Energy Saving Performance Contracting (ESPC) Basics (Text Version)
Chani Vines: Hello. We'll be starting in five minutes. We're just waiting for additional attendees to sign on. Again, this webinar will begin in a couple of minutes. We're allowing additional attendees to sign on. Thank you for your patience. Before we get started, I'd just like to go through some housekeeping items.
Please know that this session will be recorded. All attendees' phone lines will be muted. Please submit your questions via the question window. Questions will be answered at the end of the session and the presentation slides, along with the questions and answer summary, will be sent out to attendees after the training.
Bulkley-Hopkins: I'm sorry for technical difficulties. It seems like I am not able to move the screen, Jennifer? Can you please help me with that? Thank you.
Jennifer: Did you need me? Okay.
Vines: Hello. My name is Chani Vines and on behalf of the U.S. Department of Energy I'd like to thank you for joining us for this webinar on Energy Savings Performance Contracting Basics. This is presented as part of the U.S. Department of Energy's Technical Assistance Program. Next slide. The DOE technical assistance program provides state, local and tribal officials the tools and resources needed to implement successful and sustainable clean energy programs. Through, TAP, DOE has launched a $26.4 million effort to assist EECBG and SET Recovery Act recipients.
How can TAP help you? This effort is aimed at accelerating costing, improving project and program performance and increasing the return on Recovery Act investments. TAP offers one-on-one assistance, extensive online resources including webinars, events, calendar, TAP blog, best practices and project resources and facilitation of peer-to-peer exchanges on the topics including energy efficiency and renewable energy technologies, program design, financing, performance contracting and state and local capacity building.
With the launch of the Recovery Act, TAP introduced the Solution Center, an online portal for technical assistant resources like back - best practices, templates, webinars, event calendar and TAP blog. We are continually adding the resources and scheduling additional webinars on advanced ESPC topics like pricing and financing. You can also follow the link on the Solution Center to submit a technical assistance request. Here is the list of upcoming webinars, which are also listed on the Solution Center. As you can see, the Energy Savings Performance Contracts, Pricing and Finance webinar will be hosted on OctoberÂ 12. I hope you'll be able to join us then.
Now I'd like to introduce you to our webinar presenters from the Technical Assistance Team 2 who specialize in energy savings performance contracting. Karl Berntson is a senior engineer with over 30 years of experience in the energy industry. For the last ten years, he has developed and managed the energy savings performance contracting for the state and local governments, working with the state of Maryland and Prince George's County, Maryland. He has demonstrated success in selling and implementing ESPC projects from - for Maryland and saving the state over $190 million in energy expenditures. He has an additional 25 years of experience in energy efficiency and renewable energy industry including efficiency in geothermal, biomath, solar and other technologies.
And our other provider, Irina Bulkley-Hopkins, offers 15 years of experience in the energy industry, specialized in policy and regulatory analysis, project and program management, operations planning, process and state development, implementation and improvements as well as energy marketing. Irina has experience serving on both sides of the process, at some points representing federal agencies such as Department of Energy's National Renewable Lab and the Department of Energy's Western Area Power Administration as well as working in the private industry with AECOM Government Services, a major international government consulting firm, and Xcel Energy, one of the nation's leading utilities. Irina will be our first speaker.
Bulkley-Hopkins: Thank you, Chani, and thanks, everyone, for being with us today. I would like to talk to you a little bit about ESPC Technical Assistance Team role and Team 2, as we call ourselves. We have several ESPC subject matter experts who are available to help you with ESPC issues through the DOE Technical Assistance Center that Chani referred to earlier. That is in addition to Karl and myself.
Team 2 deals with the ESPC-related issues and develops resources and training materials such as this webinar, for example, that can be accessed through the Solution Center. Team 2 is developing future webinars and other tools for expanding your knowledge about ESPCs, and we're also in the process of developing tools for peer-to-peer exchange for those of you who are already Energy Efficiency and Conservation Block grantees. We will continuously add resources to the Solution Center and, as Chani mentioned, future ESPC webinars will be happening as well. There will be one on ESPC financing and pricing on OctoberÂ 12, for example, so please feel free to join us on that date.
Now that you know where to find information and how to ask for help, I would like to focus on our agenda for today, and today we will learn some legal provisions of the Recovery Act that affect you doing energy savings performance contracts. You will learn what an energy savings performance contract is and what it is not, why do an energy savings performance contract and not any other way to achieve energy savings and how to pay for it. We will go over some basics of the ESPC process and how to select good ESPC candidates and also describe some ESPC financial basics. We will also go over some enabling legislation as far as local and state legislation and then as any process, ESPC also has some challenges that you may potentially face, and we will offer you some options for turning those challenges into advantages.
As far as the legal provisions that apply to the Recovery Act, one of the first ones that you may have already heard about is called Buy American and it is also known as Section 1605. Basically, this provision says none of the funds that are made available by the Recovery Act may be used for the construction, alteration or repair of a public building or public work unless all the iron, steel and manufactured goods used for that project are produced in the United States. I'm sure that many of you right now are having this question, "What if some of those materials are not available? What if some of them cost unreasonably high and what if some other issues arise?" Yes, there are waivers and they apply to specifically non-availability of materials, unreasonable cost and inconsistency with public interest, so you do have to comply with Buy American, but you can also obtain waivers.
