Fundamental Concepts of Performance Contracting

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Fundamental Concepts of Performance Contracting

• John Kauppinen
• NORESCO

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Current Situation in Cities, Towns and School
Districts

• State local budget crunch
• Rising energy maintenance costs
• Aging buildings with obsolete systems
• Facilities staff stretched to limit

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What is Performance Contracting (ESPC)?
Energy related capital improvements paid from
future energy and operating cost savings
How it works

• Guaranteed performance
• Single source responsibility
• Life-cycle versus first cost approach
• Improvements can be made with no impact to
  taxpayers
• Supported by Massachusetts enabling legislation

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Energy Services Company Turnkey Approach

• Expert survey to identify and evaluate
  opportunities
• Design project specifications
• Manage project through design, installation and
  guarantee period
• Arrange for most-favorable financing
• Ongoing maintenance and training of staff
• On-site or remote energy monitoring management
• Long-term partnership/sustainable solution

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Focused on a Life-Cycle Costs
Initial Construction Costs are but the Tip of
the Iceberg
ESCOs Focus is on the Total Life Cycle Cost
of Ownership
There are Far Greater Hidden Operation and
Maintenance Costs
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Summary of Massachusetts Legislation
Municipalities and School Districts may now
implement an ESPC through eitherMGL Chapter
25A, Section 11C RFP processor Chapter 25A,
Section 11I RFQ process (approved February 03,
2006)
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RFP or RFQ - Evaluations SimilarESCOs must be
certified by the MA Department of Capital Asset
Management (DCAM)

• RFP ESCO Selection
• Qualifications
• Technical Merit
• Responsibility
• Responsiveness
• Overall Costs Taking into Consideration Many
  Variables
• RFP Criteria Shall Include the above, but NOT
  Limited to it

• RFQ ESCO Selection
• References of other Projects
• Quality of Products Proposed
• Method to Determine Savings
• Reputation and Capabilities
• Conformity with bid specs
• Time to Complete Project
• ANY other Factors the Public Agency Considers
  Reasonable and Appropriate

Tip Speak with many local references built
by the project team, both recently completed
and older projects
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ESPC Process

• Identify feasibility and opportunity for ESPC
• Brief all parties involved and gain support for
  the program
• Issue an RFP/RFQ under the applicable MA
  legislation
• Select preferred ESCO and negotiate agreement
• Sign detailed Energy Audit Agreement
• Select final project scope, enter into an Energy
  Services Agreement and arrange project financing
• Construction
• Project Performance / Measurement Verification

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Comprehensive Project - Best Approach
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Sample Project Cash Flows
Total Project Cost 1,340,105 Total of
10/12 Year Lease Payments 1,617,247/1,676,808
Excess Cash Flow Over 10/12 Years
12,787/279,233 Assumes 40,000 Utility Rebate
Deducted from Project Cost 3.9
Tax Exempt Municipal Lease
No Escalation in Energy Prices Expected in Next
10 Years
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• Use the Guaranteed Excess Cash Flow to Upgrade
  Obsolete Infrastructure, as in the Following
  Examples

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Old Electric Boilers
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The New Boilers
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Old Oil-Fired Boilers
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New Gas-Fired Boilers
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Outdated Energy Management Systems
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New Energy Management Systems
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Old Rooftop Units
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New Gas-Fired Rooftops
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Conclusion

• Performance contracting is an effective method to
  improve your infrastructure without capital
  budgeting
• Dont keep picking off the low-hanging fruit
  that saves energy but do little to improve your
  buildings
• Massachusetts has an easy-to-follow, established
  process to solicit for performance contracts
• Contact a DCAM-Certified ESCO today to find out
  more