ESPC Pricing and Financing (Text Version)
Chani: Hello, everyone. Thank you for joining us. This session will be recorded. All attendees' phone lines will be muted, and please submit your questions via the Q&A window, and questions will be answered at the end of the session. And the presentation slides will be sent to attendees following the training. Next slide, please.
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, pricing, and financing. This is presented as part of the U.S. Department of Energy's Technical Assistance Program. Next slide.
What is TAP? The DOE Technical Assistance Program, TAP, 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 million effort to assist the EECBG and SEP Recovery Act recipients. This effort is aimed at accelerating costing, improving project and program performance, and increasing the return on Recovery Act investment. TAP offers one-on-one assistance, extensive online resources, facilitation of peer-to-peer exchanges on energy efficiency and renewable energy technologies, program design, financing, performance contracting, and state and local capacity building.
How do you access â€" next slide, please â€" how do you access TAP resources? Well, here's a list â€" with the launch of the Recovery Act, TAP introduced the Solution Center, an online portal for technical assistance resources, like best practices, templates, webinars, event calendars, and the TAP blog. We are continually adding new resources and scheduling additional webinars. Next slide, please.
Here's a list of upcoming webinars, which are also listed on the Solution Center. We are currently developing our next webinar in the series, in our ESPC series, "Negotiating and Entering Into an ESPC," which is tentatively scheduled for mid-November. So please keep checking the calendar for a confirmed date, and I hope you'll be able to join us.
Now I'd like to introduce you to our webinar presenters from our 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 10 years, he has developed and managed the energy savings performance contracting for state and local government. Working for the state of Maryland, in Prince George's County, he has demonstrated success in selling and implementing ESPC projects, saving the state over $190 million in energy expenditures. He has also additional 25 years of experience in energy efficiency and the renewable energy industry, including geothermal, biomass, solar, and other technologies.
Our other TA provider, Irina Bulkley-Hopkins, offers 15 years of experience in the energy industry, specialized in policy and regulatory analysis, project and program management, operation, strategy development, as well as in the energy marketing. Irina has experience serving on both sides of the process, representing federal agencies such as the Department of Energy's National Renewable Lab and the Department of Energy's Western Area Power Administration, as well as working in the private sector with companies such as AECOM Government Services and with Xcel Energy. Irina will be our first speaker.
Irina: Thank you so much, Chani, and thank you very much, everyone, for joining us today. Next slide is an overview of what we will learn today. The subject matter is really ESPC pricing and financing, but before we can get into that, we need to do a little refresher on what an ESPC is and why you should consider using the ESPC model. And then we will go into some more detail about how the ESCO prices and ESPC and what you as the owner need to pay particular attention to when looking at that contract. The financing of ESPC is critical to the success of a project, so we will take a closer took at that and where the funding is coming from. Next slide is a transition slide, please. And then the next one is No. 10.
As I mentioned, we covered this with some detail in the previous webinar on August 5th and then on September 23rd, both of which are available on the Solution Center. But briefly, I would like to let you know that an ESPC is a contract between an owner, such as a grantee, and an energy service company, which we refer to as an ESCO. And this contract has a few very distinct parts to it. First of all, there is an audit agreement, which stipulates that the ESCO shall do an investment-grade audit on the facilities that you own, in order to be included in the project â€" for those facilities to be included in the project â€" and to develop all the possible energy conservation measures, which we refer to briefly as ECMs.
The next stage is when the ESCO â€" the energy services company â€" develops a detailed implementation proposal. And after an agreement is reached on the scope to be implemented, the actual ESP contract is then signed and the ESCO is allowed to begin the installation. After the installation is complete and commissioned, the project then moves to the service and maintenance fees, and sometimes there is a separate agreement written for that. However, if there is a separate agreement for operations and maintenance, it must be detailed in the ESCO's proposal as well, so that there are no surprises when the time comes to sign it. As mentioned in previous webinars, the ESCO must guarantee the energy savings, and in case of a savings shortfall in any given year during the contract, the ESCO is responsible for reimbursing the owner for the shortfall.