Another provision that I would like to address is the Davis-Bacon Act, which basically requires all contractors and subcontractors to pay laborers and mechanics prevailing wage rates and fringe benefits associated with those wages. The wages are determined by the Secretary of Labor per the locality, and those requirements spread on to any subs, so you as a prime contractor, if you decide to be a prime contractor, will be responsible for lower tier contractor compliance as well.
Next one is the National Historic Preservation Act, known as NHPA, and basically prior to being able to send federal funds to alter any structure or site, you as a grantee will be required to comply with Section 106 of the NHPA which applies to historic properties or sites listed on or are eligible for listing on the National Register of Historic Places. So you as a grantee must then contact the state historic preservation officer to coordinate the Section 106 review. Usually, however, only when the services alter the visual exterior of the building or severely impact the interior craftsmanship such review may be required. Otherwise, you will probably not be required to do the NHPA review.
And, finally, I would like to address the National Environmental Policy Act, known as NEPA, because before approving grantees' activities, Department of Energy performs a National Environmental Policy Act - NEPA - review and either issues a CX, which we know as categorical exclusion for actions that are determined not to have significant impact on environment, or it determines that an environmental assessment is required and possibly even environmental impact statement is necessary as well. Again, generally, facility upgrades and traffic lights, streetlight replacements are given the CX; however, any modifications to the type of activity that was approved must be communicated to the project officer who can help you determine if another NEPA review by the Department of Energy may be required.
So now let's try to answer this question: What is an ESPC and how can it help you? First of all, an ESPC is a contract between a grantee and an energy service company, which we refer to as an ESCO and this specific contract has a few distinct parts to it. First of all, there is an audit agreement which stipulates that the ESCO shall do an investment-grade audit of the facilities and suggest all possible energy conservation measures for you as the owner of the facility. Then that same ESCO will be developing a detailed implementation proposal and after you and the ESCO negotiate and agree upon the scope to be implemented, the actual ESP contract will be signed and the ESCO can be allowed to begin the installation.
After the installation is complete and commissioned, the project will move to the service and maintenance phase and sometimes there is a separate agreement written for that; sometimes there is not. However, if there is a separate agreement for operations and maintenance, it must be detailed in the ESCO's proposal ahead of time so there are no surprises when the time comes to sign the actual contract. As far as the ESCO is concerned, it must guarantee the energy savings and in case of a savings shortfall in any given year the ESCO shall reimburse the owner for the shortfall. With the energy savings performance contract, the beauty is that there is no need for capital funds or additional funds. You are basically just reallocating funds from what usually goes to pay your utility bills and instead pay for energy improvements. As we constantly advertise, this is a great contract because your energy savings pay for the project.
I would like to bring up the difference between state and local government ESPC and the federal ESPC. They're structured a little bit differently. In the federal market, usually an ESCO bears all upfront installation costs and also finances the whole project. The ESCO then gets paid annually from the savings that are being generated. In the state and local government, the financing is generally a separate contract between the owner, you as a grantee, and a financing company of your choice. So the owner, you as a grantee or the owner of the facility, would borrow the funds to pay the ESCO and put the money in an interest-bearing escrow account and then the ESCO gets paid on a regular basis during the installation for the work accomplished as it gets accomplished. It is not unusual for the ESCOs to be asked to help facilitate the financing, and they have longstanding experience in doing that even for the federal - for the state and local government markets, so it will not be a problem if you ask your ESCO to do that. I'm sure they will agree.
Now I would like to address some of those things that an energy savings performance contract is not, and it is important to note, especially to grantees who have never done an ESPC before, that there are no other contracts that adequately describe what is included in an ESPC, so please avoid the temptation of using an old contract such as a construction contract and modifying it generally because it doesn't work. Such contracts usually does not cover everything that must be included into an ESPC and consequently will be inadequate and create some problems for you later on down the road if you decide to use those. There are links to simple contracts on the Solution Center that can be very useful, and I encourage you to take advantage of those. It certainly is a lot easier than starting from scratch on your own.
I just want you to make sure when you use the samples that there is nothing in the contract that favors an ESCO over the owner, so it is very important that you involve your procurement and legal departments as early as possible in the ESPC process, especially if this is the first ESPC you and your organization are entering into. Frequently there are jurisdictions in your state that have done ESPC projects and are willing to share their documentation as guides, and you might even be able to utilize their contract, especially if it was issued by your state, so please check on those opportunities as well and see if maybe you can get a rider.
The very basic flowchart that I'm showing here, Karl will get into more details of that later, but we just wanted to share some very basic concepts here starting with an internal meeting to decide to use ESPC for facility upgrades and all the way through RFP development, request for proposal development, and finally the implementation stages and savings realization with the energy savings performance contract. And we're also showing here two basic steps for financing your ESPC, about which Karl will talk a little later in the presentation. This seems like a big slide, but ESPC encompasses a lot of parts to it per definition, and again it is important that your procurement and legal departments have an understanding of what an ESPC really is and how different of a contract it is when they review the actual contract language.
I would like to also note that if you have design and construction standards for the listed disciplines, they should be included in your ESPC contract by reference. Certainly I will not go over all of this in detail. You can see them on the screen. Those are just parts of the contract that you really need to pay attention to, but I would like to talk about some of them in more detail. One of those is facility energy audit. Basically, this is the process that helps you discover energy and efficiencies or new ways to save energy and this is when you need to review your utility bills from the past years, preferably a couple of years at least. Look at the data that allows you to determine which areas in your facility or in your operations may be using more energy than others.
