're offering them the same kind of employment horizon that they're, in many cases, they're used to.

There's a large pool of these people available and you should be able to, with a minimum amount of effort, find people in your area who can supplement your staff and get these projects rolling.

Next slide.

Next Slide: Technical Assistance Resources

Donald Gilligan:

I think we're back to you Matthew.

Matthew Brown:

Well thank you very much Dale and Don, those are very useful presentations. We're now to the point where we can take a few questions and I will remind you that if you have not already posted a question at the bottom right hand corner of your screen you can do so.

We've got a couple of questions and I think what I'm going to do is throw these out to both Dale and to Don for your separate perspectives.

The first one is, goes to the availability of capital and the question is how is the credit market responding to tax exempt equipment lease financing that is common in performance contracts and secondly, what are today's indicative interest rates?

Dale or Don or both of you.

Donald Gilligan:

Well I think. Go ahead Dale.

Dale Hahs:

I might respond to that a couple of ways. Several months ago when we began to hear particularly public entities share with us that there was no money available for this lease purchase type concept and so as the Energy Services Coalition we reached out to the market place and we just sent a few emails out and that's what Don had referenced, we get letters back from people that have actually posted them on that website that said I'm here, I've got money and I'm ready to lend it. So much looser than it's accused of being, now let's be clear these are trying economic times, it's relatively important to get the financier involved early in the project so that they can talk about the options and help blend these multiple opportunities of incentives and buy downs and the kind of things that Donald mentioned as an array that can package into great project.

From and indicative rate stand point if you just went out for let's say 10 year project of reasonable value from the million dollar up range, I think what we're seeing now is just under 5% so that's what I've heard lately.

Donald.

Donald Gilligan:

A couple of things to add to that. The credit markets have tightened a bit and the main forms of tightening have been are 2. Number 1 is that they are, they have shortened the time frames for project financing so if you go back a year or two it was not uncommon to have a 20 year lease financing for a project. The maximum lease terms have now been trimmed down to maybe 15 years or 12 years so that will trim down the size of some of the projects.

The other thing which has tightened up is the commitment time for a financing transaction so again if you go back a couple of years the financier might have been willing to leave a commitment on the table for 6 months. Whereas today it's probably 60 days, you wither have to execute the project and execute the agreement within 60 days or you have to renegotiate or re-solicit.

So those are the 2 very specific areas where we've seen some typing.

Matthew Brown:

Great. Thank you Dale and Don.

I'm thinking that it might be helpful for some people on the call who may or may not be familiar with the, with what a tax exempt equipment lease and what that financing is and how that works. Maybe you could just give a quick, I'll throw this out to Dale, if you could just give a quick definition of that because I think for some people on the call I think we shouldn't assume that everybody knows what that is.

Dale Hahs:

So a tax free municipal lease, fundamentally that instrument's been assembled for public entities to utilize and it requires some transaction costs upfront but those people are specialized lenders that would be glad to come along side and offer these terms and considerations.

In the programs and projects the way we've addressed them in this webinar, we're talking about utilizing the devices that would be installed into facilities or systems has the collateral of future savings for that loan to be lent, the money supplied in an escrow account and drawn through the construction periods and then the use of the savings from the technology installed is a responsibility of the borrower to pay back to the lender.

Does that help from a real _____ standpoint Matt?

Matthew Brown:

I think it does. I think it does.

Next question was is there a rule of thumb still that 1.5 million dollars serves as the minimum deal size for tax exempt equipment financing?

Dale Hahs:

In my conversation with the leasing companies and municipal leasing companies it's a _____ the organizations themselves so some have an appetite for a larger instrument, some you know, would like a bunch of small ones. You just wanna be smart so that it doesn't become so small that the transaction cost generates an effective rate much higher than you'd expected the rate to be. So working early with the financiers and whoever else is assisting you with the program to get a real look at what your cost of money is, under those circumstances, makes the ___.

Matthew Brown:

Is there a common rule of thumb as far as what transaction costs might tend to be as a percentage of the total or as to what you're fixed transactions cost might be?

Dale Hahs:

I'm sure from my history that I believe that's as well about as unique as the market place can offer so ____ the competition between financiers to ____ a piece of business you may see some of those things move up and down would be, I'd be hard pressed to quote on the industries behalf what those transaction costs would look like.