With the ESPC, there is no need for capital funds or any additional funds whatsoever. Basically, you're just reallocating funds from what usually goes to pay utility bills, and instead you pay for improvements. Energy savings pay for the project; that's the muscle of ESPCs. And it is important to note that an ESPC in the state and local government market is structured no differently than a federal ESPC, because in the federal market, in one scenario, the ESCO bears all upfront installation costs, and it also finances the entire project, and then the ESCO gets paid annually from the savings that are generated by the project. In the state and local government projects, the financing is generally a separate contract between the owner and the financing company of the owner's choice. And then the owner basically borrows the funds required to pay the ESCO for the installation, and puts that money in an interest-bearing escrow account. And the ESCO then gets paid on a regular basis during the installation period for the work that it gets accomplished, as it gets accomplished.
It is not uncommon for the ESCOs in the state and local markets to be asked still to help facilitate or arrange the financing, and they have longstanding experience in doing that, so please don't be shy. If you need that option, you're certainly welcome to utilize that. And it is important to remember, especially to grantees who have never done an ESPC before, that there are no other contracts in the energy market that describe what is included in ESPC. And it is easy to be inclined to just say, "Oh, okay, I'll just use an old contract, such as a construction contract. Just make some modifications." But please stay away from that, because it generally does not work. And any of those contracts â€" none of those contracts, basically, cover everything that must be included into an ESPC. And consequently, those contracts will be inadequate and may get you in trouble if you tried to use those instead of a specific ESPC contract.
The links to sample contracts can be found on the Solution Center, and Chani explained how to get to the Solution Center in the beginning of this presentation. So that can be very useful, and we encourage you to take advantage of those links. It certainly is a lot easier than starting from scratch on your own. And just make sure when you look at those, when you use those samples, that there is nothing in the contract that favors an ESCO over the owner, which is obviously you if you're a grantee or if you're just an owner of the facility.
It is also important to remember to involve your procurement and legal departments as early as possible in the ESPC process, especially if this is the first ESPC your organization is entering into, because frequently there are jurisdictions in your state that have done ESPC projects before, and they also would be willing to share their documentation as guidelines for you. And so you might even be able to utilize their contract and get a rider on that one, especially if it was a contract issued by your state. Next slide, please.
On the next slide, it is an animation, and we will go over the ESPC basic principle. The features of ESPCs that are often found most attractive are the financing and the guarantee of energy savings, of course. With no upfront capital required from the grantee or from the owner of the facility, whoever you are at this moment, the ESCO provides all the labor, all the materials, equipment, and engineering design for your energy improvement project, and guarantees the reduction of the energy costs.
The contracts require the ESCOs to implement energy conservation measures â€" ECM, as we mentioned before â€" for their grantee customers, and also guarantee that these improvements will result in the specified level of annual energy savings. Those savings then, when they're received, are used to pay back the loan to the financing company. And as I stated earlier, if there is a savings shortfall in any given year, the ESCO is responsible to reimburse you, the owner of the facility, for the shortfall amount.
So what this slide basically shows is that before the ESPC, the grantee has a certain amount that is spent on utilities and operations and maintenance. And here on this diagram, it's shown as grantees' cash flow dollars. The next bar demonstrates what the cash flow distribution is after the ESCO has implemented the ECMs. The utility and operation and maintenance costs are significantly lower, as you can see. The guaranteed savings will pay back the loan that was used to finance the implementation, and then there might be some savings still left over. The ESCOs typically do not guarantee 100 percent of the savings, but the estimates will be generated, and it is just a sound risk management on their part, so that's not a problem at all. And the third part is, after the loan has been paid back to the financial institution, all the savings are realized by the grantee, by you as the owner of the facility, and they can actually lower the operating budget on your end. Next slide, please.
Why do an ESPC? Some of you probably looked at this and are wondering, "Why should we do this? It looks like a complicated process." So I would like to take a brief look at why a jurisdiction should consider an ESPC and how this contract helps leverage the EECBG funds in particular.
