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What is an energy savings performance contract?

An energy savings performance contract is an agreement between an energy services company (ESCO) and a building owner. Oregon defines it as a public contract between a state agency and a qualified energy service company for the identification, evaluation, recommendation, design and construction of energy conservation measures, including a design-build contract, that guarantee energy savings or performance. (ORS 279A.010)
 
At its core, an energy savings performance contract is a “design-build” contract with some highly tailored specializations. The owner uses the energy cost savings to reimburse the ESCO and to pay off the loan that financed the energy conservation projects. Agreements with ESCOs are typically five to seven-year agreements. The ESCO provides an array of services:
  • Conducts a facility energy study
  • Identifies cost-effective projects
  • Designs all aspects of the chosen projects
  • Hires subcontractors
  • Manages the project installation
  • Assists in structuring and securing the financing for the project
 
If an owner chooses, the ESCOs will
  • Guarantees savings (if utility savings are less than the lease cost, the ESCO pays the school district)
  • Adhere to a “Not to Exceed” project price
 
What kinds of projects can use energy performance contracting?

Energy savings performance contracts are not for individuals. They are for large institutions or combination of institutions. Virtually any project that saves energy or produces energy can use an energy savings performance contract. Typical projects have included energy management control systems, HVAC equipment, high efficiency lighting, variable speed drives, insulation, and window replacement.  
 
However, as a contracting vehicle, ESPC are best suited to large (> $750,000 capital cost) projects that impact multiple (i.e., two or more) large energy systems. Use the simple chart below to determine if an ESPC makes financial sense for your organization and project:
 

 
Indeed, there are different rules for state agencies, who must also comply with SEED requirements when seeking to use an ESPC for a project.  This builds on the previous chart and while it is only for state agencies, it is instructive to anyone considering a ESPC project:
 
 

How are projects financed?

Performance contract projects were typically financed through the ESCO. This is not the case now, as most owners arrange their own financing. There are multiple financing paths to pursue: The Oregon Department of Energy Loan Program and private lenders (banks) can also finance projects. Utility rebates/incentives, construction-site recycling, and proceeds from the sale of  freon (from existing chillers) can reduce project costs.
 
Why use an energy performance contract? 

Owners without project management expertise or without the time to pursue cost-effective energy projects can consider using ESPCs. When executed correctly an ESPC can have many advantages over traditional contracting methods. From a taxpayer perspective, ESPCs used by local/state governments provide a vehicle to quickly achieve substantial energy savings with limited fiscal or budgetary impacts – due to the financing of large projects via energy savings, not the capital budget.

Below is a brief list of some of the benefits
  1. Speed – Generally relies on utility budget line item to finance the project, allowing for speedier approval / ODOE has pre-screen firms; potential clients can focus mostly on selecting a firm based on approach to project
  2. Continuity – Single point of contact for the client from project scoping through equipment commissioning / Technical experts embodied in energy service firm
  3. Accountability  - One firm oversees and must deliver on all aspects of the project, especially the energy savings / No change orders unless client changes scope / Open book pricing on subcontractors
  4.  Risk Mitigation – Maximum project cost / Guaranteed energy savings / Final compensation tied directly to performance of installed systems / Energy services firm accepts technical responsibility / Selection is based on approach and experience in achieving energy savings from similar projects, not lowest bid.
  5. Clarity – Project definition includes comfort and performance standards of installed equipment / Owner can specify equipment based on their own criteria
  6. Comprehensiveness – Energy services firm incented to maximize financial participation from other programs (Business Energy Incetives, ETO, etc.) / Project design must optimize multiple systems to achieve maximum savings / Commissioning and staff training are integral to the contract as it impacts guaranteed savings
  7. Flexibility – Like other “Design-Build” contracts, the project scope can expand or contract dynamically based on changing variables (i.e., changes in utility rates, budget cuts, new technology, etc.)
 
What role will the Oregon Department of Energy (ODOE) play into the future?

ODOE will be doing several things. First, ODOE plans to maintain and update the prequalified list annually. ODOE does not plan on adding any more firms to the prequalified list once the third solicitation is concluded. For state agencies, by default ODOE’s State Energy Efficient Design (SEED) team will provide technical oversight on project design. In addition, the SEED team can act as an “owner’s rep” when requested by the contracting agency. Lastly, ODOE will receive a copy of every facility audit conducted by a prequalified firm on any government agency (e.g., school, port, etc.). ODOE staff can review these audits upon request by the contracting agency.
 
What should we expect to see over the next few months/years with regards to Energy Savings Performance Contract services in the state of Oregon?

In the near term ODOE will be adding more firms to the state’s prequalified list. From a business perspective, ODOE anticipates several million dollars worth of energy efficiency work at local government and university buildings will be launched in 2010 using energy savings performance contracts. ODOE anticipates state agencies will contract for less work during this biennium; between $1 million to $2 million worth of work.
 
How many firms have been/will be “prequalified” by ODOE?

Six firms have been prequalified already to provide ESPC services to state agencies. Other entities are welcome to use the list and associated documents.
 
What goes into being a state of Oregon “prequalified” firm?

ODOE prequalified firms based on three criteria: their (1) profile, (2) qualifications, and (3) approach to ESPC work. Each of the prequalified firms will have the demonstrated staffing, capabilities, experience and balance sheet to work with state agencies. 
 
Where do I get more assistance?

The Oregon Department of Energy can provide help to develop solicitations, select firms, assess the viability of proposals, and review measurement and verification plans.
 
Contact: 
Oregon Department of Energy
625 Marion Street, NE
Salem, OR 97301-3737    
1-800-221-8035 (toll-free)
ESPC Team @ 503-378-4040 (direct)
E-mail: energyweb.incoming@state.or.us
ESPC Home 
 
Pre-qualified ESCOs