Tribal Energy Project Development Through ESCOs (Text Version)
Below is a text version of the April 1, 2010 Financing Program Support for ARRA Recipients
Announcer: Roger Taylor
Good afternoon, or morning to everybody, depending on which time zone you are in. My name is Roger Taylor, I'm the manager of the Tribal Energy Program at the National Renewable Energy Laboratory and we thank you for joining our webinar today on Energy Service Companies. With me, I have Dustin Knudson and Phil Voss, who are in part of our Federal Energy Management Program that works primarily with the Federal Sector, in promoting these opportunities with Energy Service Companies that you are going to learn about today. One of our objectives that we have had, a number of inquiries from __ Affairs, Indian Health Service, schools and clinics, some of which have been explored by our folks here. We want to use this as an opportunity to make you aware of this Energy Service Company Community and how you might be able to get projects done without having cash available to do it. It's been used increasingly widely in the federal sector to avoid the need for facility appropriations through Congress. A different way of working, so hopefully you'll learn some useful things today and we will also be having a conference here in Denver in a couple of months, I'll mention at the end where we'll go into this in more detail, but without further ado Dustin, it's all yours.
Thanks Roger! Welcome everybody! Let's see if I can advance the slide here to the next one, here we go.
Alright, please mute your phones, if you haven't done so already. This is a courtesy to everyone and please don't place your phone on hold. It's just another quick reminder. If you do, we all may hear the hold music and while it is nice to present with music in the background, I don't know if others will appreciate it as much as we do sometimes.
To start, I'll go through the agenda, what were going to talk about today. First of all, we'll introduce you to Energy Service Companies and describe and define generally what they are. We'll talk about the Energy Savings Performance Contracting or (ESPC), as you'll hear me refer to it. Contracting mechanism, basics of that, we'll spend some time in there and walk through that. We'll talk a little bit about the history of Performance Contracting over the past 40 years or so, 30 to 40 years, and kind of how it has developed into what it is today, Federal indefinite delivery, indefinite quantity contracts now, and widespread use of performance contracting across the country and also across the world. We'll touch on business models and approaches to performance contracting, what you'll find is that ESCO's wear a variety of hats, they have a variety of different services, they all have different business models that they present and we'll talk a little bit about what that looks like and what the comprehensive set of solutions that the ESCO's can provide to you are. We'll also talk about some specific challenges to Tribal Country, I am going to refer to Phil Voss for that, he is, had some project experience working a couple of federal contracts or supporting them rather, from his work with NREL and he can describe some specific challenges and some of the opportunities and things that he saw through those projects. So, we use those project examples to give you a good picture of what has been done in the past. And then, lastly, we'll end up with some steps on how you can get started and talk about an upcoming workshop that you could attend, that you could not only meet the ESCO's but, to really dive into the contracting mechanism in more depth. You should view this webinar as a chance to introduce yourself to performance contracting, a chance to get familiar with it. I realize that some of you are probably already familiar with performance contracting and have some pretty good knowledge of it. If that's the case, you can view this as a review session or a refresher, but realizing most of you probably don't have extensive experience with Energy Service Companies or Performance Contracting, so this should give you a good overview and I would hope that by the end, you'll be able to describe or define ESPC and be able to generally describe what ESCO's do and how you can work with them, as well as understand some of the "ins-and-outs" of performance contracting and the mechanism itself and what all goes into that. What the requirements are for measurement and verification of savings, how you pay the contactor with the cash flow looks like. Looking at issues like the risk and responsibility that you can take on in a contract and what falls to you or what falls to the ESCO and how that is negotiated. So, without further ado, we'll move on into ESPC basics and describing what is an ESCO.
Energy service companies are companies with the expertise and ability to identify energy efficiency and renewable conservation measures, and this can be an existing plant, equipment, an office building, schools, warehouses, hospitals, casinos, residences, many other potential locations that you can think of, both in public and private sector. They also help secure financing on behalf of their customers or the agency. And the ESCO will install, operate and maintain their installed measures and what the key piece of that you should know about performance contracting is the ESCO's guarantee the result in energy savings in the energy related cost savings, there associated with the newly installed retrofits over the life of the contract or the contract term.
So, who are these guys? We've got 2 contracts listed on this slide, some of the ESCO's here, 16 of them are the current pre-qualified ESCO's under the Department of Energy's indefinite delivery and indefinite quality contract at IDIQ. It's basically a master contract that the Department of Energy has set up, pre-qualifying ESCO's that you could work with and the way it works is you'd issue a task order, if you're familiar with contracting, against that IDIQ, to award to work with one of these companies. The contract really helps streamline the overall process; we'll talk a little bit about various ways you can contract __ ESPC and through an IDIQ, it really helps get a lot of that template language and some of the guidance and things that are helpful to you. Take care ahead of time and that thing you can use for your benefit so that you do not have to "re-invent the wheel." Along the right side, you'll also see the Department of Defense Army Corp of Engineer's IDIQ, ESCO'S. You'll see that on this slide, the ESCO's listed in black font, are unique to the particular contracts listed and the ESCO's listed in blue are those that are common to both contracts. We just show that to you, just for your reference, so you're deciding on which IDIQ to use, that type of thing. You'll have a general idea that a lot of the companies, you'll be working with are the same.
Now, to talk a little bit about Performance Contracting basics, to introduce you to the ESPC, it's a contracting mechanism by which the ESCO works with the customer. Works with you to identify your retrofit possibilities. I mentioned before they help you secure the financing, they come in and install the measures, whether it's the ESCO's themselves or through the sub-contractor. They address the risk and responsibility, work with you to develop what we call a "risk responsibility and performance matrix." That's something that we recommend as a best practice in the ESPC and also a requirement of DOE's IDIQ contract, and that's where, it's really an ongoing negotiation as you're developing these contracts, as you are working through with an ESCO.