It is not a secret, especially these days, that capital dollars for facility improvement are very hard to come by. And an ESPC provides a method to make the long-needed facility improvements without those capital dollars. So what's wrong with that? Absolutely nothing. The energy savings dollars pay for the improvements. You need the improvements. That is great. And most governmental jurisdictions never appropriate sufficient funds for facility management anyway to keep up with the required equipment maintenance, such as chillers, boilers, cooling towers, anything else that may just go wrong or get broken.
An ESPC does provide the method for getting this done. Either it's via the equipment replacement or just repairs and overhauls, but you will get it done. Because it is an energy savings performance contract, it's in the name and in the condition that it saves energy, and the energy savings are guaranteed. That's another bonus that you get with this contract. And for example, by upgrading the HVAC and building automation systems, the indoor air quality will definitely be improved, and in turn, that will improve the comfort level of the occupants in your building and increase their productivity. So that's another side effect â€" side bonus of the ESPC. And by utilizing the EECBG funds in an ESPC, energy conservation measures that have long paybacks and would normally not fit within an ESPC can now be included, and their savings help you pay for additional projects, another bonus.
There is a cost of delay, and delaying the implementation of any energy conservation project definitely has a cost associated with it. EPA's Energy Star has a free portfolio manager that has an excellent cash-flow opportunity calculator and also has a cost-of-delay function. I highly recommend that you use the Energy Star portfolio manager, both to benchmark your facilities and to investigate the costs and payback of various ECMs, and consider what the cost of delay would be if you didn't implement those measures. So with that, I'm going to turn this presentation over to Karl.
Karl: Thank you, Irina, and welcome, everybody. We are now gonna start talking a little bit about the pricing on an ESPC and see how the client can assure yourself that the pricing is fair and reasonable.
Before we get into the actual pricing, we need to take a look at a few items that could apply to your project and have an impact on pricing. But first is a question you need to have your procurement/legal people answer, and that is whether the project is exempt from sales taxes or not. The ESCO, the energy service company, needs to know that when they request quotes from the suppliers and subcontractors, and also for the pricing of internal work.
If it is tax exempt, you will need to provide an exemption number or an ID to the ESCO for use for that specific project. Then you need to establish whether there are any minority business enterprises participation requirements that apply to your project. When there are MBE requirements â€" that's minority business enterprises â€" they generally are expressed as a percent of the project cost. This is also something the ESCO needs to know when they are planning the project and getting calls from suppliers and subcontractors for the various energy conservation measures, since that is where the minority business participation will occur. It should be noted that the ESCOs do the investment-grade audits generally in house with internal resources; and therefore, the MBE requirements cannot apply to that part of the project.
It obviously is up to the individual jurisdictions how to handle pricing information required from the ESCO. However, in order to expedite the pricing verification, it is beneficial to include the open-book pricing requirement in the audit agreement. That way, the ESCO must provide copies for all cost or price calculations.
The next consideration should be given to what sequence a project implementation takes place. Are there any ECMs that you want installed as soon as possible? That could be such things as replacement of equipment, where it may be existing piece of equipment is about to fail. It could be that you want the lighting project started without delay, to take advantage of savings as soon as possible. It could be a specific building you want done before the cold weather sets in. It may be it's a boiler replacement needs to happen. The only possible negative effect could be if you want a specific ECM installed early in some buildings but for some reason that particular ECM cannot be installed in other buildings until later. That could cause a contractor to have to mobilize twice to complete the same ECM. This obviously can have an effect on the price. These are things to think about, discuss with your ESCO so they can develop the pricing accordingly.
Contingencies. On a regular construction contract, where the contractor makes an estimate based on a set of drawings and specifications, contingencies are included in the contract. Because there are generally items that are not fully described or missed on drawings, then specifications must be included in the construction. On the ESPC, we don't have that situation. The ESCO does the audit. They walk through the buildings; they develop the drawings; and they should know exactly what needs to be included in the project. Therefore, contingencies should not be included.