This is also where you need to take a look at your building systems, review manuals and drawings of building equipment and mechanical systems, and the goal of that is to determine their type, size and age. This is also where you examine various reports and interview all the relevant stops to determine usage patterns and general condition of your equipment, recent maintenance schedules and so on and so forth, all of those things that basically affect your energy consumption and then later will affect your energy savings as well. I would also like to mention building management system design and installation because it is important to try and find out if your jurisdiction decided to use a specific building management system across the board, because this could eliminate certain ESCOs from competition. That is not to say that there's anything wrong with that. To the contrary, actually, having uniform building management system throughout all the facilities makes a lot of sense and helps gain some headways on the energy standards and finally for all the designs items listed here on this slide, the jurisdiction's design guidelines such as minimum equipment energy efficiencies shall also be included if they are available.
Now that you've looked in - at what is involved, you're probably wondering why do an ESPC at all, so now we're going to take a look at why a jurisdiction should consider an ESPC and how it actually helps leverage the Energy Efficiency and Conservation Block Grant funding for you. It is not a secret, especially these days, that capital dollars for facility improvements in any government today are very hard to come by, and the energy savings performance contract provides a method to make the long-needed facility improvements without those capital dollars that are so hard to find. Basically, the energy savings dollars pay for the improvements and most governmental jurisdictions never appropriate sufficient funds for facility management to keep up with the required equipment maintenance such as chillers, boilers, cooling towers, air handlers, pumps and so on, so an ESPC does provide the method for getting this done. It is either via equipment replacement or just repairs and overhauls, but you will be able to get this accomplished and again without capital dollars being involved.
Another good point is that per definition it is an energy savings performance contract, so it saves energy and the energy savings are guaranteed when you do that. By upgrading your HVAC systems and building automation systems, indoor air quality can be improved, which is not a bad idea, and in turn that improves the comfort level of the occupants and increases their productivity in the building, so this is a point for consideration as well and by utilizing the EECBG funds in an ESPC, energy conservation measures that have long paybacks, for example, and would normally not fit in to an ESPC can then be included and their savings help pay for additional projects. There is also something to say about avoiding the cost of delays because delaying the implementation of energy conservation projects has definitely a serious cost associated with it. It's not always immediately realized, but it is there.
EPA's Energy Star has, for example, a free portfolio manager that in turn has an excellent cash flow opportunity calculator and also has a cost of delay function, so I encourage you and recommend to use the Energy Star Portfolio Manager both to benchmark your facilities and to investigate the cost and payback of various energy conservation measures that you may be considering. And with that, I am going to turn this presentation over to Karl.
Berntson: Thank you, Irina, for getting us started, so now we will discuss a little bit about how an ESPC project is paid and here we have a project cash flow slide that shows the features of the ESPC. The ones that are most attractive to the grantee are the financing with no upfront capital required and the grantee - on the grantee for energy savings. The ESCO provides all the labor, materials, equipment, engineering design for improvement projects to reduce the energy cost. The contracts require the ESCO to implement the energy conservation measures - we call them ECMs for short - for the customer and guarantee the annual energy savings. It is those savings that are then used to pay back the loan to the financing company and, as stated earlier, if there is a savings shortfall in any given year, the ESCO reimburses the owner for the shortfall amount.
What this slide here actually shows is before the ESPC the grantee has a certain amount to spend for utilities and operation and maintenance. It's here shown as the grantee cash flow. The next bar shows what the cash flow distribution is after the ESCO has implemented the ECM. Utility and operation management costs are significantly lower, and if you wanna click then on - Irina - thank you - to guarantee savings used to pay back the loan that was used to finance the implementation and ESCO services and then measurement and verification. Then there might be some cash flow left over which is because ESCOs typically they do not guarantee 100Â percent of what their predicted savings will be. That is sound risk management on their part. So can you click again? Thank you.
After the loan has been paid back to the financial institution, all the savings are realized by the agency, and they can actually reduce the operating budget as shown on the third bar. Another click, please? Thank you. That's the end of that. It shows after it's implemented and paid back you have actually reduced your budget. New slide, please. What's going on? Sorry, we have some technical issues here apparently.
Entering into an ESPC contract then the ESCO shall be viewed as a long-term partnership. It can be for 15, 20 years or more. It's important that you're comfortable working with the ESCO you select. Check the ESCO's references before finalizing your selection. During the audit phase, the ESCO will develop a baseline energy usage based on the utility data for at least the preceding two years. It's very important that the owner reviews and understand exactly how that baseline is developed and what assumptions are made.
It's also very important to understand what parameters are behind the baseline, such as what the occupancy was of the facility during this last two years. What were the thermostat settings and what were the operating hours? Was it 7:00 to 6:00 or maybe 9:00 to 5:00? And those assumption they must be documented and agreed to and they shall be included in the final ESPC contract so if there are changes back in the future they can be accounted for.
The energy savings are reconciled once a year and the baseline is suggested, first for weather, heating and cooling degree base, and then for any of the other parameters that might affect the energy usage of the facility. Adjusted baseline means what the present energy use would be if the ESPC had not been implemented, so adjusted baseline sounds a little strange but it's very straightforward actually. Fundamentally stated, the total energy savings for a given year must exceed the total cost.