Donald Higgins:

Matthew, I would simply add that I think if somebody's looking for a hard cut off of the availability of financing that might be close to a 1/4 of a million dollars than a million and a half dollars.

Matthew Brown:

And has that number changed in the last year?

Donald Higgins:

Well it's changed a bit and it's changed not so much in the amount of the financing as in the types of entities that a certain organizations will finance. So one of the aspects of the credit crisis has been that the rating agencies ____ and standard ____ and people like that have been discredited so and that really affects smaller public entities. So in previous years a financiers or bank or leasing company that wanted to do a smaller deal with a smaller public entity could go to one of the rating agency publications, look up the rating and have some confidence that that was a reasonable way to underwrite a project. Since the rating agencies have been discredited some of the lending institutions have said, now we really have to do our own underwriting on every deal and therefore their appetite for smaller deals is diminished.

Matthew Brown:

Thanks. Another question that's come up is how do you feel about third party consultants? Comment here, some states require their use such as Nevada, the last, last week's seminar did not mention this topic except in a question that, if, Dale you wanna look at this, talk about this first and then we'll move to Donald?

Dale Hahs:

Sure I'd be glad to but I'd like to back up, digress just a step and tether to the previous set of responses that Energy Star really built a great too, Donald help me, cash flow opportunity analysis.

Donald Higgins:

The cash flow opportunity calculator, yes.

Dale Hahs:

Calculator. So as our audience is considering rates and the impact of rates it's nice to know that out on the energy star website this cash flow opportunity calculator is there to allow you to play a little bit of what if games. What if I wait for interest rates to go down, what does that look like compared to the energy savings that I might be losing?

So it's a real investment analysis out there that you can download and use freely.

Donald Higgins:

And I would add to that that what that analysis shows is that the sensible waiting time for lower interest rates or even for cash if you think you might get a budget allocation down the road to do your project, the sensible waiting time is much, much shorter than most people would think. It's really counter intuitive, it's a very simple tool to use, it's available on the Energy Star website that we, the address we put up earlier and I would urge people to look at that. You can do a project analysis in 10 or 15 minutes that really gets things pretty clear in your mind.

Dale Hahs:

On to the concept of consultants, you know, I have a great deal of respect for consultants as subject matter experts and you know, you just have to decide what you want them engaged to manage. So in some cases those consultants are required because they provide a second set of eyes as a back ___ from what might be technically confusing to you as a project lender so the consultant might come on board with the expertise to look and provide sanity checking regarding the offering that come from the construction industry or from the energy services company. It may be that you are looking for a consultant to manage the selection of provider's process. And while there may be other resources for that those resources are becoming strapped too. So having someone that's done this before and understands the concepts of measurement and verification and how important they are to understand prior to moving forward. Somebody that can help you source out the types of questions that you need to understand the references and projects so that you find things that are similar to yours.

So I'd offer undying respect for those folks assuming that you find out what the scope of work is that you're trying to achieve, find the right consultant for that I think all parties will be pleased.

Donald Higgins:

I would second that. I think our experience in the ESCO industry is that the customer really needs as much consulting firepower or ___ on their side to make them comfortable. If they're not comfortable they genuinely don't take a risk, they generally don't, the project development process goes much slower so we're very supportive of customers getting the kind of technical and financial help that they need to understand their project from their side. As Dale said it's important to get consultants who really understand your situation and what, where you need help and where you don't need help so that the consultants can really help you.

Matthew Brown:

Another question is come up about pay back periods, and the question is what are typically pay back periods that are associated with financing in the sector and the question is how long do you have to pay back a loan? Dale first.

Dale Hahs:

Ah sure. There's a couple of ways to think about that. In many cases projects that are single measure projects and an example perhaps the lighting retrofits if we laid out as a typical scenario.

In many situations that technology in and of itself might pay back depending upon the hours of operation of a facility within, oh 3-5 years comfortably, if you're using the facilities a lot and certainly if you're using them less than that that gets extended. It's very common that these instruments get structured for the energy payback time to align with the life cycle of systems. So one way to think about it in the energy savings and assistance, those loans could be available for the 3, 4, 5 year term that was required.

In today's economy we've actually seen some folks use these models a little more creatively than that. So let's assume that I needed that 1/4 of a million dollar lighting retrofit, it was going to pay for itself in 5 years in conversation with the financier I might find that I could borrow those funds for 7 years. Now effectively while you pay a little bit more interest over that term you might find that that helps make your organization a little cash positive. And in today's trying times that could be a good thing.