However, if you do include contingencies in the contract â€" the ESCOs are gonna ask for them â€" it is suggested that you stipulate owner program for its use and that any unused contingencies at the end of the contract revert back to the owner. If contingencies are included, make sure that the savings will be sufficient to cover the cost should all the contingencies be used. Also note, by including contingencies, you might be eliminating energy conservation measures from the project equal to the amount of the contingency. So if you could take that money and use it to do another project that you now can't afford because the money is set aside for contingencies.
Briefly here we're gonna talk about the installation pricing. When the owner's project manager presents a project to the procurement approval authority, he or she ________ be able to state that the pricing is fair and reasonable. That's project manager's job. Therefore, it's very important to have a structured method to verify that, yes, this pricing of the product is just that, fair and reasonable. ESCO develops the cost savings for each energy conservation measures ______ building, which then establishes a simply payback for all ECMs individually. This is followed by a joint discussion by the owner and the ESCO which energy conservation measures to include in the overall project.
As shown here, the overhead and profit rate shall be pre-established, meaning that the ESCO shall be required to provide those rates in the audit proposal, including information __________ on how they are applied. Make sure here that it is understood that this is not margins. Margins are calculated differently by markup, and it's markups we're talking about here.
So based on the agreed-upon energy conservation measures, the ESCO develops a total project cost including all design engineering, construction material and labor, project management, overhead and profit, commissioning, service, maintenance, training, measurement, and verification. Even though the final financing method has not yet been established, you need to get an idea from possible financing providers what the interest rate would be on a loan. So the ESCO has the reasonable value to use to develop the cash flow analysis to verify that the project can be paid for with a guaranteed savings and within the allowed payback period. Some jurisdictions have 10 years; some have 15; others have 20, maybe 25.
Keep in mind that the net cash flow must be positive or zero for each year of the payback. You cannot have a negative cash flow on any given year, because then you don't have enough money to pay back the loan to the financing institution.
Price verification, and this goes back to that the project manager has to state that the price for the project is fair and reasonable. Once the total project cost is established, it's helpful if the ESCO submits a preliminary project proposal to the owner, so he can start the pricing verification and initiate the negotiation for the project. It's very important that the owner would use preliminary drawings and equipment spec sheets to fully understand the ECMs.
After the ESCO has provided the preliminary cost data, the owner needs to verify the cost, and the best way to do that is to use RSMeans construction cost data, a similar accepted industry resource, to come up with independent cost level for the project. It's unrealistic to expect the owner to verify every cost item on the project, but detailed verification should be made for at least representative samples of ECMs. And also, the owner should go out and obtain a few independent quotes for equipment, and maybe even from the construction contractor that's gonna handle the installation on the ESCO's behalf.
The issue that can cause some difficulty is when there is demolition involved. For example, if the ECM is a chiller replacement, the old chiller must be removed; maybe piping needs to be demolished, rerouted; and electrical panel might have to be moved. In that case, it's appropriate to ask the ESCO for a complete breakdown of cost that shows the cost of each individual step involved in replacement of the chiller.
The owner also needs to verify that the engineering and design costs are reasonable and charged at reasonable rates. And the same goes for project management. The owner's gonna have a project manager, maybe a project engineer, so you need to look at how long time they're gonna be on the project, how much time they're gonna spend there, if it's full time or maybe only part time, and then look at the going rates in your specific area.
These items can be a little more difficult to verify, but the owner should be able to find the going rates for designers and engineers in his or her locality. The reasonableness of total hours quoted for each discipline is a judgment call. That is something you need to look at what actually the workers there are going to do and see what you think the total time will be for them to accomplish that.
For design, it's a question of how many drawings need to be developed. Remember, you probably need as-built drawings at the end of the project for archiving and future efforts, so simple layouts might not be enough.
As far as project management, is there a need for an ESCO to have more than one project manager? Do they need to have a project engineer or maybe a construction superintendent as well? By answering that, you can assess whether the project management cost is reasonable.