We'll talk a little bit about the phases and the process and how it all comes together, but, in general, there's a preliminary assessment or initial proposal that the ESCO will propose to you. The level of detail of that proposal can vary, that can also be used for selecting your ESCO. There are some options to that that we'll talk about, but that's kind of an initial take at looking at some of the risks and responsibilities of the contract. Looking at measurement and verification options that would be assigned to particular conservation measures and then what the agency would do, is, take that initial proposal or preliminary assessment and provide comment back to the Energy Service Company, before they go through an investment grade audit, which is a much more detailed audit, to determine your baseline for your contract and I really nailed down all the engineering calculations and things that you'd be signing up for, for the life of your contract. So, you're negotiating risk throughout that whole period, throughout that time, as you're going through one proposal to the next and getting to that final proposal after an investment grade audit. So, I digress for a minute, to get back to the definition here, the performance contracts also guarantee savings, they're the mechanism by which you can measure and verify and that the ESCO can be assured of re-payment for their capital investment, assuming that equipment is performing as intended as they agreed to. We'll also talk a little bit about what happens in the event of a "short fall," and how the ESCO's liable for performances or equipment.
So, you might be wondering how ESCO's get paid back through this service. They're re-paid through energy and energy related costs savings. The payments to the ESCO at any given year, by law, cannot exceed your savings. So, it's nice to have as your considering your options and what you can to implement the projects you want to get in your facilities now that you may not have the appropriations to do at the current time.
We covered the definition slightly already, but here's a brief summary, a couple good photos to look at, and some of the types of retrofits and things that you could implement, some of the energy conservation measures that can go into a performance contract. Performance contracts really cover everything from lighting, to exit signs, to industrial boilers, to renewable energy equipment, you name it, and you could pretty much do it in an ESPC, as long as it saves energy. So, again, key points, the contract between, you the agency and the Energy Service Company, it's a no up-front cost contracting method, so no capital investment is required on part of the agency. Then the ESCO guarantee is a crucial piece to remember about this and that they're paid through savings.
Jumping into a few of the legal requirements, this is a slide that we present in our federal ESPC training program workshops. You'll see a couple of those in here that are noted by the source in the lower left hand corner but, four key points to remember are 1.) That savings guarantees are mandatory 2.) Management and verification of savings are mandatory 3.) Savings must exceed payments in every year of the contract and lastly 4.) The contract term cannot exceed 25 years. That includes the construction period, so, say you go forward on the contract and you're bundling several conservation measures, you've got lighting, boilers, chillers, a heavy renewable measure, you may not be able to do otherwise, but capturing the savings from all of those together and paying off one contract. You might have a pretty lengthy contract term and so if you have a two-year construction period, then really you're contract term, your performance period can't exceed 23 years, because you need to include that two years for construction. One thing I should note, as I mention this, 25 years seems like a long time, it can be, just depends on what you're really trying to achieve as an agency. We see on average most of these contracts are around 12 years, "plus or minus" or "give or take", a few years.
I referred earlier to some ESPC basics, approaches; it is kind of, business as usual or the contracting as usual approach along the upper left hand corner. That would be stand alone or individual contracts that you would issue as an agency, that you would write your own requests for proposal, your RFP, your own solicitation, write your own requirements, submit that out to industry, wouldn't necessarily be part of an IDIQ contract. Another option that you have on here is that, a lot of the companies are available, if you want to work with a lot of the companies, are available on the GSA schedule. Then the two lists of ESCO's that you saw earlier came from the IDIQ contracts listed on here, the Army Corps Engineer and the Department of Energy IDIQ contracts, and again, to reiterate those are more streamlined methods. It takes less time and effort typically than writing your own RFP, there worded as task orders. There are contract templates, guidance, the FEMP webpage, if you go to EERE, office of Energy Efficiency Renewable Energy.gov, EERE.energy.gov, and you look at the FEMP webpage and click under contracting mechanisms, you can find, not only performance contracting, but, utility energy service contracts, power purchase agreements and sample projects on there, and contract documents that'll kind of guide you through the process. One of those, in particular that is very helpful, is the measurement and verification and guidelines, that's version 3.0, something to look at when you are considering how to measure your conservation measures.
So, moving along, we'll talk a little about Project Cash Flow. If there is a chart or a graph, or something that, if you're sitting down with a friend at a restaurant and you want to describe to them, here's performance contracting, here's generally how it works. This will be a good slide, you know, to jot down on a napkin and pass across the table and say here's how it goes. So, along the left side, you'll see the agency's cash flow and you'll see the bar, this is before the ESPC contract and the chart represents the energy plus the operations and maintenance (e+o and m), that you're paying currently to operate your facilities.
During an energy savings performance contract, your energy and operations and maintenance decreases, and that are due to the installation of the energy conservation measures. You run the same building at the current level of comfort ability or even better, in most cases, and the difference, for less energy. So, basically, what you're using before could be referred to as what is currently going out the window, or cost that you don't necessarily need to pay to operate your facility. The performance contract helps you run more efficiently and the difference there is what you see in grey and it showed up as guaranteed energy and operations and maintenance savings plus excess savings if you have any above your guarantee. During the contract, that's actually what goes to pay the ESCO for their services and to finance your project, so towards the debt service. Once the contract has ended, then you start to realize all the savings as an agency. One of the most common misperceptions about performance contracting is the question, "Where's my savings, I thought this was supposed to save me money?" "Where's my cash, in hand?" and this is during the contract, that people would ask that, and you say, "Well the savings are there, they're real, and we are meeting our savings." They're just being used to pay the ESCO, and to pay off our debt service for the equipment that we've installed. It's after the contract that you see that you have that true cost avoided in your energy and operations and maintenance budgets.
Another common question we get is, "What if energy prices increase, how does that affect the overall contract, and what I'm going to pay and can I end up paying more with the Performance Contract than I would have otherwise?" That's another common misperception and let's just walk through that a little bit and see how that looks. So, the graph that you see on here shows the energy required for operation of your facility and the cost attributed to that energy. So, along the left, you don't have a Performance Contract and it's just showing current costs, you're paying for, you know, "you get what you are paying for", basically. Your energy is costing a certain amount and whatever that cost is I have that equal to what's required for that energy. Alongside that, you'll see with the ESPC, if energy costs remain the same, you've got your lowered energy required for operation, and then that extra kind of shaded box, if you will, above the top that is the portion we just described on the last slide, it's going toward the ESCO during your contract.