The ESCO guarantees the savings and should there be a shortfall, as we have said a couple of times, the ______ savings for you ______ year, the ESCO writes a check for the shortfall amount. Excess saving in future years cannot pay for shortfalls in prior years. It simply does not fit into governmental budgeting process. If you get check from the ESCO that goes into the general fund, and you can't take that and pay an ESCO for earlier shortfalls. That would have to go through the appropriation process. It gets very complicated. New slide, please.
Additional ESPC saving guarantees. Once the ESCO has completed the audit and they have developed a matrix of possible ECMs, the owner and the ESCO determine what ECMs shall be included in the final project. The ESCO develops the final proposed cost for each ECM and then the final proposal - proposed overall cost. Once the negotiations are completed and the contract signed, the final cost will not change unless the owner changes the scope. There should never be any ESCO-initiated change orders in energy savings performance contract.
The ESCO guarantees the saving, as stated earlier. In order to do that, they are in effect guaranteeing the equipment performance. Since the ESCO guarantees the savings based on specific equipment they installed and that it's operating properly, they should be responsible for any required replacement or repair of equipment they installed for the payback period of the project, and you need to make sure that that is covered in your contract. New slide.
ESPC advantages. The ESPC is a streamlined process. The ESCO performs the energy audit to calculate the savings, designs the project, installs the upgrades, arranges the financing if you want them to do that or you do that on your own, commission the energy conservation measures, performs maintenance and oversees measurement verification of the savings. If all these functions were to be handled separately, it would take numerous consecutive contracts and would be logistically difficult, costly and could severely tax your in-house resources. It was shown there is no need to wait for capital dollars to be available to do the facility operate. Future energy savings pay for facility operation. Now that is the real benefit of an ESPC.
As stated earlier, savings are guaranteed. Savings are reconciled on an annual basis and should there be shortfall in any single year, the ESCO shall write the check for the difference, and we have had said it several times and it is very important 'cause this is make sure that all of us have enough funds to pay off your loan. One of the most important factors in the ESPC is that it's a partnership between the owner and the ESCO that went back in some cases up to a quarter of a century, so that puts the responsibility, single-point accountability in the - on the ESCO. It's preferable to have an ESCO responsible for the service and maintenance of everything they install for the full payback period of the contract. That avoids finger pointing should there happen to be a shortfall, which, by the way, it's not a very common occurrence. On some contracts it might happen the first year and then the ESCO corrects the problem and in future years there are no shortfalls. Excuse me.
The ESCO selection is generally based on proposed ESPC for only single building and the audit cost for all the facilities to be included. By that method, the owner can evaluate which ESCO would provide the best value. The owner participates in the equipment, the subcontract of that selection. The ESCO cannot force anybody on you that you don't want, you know. You are part of the decision-making process, and you can tell the ESCO if there is some particular companies or particular brand of equipment that you don't want or if there's some that you specifically want. They will take that into account.
The ESCO can help the owner in getting the best financing options. They are used to doing that, and you should take advantage of their knowledge and understanding of the financial side. The IPMVP, which is the international protocol measurement verification, has established performance measures protocols followed by the energy performance contract in the industry, not only in the U.S.A. but worldwide. We might have a webinar in late fall covering that, but we don't know that for sure at this point.
And then we have the ESPC process. Now let's take a brief look at the ESPC process. At first glance it might seem a little complex, but it follows the same basic principles of other projects, so let's move on. In order to get an initial feeling for what an ESPC could accomplish, an owner sometimes decides to have a preliminary audit done prior to engaging an ESCO. This is by no means necessary. Most owners have a feel for how their facilities are doing as far as energy efficiency, and it's overall more cost effective to select an escrow and get the investment-grade audit completed as soon as possible.
In order to select an ESCO an RFP must be developed. This is the only RFP that will be involved in the whole ESPC process except for the financing. There might be separate RFP for that, but this RFP for selecting the ESCO it has to cover all aspects of the ESPC, although initially it's only used for selecting the ESCO. And all aspects, that includes all general conditions you need for construction and those type of things. Typically at least three ESCOs are invited to bid on the project. Selection process starts with the owner selecting one or two facilities which shall be the basis for the ESCO selection.
The owner collects all the pertinent building data, energy consumption data for those buildings. The ESCO - and then ESCOs are then invited to a building walk-through and requested to develop a proposal for those buildings. Their proposals shall also include the audit cost for all the buildings that ultimately intend to do the ESPC for and make sure that they are described properly in your RFP so the ESCOs know what there is they actually need to look at eventually. The owner receives the proposal. It elevates - evaluates the proposed ECMs, energy conservation measures. It evaluates all the cost and all the schedule as well as the ESCO's qualification. Then you make an ESCO selection.
The selected ESCO performs the investment-grade audit for all the facilities included and develops a list of possible energy conservation measures while at the same time developing a baseline energy usage for all the facilities. As stated earlier, the only - owner needs to understand and agree to the baseline. That is very important. You need to understand how that is developed.
Their collaboration. The escrow and the owner select which energy conservation measures shall be included in the final project and the ESCO develops a ______ proposal for the implementation of the project including service, training, maintenance, measurement and verification. The ESCO will guarantee the savings as discussed earlier and shall also provide a guarantee instrument for the savings guarantee. That can be in the form of a performance bond which nowadays is a little difficult to obtain. It can be an insurance policy or irrevocable letter of credit.