Are there any areas where costs can be reduced without affecting savings or quality of the project? Is the ESCO quoting with the optimum equipment? Is there another, less costly brand that would accomplish the same as what is quoted and is of similar quality? Also, take a look at the installation schedule to ensure that it's not too conservative. Remember the cost of delay. The longer the installation takes, the more cost of delay you have. Obviously, you don't want a schedule that's unrealistically optimistic either. It has to be reasonable.
By the owner having verified the ESCO's proposed costs, it puts the owner and the ESCO on a more level playing field for negotiations. Once the owner has determined where he thinks the price should be, the negotiation can proceed. We are planning a separate webinar on negotiation and contracting in the near future, so we're not gonna go into details on that yet today.
Suffice it to say that before starting negotiations, the owner must in his mind establish where he wants to get with the negotiations. Write down on a piece of paper so he can help focus on the goal during negotiations. Remember, the ESCO does not give the absolute lowest cost initially. It's the same with buying a car. You need to pressure the ESCO to get the best deal. Keep in mind you are negotiating the complete contract, including installation, service, maintenance, training, commissioning, measurement, and verification. In the end, when you reach a point where extended negotiation will yield less cost reduction in the monthly savings projection, stop and come to an agreement.
Now we will switch gears a little and talk about financing options of the ESPC. Prior to developing the financing RFP, the method of project financing must be determined. It is necessary to identify in the ESPC RFP if the ESCO will be responsible for financing the project costs during construction and/or for the complete payback period. However, it's important to remember that there are alternative methods of financing, usually at a lower interest rate than what the ESCO will charge. If your agency will require financing done by the ESCO, then you will need to include alternative language in the ESPC RFP documents and contract documents. I strongly advise that you work with your financial and legal staff to develop such language.
The method of financing should be established as early on in the project as possible. The financing RFP should be issued and basic financing bids received. You can even sign a basic financing agreement without knowing the exact cost of the project, so a generic agreement, and once you know the cost of the project, you let the financier know so they can tell you what the interest rate's gonna be at that particular time, and then actually sign the financing â€" final contract.
In general, there are several alternatives for financing an ESPC, and all of them should be considered. The most common method is via a tax-exempt lease-purchase agreement. Another method, although not as popular, is through a bond sale. The problem is that the governmental entities like to preserve their bonding capacity and generally don't consider ESPC to qualify as being important enough to finance via bonds. And generally, it's likely more expensive to use bonds there too.
Again, your ESCO might be willing to finance, but it likely will be at significantly higher interest rate than what you can get by going directly to a financing institution. So let's look at various sources of funds that might be available to you.
As with any facility improvement, an ESPC obviously must get paid for. We know that. The fundamental source of funds is the energy savings generated by the ESPC project. That means a reallocation of a portion of the operating funds from the utility account to a loan payment account. This reallocation must occur every ______ year for the payback period of the loan used to finance the ESPC. So it's critical that your project and finance departments has a full understanding of this and are in agreement.
In addition to the main loan, there are several other fund sources that can be used less to pay for a portion of the ESPC project. So let's take a look what the financing possibilities are.
Cash is a rare commodity, and most private corporations don't have extra cash available in their operating budget. The operating budget is generally made up of tax receipts and fees that are imposed on various services. Utility account is part of the operating budget, so the energy savings generated by the ESPC actually reduces utility line items in the operating budget. However, to repeat, when the funds for the ESPC are borrowed, the amount utility line item is reduced must be reallocated to a loan payment line item. Cash is the least favored ESPC payment method.
Capital budget. Most local and municipal governments obtain the capital funds through bond sales. In other words, they borrow them with a huge tax revenue and other revenue streams as collateral. Obviously, capital funds can count tax receipts as well, but that's probably a rare situation where a governmental entity has more tax revenue than they need for the daily operation. Typically, the only capital funds available on an ESPC are when the funds have been appropriated for equipment replacement, and that equipment now will be replaced through the ESPC.