So, if you look at the red line and the arrow here, it shows, basically what you're going to pay or the cost will remain the same whether you have an ESPC, or without an ESPC, during the term of the contract, the only difference is, you can meet your energy goals, reduce your usage and then use that money to go to pay for your equipment instead of having to have it go out the window. Well here is what happens when costs increase, if you look at the third bar, the third set of bars on the graph here, if you have no Performance Contract and you energy costs double, your energy required for operation is the same as the first chart, but your costs go way up. Looking at the last one, you have an ESPC and you energy costs double, you still owe that portion to the utility, for the increase in the energy cost, and that's the dark blue bar. But then you'd also still owe to your ESCO what you agreed for your Performance Contract, which is reflected by the two blue, the lighter shade blue boxes, showing the savings plus payments to the ESCO, plus payments for your financing. And so, looking at that, you might think, well look at this new red line, now I'm paying more than I did before, when I didn't have a Performance Contract. Well that would be true, because you're energy costs have increased. But, regardless of whether you'd have a Performance Contract, you'd have been paying more anyway if your energy costs went up. And, so, the argument then is that with a Performance Contract, you have additional costs avoided, because had you not implemented a Performance Contract, you would have been paying the bar along the top. So, in a way, you can think of Performance Contracting has a hedge against rising costs in energy. Another common question along these lines, is, "What about energy escalation?" and "Are these contracts not, is there not some escalation rate that's assigned to these contracts ahead of time and is not allocated for?" The answer is, it is, it's one of the risks, it's under, and it's a financial risk, under the Risk Responsibility and Performance Matrix. You'll agree to some percentage, the National Institute of Science Technology, NIST, ssues some estimates or escalation that you could use is typically what we see in contracts, combined with other local factors. Taking a look at whether your historical rates from your current utility and how those costs increased or decreased over time, and then taking some combination of the two of those, can help provide a pretty realistic escalation rate. But again, I'm getting ahead of my-self; we can talk about that more later with Risk Responsibility and Performance Matrix.
Looking at a typical project timeline for these projects is important ahead of time. It's important to know that these, they're not a contract that you can just sign up for and complete in a month. It takes typically 2-3 months of project planning and gathering together an acquisition team, which we'll talk about and assessing your facilities, looking at your opportunities are, determining how you want to proceed and whether having an ESCO look at through your facilities and propose to you, up front, and kind of a contractor identified method, or whether you'd kind of take a look yourself and maybe submit out to the ESCO's with an IDIQ, the same set of requirements and the things that you are looking at. So, there is a little bit of planning and discussion that goes on ahead of time there, and then whether or not you choose to have preliminary assessment responses from ESCO's or a little bit less than that to determine whom you are going to work with, is your discretion, at least on the DOE IDIQ contract. That process can take a few months as well. So, we're looking at, you know, potentially 6 months or so before you even select an ESCO and move forward into an Investment Grade Audit. That Investment Grade Audit, depending on your location of your facilities, their size, and the types of measures that you're looking at can take some time. If you are looking at putting together or including a wind, you know a wind renewable ECM, in your contract, you may want to install a "net tower", and collect data for a year. So, that can be a lengthy process before you move forward with that particular ECM. So, we say 16-18 months in this phase three.
Moving into phase four here, we've got Design Construction and Acceptance. You're looking at a construction period here that is going to be typical to your standard construction contracts that you're used to. ESPC construction is very, very similar and can take a year to two years, on average. Once that‘s happened, then you're really, you know, a lot of people at that point say "Ok, finally, I'm done! We've tested our equipment, we've signed off, we've measured, we've verified, we've made sure everything is installed, you know, operating properly, it's been commissioned, we're good to go, we're done with this thing!" and I would caution people that think that way, you're really just beginning. It's takes a while to award these contracts, and can feel like you're finished with it at that point, but, you really need to pay close attention and do your due diligence during the performance period of your contract, to ensure annually that these savings are being met, before you pay your contractor. That comes in the form of an annual verification report that's witnessed by you, the agent, you signed off on before you had made payment annually.
I mentioned the acquisition team, the acquisition team is a team that you're going to put together in phase 1, early in the process, and you really want to include anyone, or everyone that could either hinder your process or help you along the way and you'll need a contracting officer and a technical representative, facility manager, or an energy manager, can be a great technical representative for your contracting officer. You want to try to run everything through your one main point of contact, if possible, whether that is your technical representative or your CO, it helps to have a consistent voice, back and forth to the ESCO, there is a lot of conversation and things that go on between energy managers, contracting officers and others as your coordinating working with the ESCO to develop your project, so it really helps to stay organized if you have a single point of contact to run any official decisions through.
I'm getting a, I noticed a question on here, I'll address right away, it says "How does a Tribal organization become an ESCO, what is timeline and cost?" We're not really talking about Tribal organizations becoming Energy Service Companies, I think what we're trying to focus on in this webinar is, Tribal organizations working with already existing Energy Service Companies, to help improve your facilities, get you energy conservation measures that you wouldn't necessarily be able to afford otherwise directly with appropriations. So, I hope that distinction is clear.
Some of the acquisition teams are old, includes steering your agencies efforts, building support for project in the agency, indentifying key decision makers and those that have authority to approve or to reject your project. Again, you want to bring people on board ahead of time and have a very coordinated approach rather than leave people out of the loop and then come back to them after the fact and getting a stop in your project. So, a best practice, I would say, is to have your team coordinated ahead of time, educated about performance contracting, knowing what you are signing up for, and what you are getting into and the amount of time it's going to take to get to an award. You also want to educate the other staff about the project, or anyone that could be affected by measures that are installed or anything that could interrupt current work, during construction period, or otherwise. People should generally know about what's going on and get them involved ahead of time so they can help support the process, rather than becoming a hindrance.
Looking at the effort required, to a word, you are going to need approximately two-thirds of an energy manager, so 2-5 full-time employee months, approximately one-third for contracting, and again these are just kind of "rule of thumb" estimates. They can really vary, depending upon the size of your project, how many buildings you're including, and other factors. But, in general, when you do it, plan for and expect some time from your current employees or request assistance from others to be able to get through this effort, because it is pretty significant. During construction, commissioning and post installation measurement and verification, it is mostly the responsibility of the energy manager that will be needed, but again, it can vary widely, based on project complexity, and then administering the contract through resolution of the first year of measurement and verification, that the first payment that you'll pay the ESCO, is going to take approximately a FTE month, from your contracting staff.