As opposed to federal ESPCs, in the state and local government market, the ESCO typically does not finance the project. The ESCO can arrange financing, as we have stated, but it generally is most beneficial if the state or local government arrange if it owns tax-exempt lease/purchase financing. That is the most common type of financing for ESPCs. It's tax-exempt lease/purchase financing and it is generally not considered debt to the government.
Bulkley-Hopkins: I'm sorry. I'm just having some difficulty moving the slide forward to the next one.
Berntson: Next slide____
Bulkley-Hopkins: My apologies. Still can't move it forward. Jennifer, could you please help us with this? Karl, let's see if you will be able to move those. I just made you a presenter.
Berntson: Oh, you did. Well, then I need to pull this up on my â€"
Bulkley-Hopkins: Okay. All right. I'm able to move them, too. I apologize.
Berntson: You are? Okay.
Berntson: So can you take the screen back then?
Jennifer: You need to hit the button at the top that says "show my screen."
Berntson: Oh, okay.
Bulkley-Hopkins: Okay, we're on.
Berntson: Fourth slide of I'll be seeing.
Jennifer: We are -
Vines: We should be on Slide 24.
Berntson: Are you seeing my screen now?
Berntson: Oh, okay.
Jennifer: Can you make that full screen?
Berntson: Yeah. Oops. I messed that up. Sorry. [Laughter] I can't move it anyway.
Bulkley-Hopkins: Okay, let's see if you can see my screen, attendees. We apologize for this technical difficulties, but can you see my screen?
Berntson: I see it. We've got your screen now.
Bulkley-Hopkins: Okay, great. So â€"
Berntson: Are we back to â€"?
Bulkley-Hopkins: My apologies again. We're back to the slide that we need.
Berntson: Thank you. This slide shows typical timeline ranges. The first 85 business day that shows on top in the light beige there, 85, that includes the 35 days for initial meetings, data collection, ESCO's development of a proposal and selecting - making an audit contact with an ESCO. They might be a little optimistic especially if this is the first time you are going through an ESPC process. After that there is an audit phase that obviously is very dependent upon the size of the project. That's why there's such a large range. You know, a project with say 25 buildings will take a lot longer to audit than if it's a 5-building project.
After the audit is done, the contract gets negotiated. Eventually it goes through legal review and final contract gets approved and that's - we're looking at 40 to 45 additional days here. So we end up at about 235 days is the earliest point where you have a contract in place where you can obligate the funds 'cause no matter how you finance this, the whole point here is that you're gonna include your grant fund as part of this project and that point is the earliest point you can obligate those funds. There is a possibility you can fast-track some ECMs in order to get the obligation in the spending earlier, which is typically the lighting on a project is really the basis by - and water conservation. They have short payback items and they can be implemented in a short period of time, so if you can negotiate with the ESCO to do those first then there is a chance you can pay it at least earlier in the process after the implementation has started. New slide, please.
We have a couple of slides here about what makes a good ESPC candidate and possible energy conservation measures. How do you know if your facilities are good candidates for ESPC and what are good candidates? Deferred maintenance. That can make very good candidate. Equipment that's not properly maintained tends to waste energy and, as we know, governments not - don't have enough money so typically the maintenance and upgrades of facility, infrastructure, equipment suffers and that's a great benefit of the ESPC. You can get your equipment upgraded. You save energy without any additional cost to the government.
The next one is energy use index guidelines vary with location, but if it's about 100,000 or above it's a good ESPC candidate just about everywhere in the country. It obviously depends on the type of facility. You would, for example, expect a hospital to have significant higher index without being inefficient because it has a lotta lights and equipment that's on 24/7. The other can be like a modern facility management system. It can make it impossible to operate the building as efficiently as you would like to and can make a building a very good candidate.
The size of utility bills are initially important, not from an efficiency point of view, but the ESCO's interest might be less if it's a smaller project, so - or if the utility bills are lower. Be looking at certainly half a million annually. The ESCOs are interested and - but it's not to say that the facilities with less than half a million dollars in utility bills cannot be good candidates.
There are several ESPC projects where utility bills have between - been between $100,000.00 and $500,000.00. Traffic signals, streetlight projects involving switch to LED lighting, that - generally very short paybacks. There are several projects where you can save up to 80-85 percent energy by switching from the regular incandescent lights to LEDs. To generalize, if your facility has not had any significant upgrades in the last five or eight years, an ESPC will probably do very well for you. New slide.
Typical ECMs. New building management system can significantly improve the energy efficiency of a building. They can be programmed to automatically optimize start and stop times for HVAC equipment and overall system operations so you don't have to guess. You can just allow the system to determine. You set what time you want the building to be cold in the morning in summer or when you want it to be hot and the same thing when you can turn it off at night and the system will actually figure out when it needs to start equipment and when it can shut it down in order to accomplish your goals.
Building interior lighting is generally the foundation of an ESPC because the payback period is typically only a few years and therefore the lighting ECM can help pay for other longer payback ECMs such as building in a lot of programs, windows and those type of things. Windows have very long payback and typically are very difficult to fit in and they get disabled. If you have a lot of lights with short payback you might be able to fit your windows in.