Then we have bonds, general obligation bonds. They are a long-term debt instruments ____ by investors and are treated as on-balance-sheet financing. Since bonding capacity is based on outstanding debts and bonds typically being used to provide needed capital for the government organization, it's not favorable method for financing ESPCs. Public entities pledge further tax receipts as security for the general obligation bonds.
State energy office incentive programs, rebates, grants. State energy office often provides rebates for energy efficiency upgrades, so contact your state energy office and see if they have any incentive grants available to you.
With the emphasis on energy conservation, it's also common to find that the utility companies have incentive programs that can provide a portion of your needed funds. And obviously, here we're talking about the EECPG grants. EECPG grants can be leveraged by including them in the energy savings performance contracts. The EECPG grant is the same as cash, and the same use from ECMs paid by the grant can be used to pay for additional energy conservation measures that you otherwise could not include in the project. Sometimes the county might provide incentives to municipalities that can help pay for your ESPC.
Lease. Tax-exempt lease-purchase agreement, as I mentioned, it's short â€" TELP. They'd be the most favorable method for financing ESPC projects. The lease purchases the equipment through regular payments to the lessor over the term of the lease. From an accounting point of view, a tax-exempt lease-purchase can be considered off-balance-sheet in most states, provided the agreement contains the non-appropriation clause. Because the lease payments ___________ appropriation, this type of lease is not considered a long-term debt. This is a technicality, but should the funds to pay the lease not be appropriated, it is technically not in the fold, but credit-grading agencies would look at it as if it is. So obviously, you always have to pay your debts.
Available funds sources. That could be involving loan funds. The state energy office often has low-interest revolving loan funds available to state/local/municipal governments in order to promote energy conservation projects. However, dollar limit to lease loans is generally fairly low compared to total funds needed for your ESPC. But take advantage of any low-interest loans you can get.
Typically, the repayment period of a revolving loan fund is less than ten years. Plus their payments go back into the fund, so they can provide loans to other energy efficiency and conservation projects. To learn more about revolving loan funds, go to the link shown here. And as we mentioned earlier, don't worry about writing this down. The slides will be e-mailed to all the attendees in a few days, so you don't need to worry about that. When you get the slides, you can get the link.
Capital lease. The lessee purchase equipment for bargain purchase option at the end of the lease. The equipment is actually owned by the financing company during the term of the lease. Ownership is transferred at the end of the lease ______ actual purchase of the equipment. Capital lease is not commonly used to finance an ESPC, but just mention it here so that you are aware that it does exist.
Operating lease. Equipment ownership stays with the lessor indefinitely, making this option undesirable to most governmental entities. It's equal to an equipment rental agreement, and from an accounting point of view, an operating lease is off-balance-sheet.
QECB, Qualifying Energy Conservation Bonds. QECBs may be used by certain governmental issuers to finance certain types of energy conservation and renewable energy projects. QECBs are qualified tax credit bonds. With tax credit bonds, the issuer of the bond pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest. The tax credit rate is set daily by the U.S. Treasury Department. The regulations for QECBs are changing, so if you go to the Solution Center, as mentioned earlier on in the presentation, and you click on Webcast, which is the link shown here, you will find a webcast on QECBs that was held on September 23. That will give you the up-to-date information.
Master lease. Master lease is not the direct method of financing; it's, however, a convenient approach to financing multiple projects without having to issue RFPs as separate contracts for the financing of each project. The master lease is an agreement between a financial institution and a property owner that the financial institution will finance several projects to be implemented over a period of time. Typically, there is also a dollar limit set on the total amount that can be borrowed under the lease. The interest rate and loan term is separately for each project that's financed under one master lease agreement. By establishing the basic contractual agreement up front, the time to finance each project under the master lease is significantly reduced. It's just a matter of weeks instead of months. The work to secure the financing needs to start at the same time the decision is made to use an ESPC to do energy upgrades to your facility.
And here we're gonna get into a little more how we calculate the various items here, specifically the total cost and then how we determine how much you'll need to borrow. So adding it all up, what we are trying to show with this slide is that, in order to determine the amount you need to borrow to pay for the ESPC, you start with the total cost and deduct whatever other funds you have available, to determine how much borrowed funds that you need.