So to say where the terms fit anywhere from a couple years, 3, 4 years into about the 10 year range as Donald mentioned earlier there, we're gonna have to work a little bit harder still from the financier stand point to get back to the 15 and 20 year notes that were pretty traditional in our market place a year or so ago.

Matthew Brown:

Donald do you have any comments on that?

Donald Higgins:

No, I think that's a good example. I think that the, we have the ______ Berkley National Laboratory had a database of energy savings performance contracts; it's a close to 4,000 projects now. I believe that the, my recollection is that the for state and local government projects the average payback period for those projects is edging up toward 10 years and in some states it's more than it may be an average of 12 years because many government agencies are using performance contracts not to generate cash flow from energy savings; but to really maximize the amount of improvements that they can get in their facilities so they're using the short payback measures like lighting to pay for the longer payback measures like window and roofs simply because they can't get funding through the budget process for those kinds of capital improvements.

Matthew Brown:

One more question and I think I'm focusing again on payback periods and saying how do payback periods of retrofits work with existing performance contracts?

Dale if you're, if you can look at that one first.

Dale Hahs:

In fairness I'll tell you I don't really understand that question, Donald are you seeing it clearer than I am?

Donald Higgins:

No, I think to the extent that I understand it I think we just answered it. And existing performance contracts have the kinds of payback characteristics that Dale and I talked about.

Matthew Brown:

You know what, Leon Adams added, so let me restate it, looks like there was a word missing. It says how do payback periods of retrofits work with existing ESCO performance contract timeline?

Dale Hahs:

Let's take a stab at this since it's ____ ______ conversation, let's assume that you have an energy savings performance contract presently in your facility and you're going to do additional retrofits that might be the consideration, I think, you know, one of the sources there is that you go back to the original provider and understand the impact of those considerations and those timelines, you know, likely would just roll into a recast performance. That might be one look at this, another look at this would be, what are the ESCO's typical performance contracting terms? Think a great answer to that would be whatever you decide. One of the things that's often misunderstood is that these concepts are vehicles, the tool of you, the __ user, the agency, the state, the county so if you wish to have a 6.29 term you ask for the deal to be structured in that fashion. If you want to try to use 10 and again I'd encourage trying to get the financiers on early then that 10 years is the parameter that you'd offer to the construction industry and engineering industry and say, that's what I want to work within. So there's not a fixed term as part and process of the energy savings performance contracting industry or the energy services companies world, it's what makes best sense for the end user.

Donald Gilligan:

I would second that and say that one of the things that can make a project development schedule go faster is if you're very clear with the ESCO upfront about what your payback expectations are. So you don't want to have an ESCO come in and give the ESCO the instruction, well look at everything soup to nuts, have the ESCO come back with a very elaborate energy audit that's looked at every possible measure and then say, oh well we really can only look at stuff that has a 5 year payback.

That's a lot of wasted time and effort for everybody to go through that so to the extent that you can define your payback and financial goals upfront that's, that will accelerate the project development process.

Matthew Brown:

Well Pete if we could move to the next slide.

Next Slide: Upcoming Webinars

Matthew Brown:

I think that we have come to the end of our hour and I'd like to thank both Dale Hahs and Donald Gilligan very much for a terrific, very interesting presentation. This again was the second of our webinars addressing energy savings performance contracting and this one was kind of a deeper dive into the issues that were introduced on January 14th.

For those of you, who were not able to participate in the January 14th webinar, do know that that webinar is available in its recorded form on the solutions center, the website for that solution center is up on your screen at the moment.

I'd like also to note that there are additional webinars which are coming down the pike, the next one is actually tomorrow which you should all have received notification about last week and before that even addressing the use of secondary markets, secondary markets in this case is a way for, to increase the amount of capital available to lenders to invest in energy efficiency loan programs. The second one, a second 3 actually are detailed discussions of three different programs run by the states of Pennsylvania, a program that is under development in _____ and then a program which is under development and is now working in Portland, Oregon.

Three different types of financing programs for different sectors, they are on January 28th, February 4th and February 11th. Again I'd like to thank all of you for participating in this Department of Energy sponsored web conference and we'll look forward to seeing you at the, at future webinars. Thank you very, very much.

Donald Higgins:

Thanks everybody for participating.