So, how the guarantee is met, savings may be used to pay the ESCO, are categorized as energy and water cost savings, and energy and water related cost savings. So, there are 2 components to that, that's performance, which is the rate of your energy use, and then your usage, or your hours of use. The energy use then becomes the product of those two. So, looking at with electricity, you've got equipment running at a rate of a certain amount of kilo-watts, multiply that by the hours it's running, you get your get your kilowatt hours of total energy. So, reducing the rate of energy use and/or the number of hours reduces your total energy use, looking at a chart of that, you can see the rate along the left hand side, along the y axis, and the hours along the bottom. You can see the yellow chart shows your pre-installation or your baseline energy use. Turn operating hours, and current efficiency, say you install some measures that increase your efficiency, thereby improving it, or reducing the rate of electricity required to run your operation, that shows, that is arrow along the left, kind of moving down to the green box. And then, because of that, say your equipment so efficient, that you can reduce your operating hours as well, it doesn't need as long to perform the same as you had before, then that decreases that the hours per year, as well and the area difference between the two is then your savings.
Because, there is some level of uncertainty, with savings, because you're measuring the _____ something, you can't directly measure it, you have to look at pre and post usage. It can be difficult to quantify exactly what the savings are, another reason for that is you may have several measures that have been installed that have interactive effects, or you may have changes in your facility, where you have increase in the number of people working there, or special events going on, you may have, I am trying to think of other examples, other instances where you are not running based on your average or typical operation and maybe you shut your facility for a day or two or you change use, you move from a warehouse type of facility to more office space or changes like that, and that can affect your energy use ahead of time and when you are trying to make your estimates.
So, what you are going see is, on this chart here, it looks a little fuzzy, and then that is why we allow for a little bit of flex or lee-way in terms of what the ESCO guarantees in savings and that ends up being a benefit to you, the agents to the ESCO. So, you may see estimated savings at a certain amount and then a guaranteed savings amount at about 90%, or so of what that estimate is, and that really, like I mentioned is a benefit to both, on both parties.
So, taking a look at what this looks like year to year during your contract, your actual savings will fluctuate, but they should always exceed the guaranteed amount. Here, you are going to see the contract year along the bottom and the savings reflected by the black line. You have an estimated amount and a guaranteed amount, and that, like I mentioned, that guaranteed amount might be 90% of an estimate, or so. Then, you see you realize the savings on that black line, and in year six, in this case, there is a performance, there is a short fall. The savings aren't realized. But, because it's a performance contract, and assuming that the, the performance is a result of a failure of equipment, or it's the ESCO's fault, in this case, the difference between the actual savings and the guarantee would be reimbursed by the ESCO. The way we see that handled is typically in a reduction of your payment for the next year, while the ESCO comes in and gets that equipment operating back to its original design intent to meet the savings. We also see in some instances where the savings just aren't going to be there, you could come to an agreement to install additional measures, or come to other solutions to get that savings mark back up to that guarantee. It's rare but, in some instances, the ESCO will actually, or could actually cut, you the agency, a check, for the difference, if there is not another way to resolve it. Typically we would see that toward the very end of a contract, where there isn't another year or two to reduce their payment and the agency to be made whole. Again, this is rare case, most contracts will not have, short falls, as we've seen.
So, looking at how savings are measured, the IPMVP, or the International Performance Measurement and Verification Protocol, is a good set of guidelines that you can refer too. The Federal Energy Management Programs, guidelines, FEMP guidelines, version 3.0, like I mentioned earlier, available on the FEMP website, those are adapted from the IPMVP, so based off an international standards, and they present four options for measuring particular measures. Options A and B are retrofit isolation measures, and by that I mean they're measured individually. You have a piece of equipment that would be either spot checked or measured continuously. Then, options C and D are more whole facility measurements. If you are looking at a measure that is going to generate electricity, like a large, like a wind retrofit or solar panel s, or what not, you might just put one meter on that piece of equipment and measure it against your whole utility bill. You wouldn't necessarily want to do an option C, for a lighting retrofit, because the overall impact of a lighting retrofit on your total utility bill may or may not be significant and if it's not, most likely it's not, it's not significant enough to be able to see the difference on your utility bill, because of other fluctuations, energy use, we talked about other factors that weigh in to your bill month-to-month. It probably would be better for you to measure that particular ECM on a spot check, and using engineering calculations. So, you'd look at base line use, the energy required to run, say, a certain amount of lights, for a certain amount of hours, and then you replace those with more efficient lights, say you go from a T12 bulb to a T8, you go with a more efficient type ballast, electronic type ballast, you're going to save some energy, maybe the operating hours about the same, but you would go in ahead of time, measure what those lights are producing, multiply it by the number of lights and the hours. Then, go in after the measure has been installed, do the same calculation and that difference then, becomes your savings. That's in option A.
Option B, just to describe that a little bit more for you, would be, say you are running a boiler or a chiller, and you want to measure a continuously. So, you can take the area under a curve, pre and post retrofits and knows exactly what the savings are, rather than flat lining it. That can make the most sense for those types of measures and lastly Option D, is mostly seen with computer simulations. Where we see this with the new building retrofits or plans, you may model the savings and then, you know, verify after the fact, and compare two different models of two different designs and calculate your savings that way. Option D is a lot less common, we see mostly A, B and C.
Here is just a quick graphic that shows a meter on the outside and just demonstrates how Options A and B are inside the facility or retrofit isolation and C and D are whole facility or at the meter approaches.
Ok, now the risk responsibility and performance, you see the guy walking the tightrope on here, a lot of times this can be a balancing act in a long term, kind of negotiation, as you're developing your project. Some of the financial risks and operational risks are generally handled by the agency. And this is, again, kind of a general, more sweeping comment. They're all individually negotiated on your matrix, the ESCO will propose an approach, you can comment on that and propose something different, or require something different if you have, if you know what your requirements are ahead of time. And then the performance rescue is generally handled by the ESCO, and it's inherent in the performance contract that the ESCO responsible for equipment performance. Now the agency can take on things, like operations and maintenance, repair and replacement of equipment, if you feel you have the staff to do that. Just be aware, if you are going to do that, that the ESCO will be monitoring you to ensure that you are doing that up to the standard appropriate to maintain your equipment and vice versa. If the ESCO does it, you should ensure that they are doing that appropriately as well. One kind of key point to mention on here too, from looking at some contracts is the operations and maintenance costs. It's important to consider what that might cost you as an agency, if you are going to handle that. Especially if you are adding a lot of new equipment, that's going to require additional operations and maintenance above and beyond what you currently have. And, consider those costs in your overall life cycle cost determination and then looking at the performance contract on the whole, and really make sure that you understand the total costs are going to be, for what you are signing up for. Especially, if you've got a contract, that's going out to 25 years, towards the maximum of the contract term and you're taking on the operations and maintenance as well, it may not be as cost efficient or effective as you assume it is, or as appears on the contract, so just something to be aware of and to do your due diligence as an agency, and saving the government money.