The one thing on this chart that needs some discussion with your treasurer is the QECBs. It might be beneficial to get all funds you need to borrow through, we'll say, the QECB. It's a possibility, and it needs to be discussed, in which case you don't need the tax-exempt purchase loan. Your financial experts can advise and help with that decision. One concern could be the time required to establish and sell the QECBs.
As you can see here, all the available funds must equal the total cost, which is what you're going to pay the ESCO for the implementation of the ESPC. So the total cost, minus what you have on the top six listed fund sources here, will equal how much you need to borrow tax-exempt, how much you need from the borrowed tax-exempt lease-purchase funds. No, this is not exactly how much you need to borrow. We will get into that shortly.
Financing. What we need to establish now is what the interest rate will be on the loan and what the interest rate will be on your escrow account. And in order to do that, you must have issued an RFP and selected a financing company, unless the state where you reside, they could have a performance contract and financing contract that you can write, such as the master lease that's available to local governments and municipalities. And if that's available, you can use it; go ahead. That saves you the trouble of issuing the actual RFP. But most likely they don't have that, so you will need to issue an RFP, in which case you can find the sample financing RFP on the Solution Center with the link shown here.
Whether you need to issue an RFP or not to select an escrow institution, you can find out from your finance department. Most likely you do not need to do that. Most jurisdictions already have a bank that you do business with, and they can be your escrow rate. It is simply where you take the loan amount and you put it in an escrow account that you're actually gonna use the funds to pay off the contractor.
You need to contact the financing company you have selected and get an estimate of what they expect the interest rate to be on the date you expect to close the financing. And similar, you need to contact the escrow institution and get an estimate on what the interest rate will be that you will be earning on the funds in your escrow account.
So now you know how much borrowed funds you need, and we also know the interest rate you pay for the loan and what interest rate you earn on the escrow. Before we get into how much you actually need to borrow, it's very important to be sure that the escrow provides a realistic and accurate drawdown schedule, because the drawdown schedule will determine how much money is pulled out on a monthly or so basis out of the escrow account, which then determines how much is in the escrow account any given time, to calculate how much you actually â€" how many dollars you actually earn in that escrow account.
Two slides back we showed the total cost of the project and all the various funds that we use to pay for it. So as we said, if you take total cost and deduct all the other funds you will be using, you arrive at how much loan financing you need. What this slide is attempting to show is that the amount of loan funds you need are made up of two sources, namely the original loan amount and the interest you earn on the escrow account. So the first thing to calculate is how much money is in the escrow account for any given period, which is the original amount that you deposited minus what you have drawn down to pay the ESCO, plus the interest you have earned. Most likely you will pay the ESCO with any capital funds or grants you have, and then probably with revolving loan funds, your savings, and the lease-purchase loan will be the last thing you start using. Keep the loan money in the escrow account as long as possible, or you could wait to close the loan until you have exhausted all the other funds. Now, based on the interest rate earned and the drawdown schedule, you can calculate the actual amount you'll need to borrow.
So what we have here is a sample of a calculation to figure out how much money you need to borrow, so that between the amounts you paid out and the interest you earned, you actually end up with zero dollars when the project is completed. And in the lower corner down here, what have you, the ______ ______, that's the share you're looking for.
And the process to go through here is very simple. You put in the payment to contractor â€" that's the drawdown schedule, except in this case we used $12 million for total project cost. We have the escrow interest you earn in this column. And in this particular case we have, you can see a revolving loan fund of $500,000.00. The state energy office, they had a fee because they helped manage this project, so that does not go to pay for the project, so we actually have the difference, which is $300,000.00 that goes to pay for the project. So between the earned funds in the escrow account and the $300,000.00 revolving loan funds, this calculates how much money you actually need to borrow, which in this case is the $11,379.29 thing. And this is done by using an add-in to Microsoft Excel which is called Solver. And it's a simple thing to do. You plug in all the numbers and put the zero down here to calculate how much you need to borrow.