Steam distribution repairs can generate large savings simply by eliminating leaks and don't forget those _____ ______ system if you have a steam system and make sure you do a complete survey and functional check of all steam traps. Steam traps invariably they go bad and they need to be either repaired or replaced on a regular basis, so the ESCOs are aware of this. If you have steam system and they do an audit, they certainly will go through all the steam traps. HVAC systems can be large and complicated, as you know, and it's very difficult to get into all the details in this type of presentation but, you know, there are books and books written about it, so we don't have the time to do that, but suffice it to say that there's been a lot of efficiency improvements in HVAC systems over the last few decades, so the ESCO will investigate the efficiency gain and cost of replacing HVAC equipment.
Building _______ programs typically have long payback partly because it's somewhat difficult to really calculate the energy gain by sealing up a building. If it's believed that the building has leakage, a blower test shall be performed. Yeah, you can do that in office building as well as in the old days specifically done in residential dwellings when you do an energy audit. You do that in office buildings, too. There are techniques to do that.
Although not listed here but an area that often is overlooked is how elevator shafts are vented. If you have office buildings with elevators that's an area the ESCO needs to take a look at. There can be a lot of heat loss through the elevator shafts. Boilers, depending on age and maintenance, can waste a lot of energy. Over the last decade or so, there's been development - an ongoing development in add-on boiler efficiency controls. They actually minimize the numbers from start to stop by modulating fire instead of just using high or low fire. Minimizing starts and stops can save significant amounts because you don't have to go through venting the whole system with cold air but it shuts down and just sends a lot of heat out the chimney.
We did mention traffic signals, switching to LED. They are very typical ECMs. Water and wastewater plants, they run all the time. They have a lot of high-capacity pumps that use a lot of energy. What generally can be done to save energy are such things as replacing the motors to high efficiency units, replace old pumps to new, more efficient designs and maybe the actual pumping does not always run constant, so having variable frequency drives might save a lot of energy because it matches the pump speed for the actual need.
ESPCs and wastewater treatment plants. They also get into the process improvement, so filter systems, sludge handling and sometimes select generation from ______ to gas. Most motors do not make the full capacity all the time so consideration should be given to add variable frequency drives to all motors five horsepower and over. And one thing to look at when you do that, though, motors for variable frequency drive has to have better insulation than just regular single-speed motors, so if they don't have that they need to replace the motors at the same time as you add the variable frequency drives.
Bulkley-Hopkins: I apologize again. I can't move the slide forward. Okay.
Berntson: Okay. Financials are important. We will have a webinar, as we mentioned earlier, on OctoberÂ 12, so we don't have to go into a lot of details here. We're just gonna scratch the surface a little bit. Here and on the following slide, we give a typical ESPC project and the various financing streams involved. ESCO can but does not have to arrange the financing, as we said. It's up to you. They have the experience to deal with the financial institutions, so it does not hurt to have them help you arrange the financing or at least they can tell you what financing institutions are willing to finance energy service - energy savings performance contracts.
The typical - and I think I mentioned, the typical financing mechanism is a tax-exempt lease/purchase financing. That's generally the most advantageous to the borrower and if the proper contracted language is included in that financing contract it is not considered debt to the government entity and that is important because the amount of debt determines the bond rating for the entity, so if it does not count as debt it's beneficial to the government.
Large project scope is in everyone's interest. It helps the owner achieve most capital improvements and the best energy savings. It also lowers the performances for the ESCO because it's spread out over more buildings so more energy conservation measures and, as we said, there should be a separate financing contract and net financing with interest-bearing escrow account. We will go into detail at the financing webinar about the net financing issue. And new slide, please.
And here is a typical cash flow slide. This is for a fairly large project. In this particular slide it might be a little hard for you to see. I don't know how it shows up. Hopefully you can get an idea what this is. This particular project has a few financing streams described here. It shows up on the top portion that is - shows in the light brown background. We have a lease/purchase loan and a little further down on - fourth from the bottom in that box there is a revolving loan fund and there's also an escrow interest earned. No matter where it's at, when you take out the loan you put the funds in escrow and that earns an interest. And there is a line here for the capital funds but, as you can see, that is empty so there were no capital funds available for this particular project.
On the lower portion here, we can see on the left-hand side that this is a 13-year project and that we have two columns of energy savings. That's the guaranteed energy savings and the service contract repair savings, and the guiding principle here is that savings they have to be greater or equal to the cost so there should be - the net cash flow should be either zero or positive. It can never be negative on any year on the payback period because then we wouldn't have enough funds to pay off the loan and, as you can see here, the cost in this particular project was made up of the principal/interest loan payment, the revolving loan payment, the escrow service cost, the escrow selection and the verification cost and there is a cost for the state energy office because they verify that the ESCO is doing the right thing and saying the right thing, so there's a charge for that that the project pays for and a guaranteed letter of credit.
That is the letter of credit that guarantees that the guarantees will be there. In other words, if there should be a shortfall and the ESCO says, "No, I don't believe there is a shortfall. It's your fault," or whatever, you have a letter of credit that you can draw up on and then you can solve the issue with the ESCO later, but you get the funds so you can pay for your loan.
One little item here on the revolving loan fund, in the upper box here you see $500,000.00 and to the right it says "includes $200,000.00 for state energy office product management." That indicates two things. First, it tells you that the project is paying for the internal project management. The other thing it tells you is that actually only $300,000.00 goes to pay for the project, and you have to take those funds for the project management out of the revolving loan fund because you can't borrow them from the financial institution because they are not an asset and therefore they are not anything that they can put the lien on, so you can't finance that with a tax-exempt lease/purchase agreement. New slide.