Prepare and replacement, this is generally done best by the ESCO, for complex measures or renewable measures, most often is the case that the agency doesn't have the staff or capabilities to do repair and replacement and those types of measures. You can set up an escrow account and your performance contractor in the construction period. Say you have some construction period savings, I am back tracking for a minute, so you install your lights for string of your construction period and you are working on installation of boilers and chillers or renewable measures or what not, and you partially accept that ECM, so you can start realizing some savings from the lighting, while the other equipment is being installed. Those savings could be put in an escrow account and you could use that as a pre-performance period payment and you could also maintain an escrow account throughout the life of your contracts, so that if you do have excess savings in any given year and you want to put that in toward the escrow account so that at the end of your performance contract term, you might be able to buy out of the contract a little earlier. That can be a viable option for you as well. That's getting into the weeds a little bit, about performance contracting and we can discuss more of these things at the performance contracting workshop that Roger will talk about, later down the road.
We have another question coming in here, mentioning "How do you handle with reduced energy usage through retrofits, if you are saving energy and in response power company increased your rate since your consumption dropped?" You know, that's, one of those instances where if you're looking at rate increases or the risk of those rates, I'm going to go back up to the risk responsibility and performance matrix here, energy costs are a financial risk and so, that is something that you need to consider ahead of time when you are looking at it. It is unfortunate that a company would, or a utility would do that to you, I would say, be aware of different ranges, if they have different rates for different ranges of use, ahead of time, so, you know what's going on. You know, again, back to that chart of energy costs increase; technically you have more savings than you would of, if they had increased your rate and you had not done a performance contract. Because, you have installed more efficient equipment, you are not using, as much. That question is really kind of a special case and I suppose we can talk more about that offline.
Moving along to a brief history of performance contracting in the United States, back in the 70's, you were looking at an energy crisis and you started seeing some shared savings contracts that were being tested as a way to combat rising costs in energy. Companies or individuals would come out and realize that if you install more efficient equipment and you can benefit, you know, their customer and share in those savings that could be a viable business model for them. That kind of grew into the ESCO industry and people starting to realize that they can actually be pretty confident in the performance in their equipment and so much they'll guarantee savings and that formulated the ESCO model, as we know it today. In 1985, the Federal Government authorized the use of performance contracts, through the NECPA (National Energy Conservation Policy Act) I believe that was through a federal omnibus spending act at that time. Moving through there, the industry started to grow, getting into the 1990's, we saw a period of de-regulation and improved technology, where a lot of these technologies really started to take off. There was rapid industry growth. A lot of consolidated energy companies were getting into the game, utilities was major players. Some of the first federal projects were awarded. Then moving on into the 2000's, with the collapse of ENRON, and other re-regulation of the markets, a lot utilities got out of the business and started doing either just standard business models and selling power or I'm looking at utility energy service contracts and not so many of them were involved with performance contracting, anymore. Now, just kind of catching up to 2005 or 2010, we're seeing, you can argue this even before this as well, a national refocusing on energy and climate. We had the Energy Policy Act (EPACT) in 1992, and again in 2005, increasing energy production or energy efficiency requirements. The Energy Independence and Security Act of 2007, numerous executive orders, I will talk about them in the next slide. One positive note to end this slide with would be that over 257 federal projects have been awarded for 5.6 billion dollars in guaranteed savings. As of 1998, to March, 2010, so a fairly recent date, widespread use of this technology, it's encouraged by legislation, or rather by an executive order and we're seeing it's benefiting a lot of agencies and can be a really good way for agencies to get the retrofits they wouldn't be able to do otherwise with appropriations.
This slide here, Legislative and Regulatory History, is more for your reference, if you want to print out the slides and you want to know what you need to refer too, if you are looking at a performance contract, this gives a pretty good summary. It's not all inclusive, but it'll give you generally the goals you need to try to reach, the authorizing legislation, guidance put out by the Department of Energy and others, the executive orders that would refer to it or refer to the goals that performance contracting could help you achieve. So, here is a good list for that.
Now, looking at Energy Service Companies, they all have various business models and approaches and this is just going to be kind of a little pinwheel here of roles that the Energy Service Companies can play. They can be your advocate, your project manager, a lot of them sub-contract a lot of work, they can serve as service technicians, auditors, verifiers, proposal writers, installers, partners, financiers, salesmen, engineers, manufacturers, contractors, and comprehensive solution providers. So, it's a, there's a whole host of roles that an ESCO can play and the ESCO's will all be the experts in different areas or may subcontract out different roles or functions but they really can act as your "one stop shop" to help you get your facilities upgraded and efficient and help save you some money.
Now I'm going to pass off to Phil Voss, and he's going to describe some of the agency approaches to performance contracting and get into a few project examples and some challenges that he has seen with performance contracting in Indian Country.
Thank you, Dustin. As Dustin mentioned, we are going to get into a couple of examples here and starting with the overall approach that could be taken to a performance contract for agencies that have a Native American focus. Keeping in mind, a rule of thumb that stand alone projects probably require a project investment level of $2 million or more to both attract the ESCO interest and to really be worthwhile for the government as well. One way to get there with some of these facilities that could be small and remote, could be at the agency level, the Department of Interior, for example, could bundle other Department of Interior facilities with your Indian Affairs Facilities and make a larger project. Health and Human Services could take a similar approach with Indian Health Services and other HHS facilities to make a large enough project to build attracting interest to produce enough energy savings to create a viable financed project. Another approach that has not yet been done, but could potentially is the possibility of an inner agency agreement between Interior and Health and Human Services, given the relative location of these Native American agencies. I would say that this would be very complicated at the agency level, so it's a little bit complex to get into exploring that opportunity on a webinar, but that could be a possible discussion item for the Denver conference. The point being combining those sights would increase the investment level and the attractiveness of those projects. The other and more common approach is the director level approach, where you have Indian Affairs looks at this from a regional level or a facility level, to bundle multiple sites into one project contract where's the project at a single facility may not be large enough to be feasible and may not provide enough energy savings to result in a financeable project and we'll talk about some examples of Bureau of Indian Affairs and Indian Health Services, both approaching it that way. One question, that tends to come up, is, so you bundle these facilities together, for example, 5 BA facilities that are of a different size, there's different energy use, different energy savings potential. "How do you divide that up and how do you pay for that savings?" One method of doing that would be, bundling all of those facilities into one project, where there's, you look at it as if it's a single investment amount and a single savings stream. That's the most typical way to do that. Another method may be, to bundle all of those facilities into that single project, so you have a single payment stream and the ESCO would see a single savings stream from that, but, individually, the directors may want each facility to be cost effective and only pay their savings share of that. So, in other words, a challenge there may be that, you may not get a large chiller project at one facility that has a small amount of savings, you may not be able to bundle the ECM's together, quite as effectively and we'll discuss one example of how that was handled.