And here, we are looking at the sample cash flow analysis. This is typical ESPC cash flow analysis receipt. The sample project has several financing streams, the main being the tax-exempt loan lease-purchase arrangement. As you can see up here, it says "tax-exempt lease loan." There is the low-interest revolving loan funds in this particular project, like we mentioned. That says $500,000.00 right here, and we have â€" as I also mentioned, there was $200,000.00 that went to the state energy office, so there's $300,000.00 left here to pay for the project.
There's also a line here for â€" wait a minute, here I go â€" right here for capital funds, and as you can see, in this project there are no capital funds, and that line is left blank. The ______ cost side of the project, if you go down to the next part of the sheet, down here, we can see the cost side is made up of two loan payments that is the principal and interest on the tax-exempt loan and the revolving loan fund. Then we also have a service cost. There we go. We got the service cost. Then we have the ESCO measurement and verification. We have the state energy office verifies that the ESCO is doing things right, and the ESCO provides a guaranteed letter of ______, so those are the costs for the project. The savings are listed as the energy savings, and in this case there are service and contractual repair/maintenance savings as well. So as we stated earlier, the savings always have to be equal or less than the cost, to assure that you always have a positive or zero net cash flow. And as you can see in this particular case, each year there's a net cash flow of $130,000.00 to $150,000.00. So this is balanced.
One thing to note here is, in this particular case â€" and these are actually real interest rates for a project â€" the interest rate on the lease-purchase agreement was 3.46. And on the escrow, you actually earn 3.5, so there actually was slightly higher interest in the escrow account than there is on the loan.
And that is the basics of pricing and financing, and with that, we're gonna turn this back and allow you to ask questions, and if we can't answer them online, we will write them down â€" or we get the questions, then we will answer them via e-mail. So all attendants will see all the questions and all the answers, if we can't answer them directly today. With that, thank you, and I'll turn this over to Irina. If Irina is â€"
Irina: Karl, can you hear me?
Irina: Okay, great, so I'm back on. I had some technical difficulty. Yes, I just wanted to thank everyone for attending this webinar today. Please feel free to submit your questions via the Questions window. As Karl mentioned, he will be looking at them as they're submitted and answering as many as we can on the air. Then the rest of them will be sent along with the slides as a summary to all of you who registered for this webinar. Karl, are there any questions in the question-and-answer window?
Karl: Yes, we do have a question that was asked: Do you do a total resource cost test on the projects? And the answer to that is yes, you go through the total resources to see what you have available and ensure that you don't spend more than what you can accomplish. I will write a longer answer to that offline.
The other question we have here is: What happens if energy utility costs decline during the ESPC? You still have to pay your loan. And it is a benefit to you if the price actually has gone down; you will pay less for your utilities. So you always have to leave the ESCO _____ 'cause they have â€" or the finance company has to do their job. You pay them. Now the finance company needs to get paid, and obviously, you have to pay the finance company. So I'm not sure exactly what the question is, but if it relates to what _____ energy cost you use to calculate your dollar savings, you always use ________ value or the baseline value, whichever is highest.
Irina: We're hearing some background noise, so those of you who didn't mute your phone â€"
Karl: Greg, you'll need to _____ mute. I don't know if I can see any additional questions here. That didn't work.
Irina: I guess we will give you all another couple of minutes to ask questions, and then you also have our contact information on the slide, so please feel free to contact us offline if you have any questions, if any questions come up after today. And think of those that you can ask today in the next couple of minutes. Any more questions?
Karl: I think there are more questions here, Irina, but I can't exactly see them, so we will answer them offline.
Irina: Okay. Thank you very much, everybody, for attending the webinar today, and we will be in touch, sending you the slides and the summary of all the questions and answers that â€" all the questions that have been asked today and all the answers that we're going to provide. Thank you.
Male: And since the questions are still coming in pretty fast, we should probably leave the webinar up so those questions can still roll in.
Karl: That's a good point.
Male: Keep the questions coming.