And there are always legislative and legal language and don't let it scare you. State legislation varies from state to state, so if this is the first time you're considering the use of the ESPC process, you'll need to read the legislation that exists in your particular state. In some states it covers all entities within a state and in others it might only cover the state government agency. To our knowledge, there is no state that has legislation that prevents you from doing an ESPC, so even if the legislation does not specifically include language that allows local governments to enter into an ESPC, you can still go forward as long as you get approval from your county or city council, whichever applies here.
We know that 49 states have ESPC legislation. The 50th state in this particular case have done ESPCs but just don't have legislation on the state level, and if you're looking for - go back, Irina, if you could. I just wanna mention the last line here. If you're looking for information on the status for your particular state, you can go to the link shown here. That lists the legislation, what it covers for each state. Thank you.
And as we said, there are always challenges in any process, and the ESPC is certainly no exceptions, so there are many ways to turn those into advantages and that's what we focus on here. It's natural for people to be hesitant about something new. They're not familiar with it and there may be objections for the ESPC process initially, so you need to overcome that and to do that the first is to ensure that all the individuals in charge of your county or your city, that county executive or mayor, they have - you have full support from them, so you need to have a discussion with them and get their support so they can tell people below them that they should be supportive of this. That's mainly the financing people, the budget people. That's what they need to make sure they're onboard.
The other challenge is maybe negotiations can be drawn out. It can be a long process. It does not necessarily have to be that and the way you minimize that is to get the owner ______ involved from the beginning of the project until the end and keeps up to where the project is. The other challenge is the measurement and the verification. If you're not familiar with that, that can be a challenge. You - obviously you need to verify as much of the savings as possible and, like I mentioned earlier, the IPMVP is the protocol that's used and there are four basic principles on how you verify savings, so you just need to get familiar with that, and the ESCO will suggest what type of measurement verification for each ECM.
The thing to watch out for is if you have an ECM, say it can be simple thing as the VFDs for motors in old buildings. Well, if you have a building with only a couple of motors and you might save, say, $900.00 a year on that ECM in that building, like you wanna make sure you're not spending $1,000.00 a year to verify those savings. That would not make any sense, so there is the matter of negotiations when - to determine what measurement verification you would have. The other issue you have is the maintenance. When the ESCOs perform preventive maintenance on the facility, the contract shall stipulate that the maintenance and savings guarantee is severable, meaning that you can cancel the service agreement at any time because maybe you for some reason wanna do the maintenance yourself and when you do that the ESCO is still responsible for the savings guarantee. Now you need - if you do that, you need to make sure that the ESCO has a chance to approve the maintenance so there are no issues there.
And the last one is reconciliation of budget. We have said the savings are reconciled once a year and typically the saving starts when the construction and the implementation is completed and that can be in the middle of a budget cycle. It's preferable if you can move that so the savings reconciliation matches up with the budget cycle for your governmental entity, whatever you are, city, county, and the way you do that is you just shorten the first year as far as reconciliation, so if your fiscal year starts on JulyÂ 1 and they have implement - finished implementing the project in January then you just let the first year only be the six months up to JulyÂ 1. Then you do a reconciliation and then after that you do it at the same time, JulyÂ 1, to match the budget cycle every year. And I think that's all we have at this point and with that, I'd like to turn the presentation back over to Chani to finish up. Thank you.
Vines: Hello. Next slide, please. Hello. This is Chani Vines again from the Department of Energy. I'd just like to point out that Team 2, our ESPC team, is currently proactively reaching out to grantees by phone call who have stated in their project summaries that they are interested in ESPC programs, retrofits or will be implementing ESPC projects to help them determine if the projects are good candidates for ESPCs or to optimize projects and goals and to discuss individually the technical assistance available to them. Should you not wish to be contacted or if you are a grantee or non-grantee and would like additional information, please feel free to email me at email@example.com which appears on the screen. At this point, I'd like to turn it back it back over - next slide - to Karl, Irina and Craig for questions.
Bulkley-Hopkins: Thank you, Chani. Karl and I and Mr.Â Craig Sutton joined us very kindly for answering the questions. We have quite a few of them already and what I would like to suggest is that we answer a few of them verbally and then we will send a summary of questions and answers to everyone along with the slides as was indicated in the beginning of this webinar, so you will be receiving - as early as Friday this week and maybe early next week you will be receiving your slides, each one of you who attended the webinar, and the question and - questions and answers, all of them in a summary format. So one of the questions that I see here comes from Bruce Gerbil and the question is: How do I get Solution Center access? I'm not a grantee.
In the slides when we send those there will be a link, and actually Bruce already received the answer, but I just wanted to repeat it for everyone who attended that there is a link to the Solution Center that will be sent out with the slides, so please use that link. When you click on that link, the first page that you will see is "request technical assistance" as a button on that page. Click the button or call the number. If you are the first-time caller, you will need to call the number to get your password established and the user name created and afterwards you will be able to use the Solution Center. If it's not your first time, you will know what to do.