For example of the remote facilities and I apologize if this map is a little bit light on your end, but, for example, one of the agencies that we worked with was the Indian Health Service, Aberdeen area, which crosses North and South Dakota, and you can see here, that they have a number of hospitals, a number of small health centers and a number of, very small health stations across those two states, so we'll talk a little bit about how they ended up approaching their energy project.
So, some of these challenges, one of the obvious approaches is that this does require bundling, both of ECM's, Energy Conservation Measures, and facilities and what we mean by that, is bundling at the ECM level, bundling things like lighting with motors and chillers or boilers, and at the facility level, going so far as to bundle hospitals together, a group of hospitals, or a group of BIA schools or other facilities, for example. Again, trying to get to that, at least a minimum, $2 million and given the remoteness and location and at transaction costs certainly increase with remote facilities, sometimes those, that minimum could go up. We've seen these projects work in the ranges form $1-$5 million, so far. So, some of the challenges as well, there may be a variety of Center Directors or Hospital Directors that have a varying level of knowledge of ESPC, varying opinions on ESPC, and varying opinions on how they want to manage their facility and have their energy projects addressed. So, that's one of the items to address with the acquisition team, for example. And, various levels of facility expertise and maintenance practices, we see at times, sometimes the maintenance is completely contracted out, other times it is always handled on site, sometimes there may be proactive preventive maintenance, sometimes it may be strictly reactive. So, determining how that is being handled now and how that can be improved with an ESPC, would be an important consideration.
Dustin went through the measurement and verification options, and we would generally see these being an Option A, due to the costs. The options, the costs of the options certainly go up, given logistical challenges and remoteness, but we also, because of the logistical challenges and remoteness see simpler projects happening at these facilities. So, we try to reserve the Option C and D for the larger, more complex projects and Option A and B for the simpler, straighter forward projects that we can address through retrofit isolation. So, one example of, for the Aberdeen area, at Indian Health Service Region, we were not able to include the small health centers and health stations simply because there was such a small amount of energy use and such a small amount of operating time, at those facilities. Essentially, some of those facilities may only be open a few hours a week, so, including them in a larger project became a little too cumbersome when it came to the economics. We were able to include all 9 hospitals and they determined to do this project at the area level, where the savings would accrue and they would pay the ESCO, from the savings stream accrued at the area level, because they managed a budget at that level, anyway. So, in other words, there were hospitals that may have gotten larger projects with smaller amounts of savings and they contributed to the overall pot. This was about a 2.1 million investment, with over 340,000 in annual savings and you can see about 1/3 of that was actually operation and maintenance savings. Dustin talked about the other savings, in addition to energy savings, as well, this came as a result of combining some of the O and M contracts that they had out there and better equipment that required less maintenance also. It was a fairly simple project including lighting and controls and some HVAC, primarily chiller, chilled water pumps, HVAC motors, things like that, we did not do large chiller or boiler projects there. The, you can see from the investment savings, it was about a 6 year contract simple payback, but the contract term was about 15 years, because it included the O and M services, I believe it was about a 12 year contract term prior to including the O and M services, but that extended the contract term, which has some benefits, because they got a considerable amount of savings out of including that. It also, anytime you add a year to the term, you increase your financing costs, so that's just something to consider going forward.
I will mention also, one other brief example of an Indian Health Service Project that did not work out. That was essentially because they, the directors of the hospital preferred to take a stand alone savings approach. In other words, they felt if they were reducing, if they were producing additional energy savings they didn't want to contribute that to the overall project, they wanted that to be realized at their hospital and that ultimately resulted in some of the longer payback items being taken out and not having a large enough project to attract a financed project.
So, another example for Bureau of Indian Affairs, the Sherman Indian School, this was a 500,000 square foot school that had over $450,000 in annual energy costs. So, it was fairly expensive per square foot energy costs. The goals that they were trying to achieve, they had a large maintenance back log that they simply were not able to address, given the money that they were spending on utility costs and they needed to improve the comfort at their facility as well. So, this was addressed through an ESPC by improving the lighting, led exit signs and occupancy sensors. They also installed a 6.9Kw Photovoltaic system, which they incorporated a computer in the lobby so that they could incorporate the information coming from this into their science curriculum, as well, so they're using that as a teaching tool. They did some fairly straight forward HVAC projects, upgrading roof top units and economizers, etc. and put some time clock controls to control the operation of equipment, when people weren't there and ultimately it resulted in nearly 40% energy savings and over $30,000 in annual O and M savings, for this particular project.
So, there is a variety of other opportunities out there, at this point what's been done with these two agencies, the Bureau of Indian Affairs has done about $12million ESPC projects and over the entire contract term there's almost $30million in total savings there. You can see that there are four projects that they have undertaken, Tomawa, Sherman, and the Southwest Indian Polytechnic were all individual projects, Haskell and Riverside, even though they were in different states, were actually bundled together into one project to make it larger, not only more attractive to the ESCO, but more cost effective for the government to undertake that as well. For Indian Health Service, at this point, they've done one project, which was the one we just discussed a little more than a $2million investment and over $6million in total savings, over that contract term, as well.
We will be to address any questions that you have on those particular projects, as we go forward, and I will pass this back to Dustin to talk about how to get started again with ESPC.
Thanks Phil! Well, if you want to get started on one of these projects, your first point of contact is the FEMP, the Federal Finance Specialist (FFS), if you're considering using the Department of Energy's IDIQ contract. The FFS has been divided up into regions, so if you're in the western region, your point of contact is Scott Wolf, his contact information is on this page. The Midwest region, plus some international states, is Gordon Droor, Tom Hatterey covers the North East region and other international states, or international sites through the State Department and then Doug Calbreth covers the South East region as well as some European western hemisphere sites. I mentioned those because the DOE IDIQ contract is now global, so, these guys are divided up all over the world, but, mostly focused here in the US, so, feel free to contact them if you have any questions about a particular project or even if you're just considering not using the ESPC per say, or you are not really sure what mechanism to use, or what your opportunity might look like, but you know you want to do, do something, at your facilities and maybe you are not sure on how to finance it, or how to get your project completed, they're a good point of contact to have that discussion with and they can help point you to some solutions and provide you objective advice to get you the best contracting mechanism, which may or may not be performance contracting.
I saw another question come in here it says "Are casinos allowed?" The answer is Absolutely! I think that casinos would be a great opportunity for a performance contracting. If you consider the amount of energy and lights and things that go into a casino, you can see some substantial savings at casinos and I would think that a casino would be an opportunity that ESCO's would "jump all over" as well. Just for that very reason, in that you are going to see big savings, a lot of retrofit opportunity there and I would also ask them that may be you can consider bundling casinos with some of your other facilities, if you can, that wouldn't be able to support themselves, as standalone projects. You may be able to carry some savings from casinos over and combining your project and get a greater benefit for more sites, so, think strategically when you are considering these projects and consider bundling, consider working with other, whether it's hospitals, or office buildings, or other agencies even, you know, try to put your heads together and come up with an approach that's going to provide the most benefit, to all of you, that types of projects that many of you would not be able to do otherwise, so, things to consider.
The last slide here, for getting started, if you do choose the Department of Energy's IDIQ, there is two paths that you can take, I apologize for the slide, it's probably not that legible, but really the gist of it, is showing there's two methods you can take under the IDIQ. One is the government initiated, that I mentioned earlier and the other is, a contractor initiated method and the key takeaway here is, if you go with a contractor initiated method, or say you have an ESCO come to your door and hand your proposal and say, you know, hey, we would like to do work with you, here's some opportunity that I see as a viable at your site. Under DEO's IDIQ, if you accept that proposal, you will then need to publish a notice of requirements to all of the other 15 Energy Service Companies and not divulging any of that original ESCO's proprietary information, but just listing general requirements and putting it out to bid for all of the ESCO's. If you look at a government initiated method, say you have a general idea of what you are looking for, you can, in a way, save yourself a step, by sending that out to all the ESCO's and seeing whose interested in working with you and working from there and the government initiated method divulges into, or I should say divides, excuse me, into two separate options underneath it. The one along the left, just shows any agency of evaluating contractors, based on information that's less significant than a preliminary assessment proposal, so, not quite the level of detail of a preliminary assessment and you can get into the weeds and learn more about that later at the workshop. The other option there, along the right hand side of the government initiated method, which is the one on the left of the screen, shows an agency, evaluating responses based on a preliminary assessment proposal, so, in the case that you are able to give the Energy Service Companies sufficient information, an opportunity from what you provide to them, as well as maybe having some walk-throughs of your facilities, where all ESCO's would be invited and can take a look at your facilities and all be given fair opportunity. You might be able to get preliminary assessment proposals from them and select your contractor based on that proposal, thus saving you some time and moving you, or giving you the ability to move directly into an investment grade audit, after you select your ESCO and again, that can be a way that you can save some time and there are some challenges with it. It's probably best for a later discussion, but, looking for ways to streamline the ESPC process even when you are doing that.
Almost there, so in review, hopefully now, after going through this webinar and seeing some of the slides and getting some insight from Phil about some projects and things, that you'll be able to define an ESCO and an ESPC. We like to say, that you can spell ESPC now, in our federal workshops. Hopefully you can explain savings as they occur before, during, or after a contract, again, referring to the example that you can draw on a napkin and explain to someone that here is how an ESPC generally works. Hopefully you are able to determine appropriated measurement verification method for different types of measures that you would be considering, using A and B and C and D, and referring to FEMP guidelines, regardless of what contracting mechanisms you decide to use. Then, hopefully you can explain how ESPC's came about, how they developed, you know, from shared savings contracts, moving into guarantying equipment performance and turning into what it is today, as well as exploring some challenges to ESPC at an Indian Country. So, if you have, say you want to work with another agency, there is some interesting combinations you might be able to do, to bundle facilities and measures and help each other save, so I would challenge you, to look into that and bring your questions and concerns and your issues and everything else to the workshop, if you are able to attend.
Then, also refer to some past project examples and learn from those. So, in short I hope that this is help to you gain some knowledge of performance contracting and it helps you build some confidence in being able to move forward and saving energy at you site and implementing projects. With that I'm going to move it along to Roger, who is going to describe an upcoming workshop and then we'll take some time for questions and answers. Thank you for your attention.
We do have a follow up meeting coming in July 13th, 14th, 15th we don't have the detailed outlined agenda yet, but the 13th and the 14th will be Tribal Business Development, Project Development, Issues regarding how do you deal with the private sector in terms of coming up with the project deal, if you are working with the outside world and then the third day, we want to come back and drill into this ESCO opportunity in more detail. I do want to mention here, we have a couple questions coming that are really, very much on target with the challenge here, well Phil and Dustin have very nicely described the way the federal system is set up to work, Tribes are not part of this federal system. We have federal facilities in Indian Country that we know are being retrofitted, we also know that there are economies who scale, and what we want to begin to move towards is, first, the question of "How do we piggyback on ESCO visits to a federal facility and Indian Health Service, BIA School facility?" They're looking at those things at the same time, provided opportunity to see whether it makes sense on Tribal lands, which are collocated or home of many of these federal facilities, as long as an ESCO is in the neighborhood, to get people smart enough to ask the question, "Gee, does it make sense here for my Tribal Council building or my Fire station, or other Tribally owned facilities, that won't automatically come under the framework of one of these IDIQ contracts, but, we could in principle, fix the schools and health clinics and Tribal facilities at the same time under a parallel contract, that would basically piggyback on the federal contract, that exists, that brought the ESCO's out there in the first place. So, there is a number of contractual details here that would need to be worked out, we do see it becoming widely used throughout the federal sector as a way to get projects done without having to have all the cash up front to implement the project. It begs the question, "Can we do the same sort of thing with Tribal projects, either as energy savings contracts, or even up through the scale of a wind farm?" "Is this a mechanism that can provide a win-win situation, get renewable installed in Indian country using an ESCO like framework, where somebody else is carrying the debt and there is a revenue stream that can pay off the project and leave the project in the hands of Indian country in the long run?" So, that's kind of the game plan that we have to explore and find out whether it is a pathway worth pursuing or whether it just simply doesn't make any sense at all, so, we invite you out to Colorado, in the middle of July here to participate in that conversation.