The next question comes from Maria Hubert and, "If a grantee enters an ESPC and the ESCO performs the work under Davis-Bacon wage rates, is the work funded by energy savings also subject to Davis-Bacon or just the scope under the grant agreement?" What I would like to say about Recovery Act funding in general and not just the Davis-Bacon, the requirements become effective the moment funding is approved for use on the project, so when you pay those wages your grantees and sub-grantees and contractors, subcontractors, they will be affected immediately, and it is advised that you keep payroll and basic records for three years and you as the contractor, the prime contractor, must also ensure that all of your workers are paid weekly, and you will have to submit weekly certified payroll records to the contracting and administering agency and, in this particular case, it will be the Department of Energy, so that will be going out with your reports.
And as far as Recovery Act funding in general, any project funded in whole or in part by Recovery Act funding must comply with the provisions of Buy American and Davis-Bacon and all of those others that I mentioned. The definition of a project basically is all construction that is necessary to complete the building or work, and it is regardless of number of contracts or other agreements involved, so so long as all contracts and all of those agreements that have been awarded are closely related in purpose, time and place. So yes, the intentional splitting of Recovery Act funding into separate smaller contracts is specifically precluded and prohibited, so Davis-Bacon and Buy American definitely are part of that requirement, and it's not to say that there are not situations in which major construction activities are clearly undertaken in several phases that are distinct in purpose, time and place and in that case separate contracts or assistance agreements for recovery-based funding would carry separate requirements, but usually no, you cannot split them out into smaller agreements. I hope that answered the question.
Another question comes from Bruce Greiner and the question is: How do you keep a conflict of interest from occurring if the ESPC performs the work and commissions the work? I'm not sure â€"
Sutton: Irina, I answered that one in the - I can answer that one. [Laughter]
Bulkley-Hopkins: Okay. So you will be receiving that in the summary, the rest of the attendees who have not heard the answer. "What is best way for a facility to decide between utilizing an ESPC, UESC, which is utilities energy savings contract, or PP8 to accomplish their energy savings goals?" is the question. Karl or Craig, are you available to answer or are you typing something?
Berntson: I - I -
Sutton: I can take a shot at that. Karl, you wanna go first?
Berntson: No, go ahead. I was gonna say we probably should comment like that one for a while. I don't quite understand the consideration of a PP8 for a performance contract, but go ahead, Craig, if you have an answer.
Sutton: Well, I mean in the federal space typically you'd have an area which was covered by the original ESPC or a utility that might be operating in that service area offering one or the other, so in federal space there was usually a choice between whether you wanted to work with the Department of Energy and, you know, perhaps a national ESCO or you wanted to work with utility and the utility would be acting as the ESCO. When it comes down to it, there - again, in the federal market space there are some differences between how long contracts can go out and how fast the paybacks have to be and small differences between them, but they both effected the same end and therefore it was kind of a - depends on what area of the country you are in. When it comes to state and local, I'll refer back to what Karl said and said that we probably should do a little bit more research on how this applies to counties and cities rather than, you know, federal entities.
Bulkley-Hopkins: Thank you, Craig. The next question I see here is: Can you make the cash flow spreadsheet available with the slides? Definitely. The question came from Robert Zwid, and we will make sure that that is included in the slides. Another question is: Where can I find a listing of ESCOs? A simple listing of ESCOs can be found on the Federal Energy Management Program site among other places and when we send out the information about questions and answers, the detailed summary, we will be sure to include the link - that link and other links where you can find the listings of ESCOs.
Another question, Karl, is probably for you and it's from Paul Messerschmitt, and I apologize if I do not say anybody's last name right. My apologies, but the ESPC cash flow spreadsheet related question: Can you expand on letter of credit and who offers such a financial product? It appears the cost is about 1 percent of guaranteed savings per year.
Berntson: Yes, the - a typical letter of credit is offered by banks. It is typically - if that's the form of guarantee instrument you want, the ESCO will get that typically from the financial institution they generally deal with. It will be signed. Just you need to make sure that you are allowed to claim against that letter of credit and that is pretty straightforward. Most big financial institutions offer those.
Bulkley-Hopkins: All right. It seems like most of the questions got answered. Some of them I'm not clear completely on the what the attendee is asking, so we will have to get back with you and ask for clarifications as far as what is it that you exactly would like to know, but other than that, unless somebody else has a question that you would like to type in - we will give you about a couple of minutes for that. If we don't see any more questions popping up in our window, I would like to then thank you for participating in today's webinar, encourage you to attend the next one on OctoberÂ 12 for pricing and financing of the energy savings performance contracts.
And, like I said, we will wait and there was, seems like, another question that just popped up. Can you report the total number of attendees? We had - still we have 65 here with 63 gone, so the total was 127 attendees today. You are quite welcome. I'm going to give you another couple of minutes in case there's somebody has the last-minute question. Also, please feel free to look at the screen. Our contact information is right there and it will be sent out with the slides again either late this week or early next week and please feel free to contact either one of us to ask questions additionally.
Berntson: There was a question about how long the slides - before the slides will be received. I think Jennifer generally sends those out within the week.
Bulkley-Hopkins: We will try to do it either late this week or early next week, as soon as possible, depending on how many more questions we receive because we would like to make that summary of questions and answers so that everyone can review it, even those people that have already left. All right, it seems like no more questions are coming in. Thank you very much, everyone, for attending this webinar, and we look forward to not seeing you but definitely enjoying your presence virtually on OctoberÂ 12. Thank you so much.