I want to answer a question that came in earlier, slightly differently, we know Tribes are looking at possible manufacturing facilities, solar manufacturing facilities, Tribes, if they have the skill base, certainly could and they had most of these projects are being financed by the financial community after the investment grade audit is being, has been pulled together. So, even while some of these ESCO's started out, self-financing it, most of it's being done simply through bank loans that capitalize the projects after the investment grade audit has been made. There's no reason why that same sort of framework can't be done with projects in Indian country as yet another mechanism of moving these projects forward, without having big bags of money to bring to the project. So, that's what we have, let's see if we have any other questions here.
I have one question that says that "Does the payments for financing go to the ESCO, then to the financing institution or directly to the financing institution?"
That's a good question, because under the federal model, the debt's on the ESCO. So, the ESCO is credit worthiness will weigh into the type of interest rate that you are able to get, and your payments would go to the ESCO and the ESCO would take care of their financier. Under a state, local or individual type model, that's different. Essentially, you have payment to the financier and a payment to the ESCO, you've got a situation where you are looking at the credit worthiness of the Tribe, or the company, or the customer, whoever it may be weighing into getting your loan upfront, for the ESPC and the ESCO can help arrange that and that's typically what they do, help go after bonds or work with you to try to obtain the financing.
But there is another specific question on here that says "How Public Law 47638 works with the ESCO and if the Tribe takes over the program through self-determination, what happens with the ESPC and is the ESPC transferrable?" I am going to refer to Phil on this one.
Yeah, this was something that we addressed in a couple of projects, not addressed in the sense that it has actually happened, so, some of this is to be determined, but, I would say, a couple of things about this. One, communication is absolutely key with the IHS Aberdeen area, the area did not just decide to do a project and carry it out. They communicated very regularly with the hospital director and with the Tribal Councils, so that they understood what the area understood what the Tribal Council's desire was and the Tribal Council understood the project that was happening. The same is true for the other areas where there was a Tribal Council involved and ultimately this hasn't happened yet bit I would say that the communication is very key and whether or not it's transferrable, I think it is to be determined. If a tribe decided to take over a facility, then the contract could be terminated for convenience, in other words you could buy out the remainder of that contract term, or the Tribe and the ESCO and the government can sit down and determine that what was left on the contract term, the payments that were remaining need to be made, the projects that were done, that the Tribe would take that over. I think that's a little bit of a grey area, that we haven't addressed or that we haven't experienced directly yet.
Another question we got coming in here, it says "Along the same lines of the energy company rate question, what are agencies doing to manage energy and water contracts, especially at multiple locations where tariffs and rates may vary?"
You know, bundling contracts, like you and other agencies are doing. Rates may vary at different sites, ultimately, what you would do is, take an estimate of, or an escalation rate, for each individual site, and then you take the overall project of multiple sites combined on the whole and try to address it that way. There's ways, I'm sure that agencies have experienced that in the past and can into it. Then, it would be another question that we could follow up with more, that's a good question for the workshop, something we can get back in touch with and try to find some specific examples about that may relate specifically to that type of question.
Another question that we see coming here is "Can a federal agency bundle with the Tribe?"
I don't have the answer to that one at the moment. I don't know if Phil or Roger, if they've got a comment on that. That would be a good one for us to look into, to answer, but I just wanted to acknowledge that we saw your question on here and didn't ignore it.
Another one coming in "Can default be covered with insurance?"
An ESPC, you are looking at, if the default is, it depends on whom is responsible for it. There is, you can terminate for convenience, if the agency, say you've done a performance contract and you've got a facility that was originally part of it, that is determined that is no longer going to be used or it's going to be demolished and you would need to terminate that particular, any measures that are associated with that particular building and so doing, you look at your cash flow of your contract and it no longer works. Your payments would exceed your savings, in that instance and what you are looking at is a termination for convenience type scenario, it would be a T for C, just like you would another and other contracts. Now, termination for default is the other side of that, if the ESCO defaults and I would say, it is very rare that run into a situation termination for default. There's has been some issues or things with ESCO's and contracts in the past, but generally you work with them to try and resolve them to the best of your ability and it really falls back to performance period or life of contract maintenance and that's one issue that we see in performance contracting that, like I mentioned earlier, you get your contract signed, you are not done with it, you really got to start due diligence, recording savings, witnessing and making sure you're savings are there, year to year, keeping on top of issues, maintaining documents, if you have personnel turnover, people changing, roles, making sure that you have some sort of documentation there, that you can pass along to the next person that comes along that gets them up to speed fairly quickly on your contract. You can really help avoid a lot of those situations that would end up in having to look at, you know, termination for default or for convenience.
We have another question here that deals with sovereign immunity and issues presenting challenges and problems to ESCO's. This, like any other project, with the outside world is going to be one the issues that need to be negotiated. I don't think anybody is going ask for complete waiver of sovereign immunity, but limited waivers for particular facility just like any other contract would have to be negotiated and dealt with. A lot of up front work here and putting both the tribe and the ESCO's in this loop, that's what we want to explore in July and see whether we can find room to actually use this mechanism as a way to get things done in Indian country.
Just referring back real quickly to the question of can default be covered with insurance, to answer more directly, performance bonds can help with that issue.
Let's see if we've got any other ones coming here. Anybody else have any other question that they want to throw in here?
Let's see if we've got any other ones coming here. Anybody else have any other question that they want to throw in here?
If we don't have any questions, we'll bail out early, thank you all for attending, we will have another webinar next month, stay tuned to the emails, we'll let you know when and where and once again, join us here in July in Denver, if it makes sense we will have a flyer out on that program, hopefully in the next couple of weeks, so thank you all for your time.