Energy Performance Contracting:

Energy retrofit for existing buildings canbe very expensive.  Though buildingowners and managers know that energy-efficient buildings are morecost-effective and profitable to operate, many businesses are reluctant tospend the money to do it. One of the most cited reasons for delaying retrofitprojects has been the initial cost. Very often such projects don’t make thebudget because of the longer paybacks. Even with provincial and federalincentives (which usually pays, on average, around 20-25% of the total cost ofthe project), the business are still expected to take on the burden for theremainder.  With slow economy energyefficiency initiatives are pushed to the back burner. Those who have capitaldollars want to invest in more lucrative ventures, while others, they justdon’t want to take on additional risks.  Here is where energy performance contracting could make a hugedifference.   Performance contractinghelps you identify improvements that may result in guaranteed benefits to yourorganization. The two most popular types of energy performance contracts orEPCs in Canada are:  a) the “First-Out”or “Guaranteed Savings” performance contract, and b) the “Shared Savings”performance contract.  By entering into aperformance based contract with reputable Energy Service Companies (ESCOs), youcould share the costs or continue to spend the same amount for energy as youhave been before the retrofit, but now with the added comfort of knowing thatyou are operating a more energy-efficient building that is not only cheaper tooperate but also offers a higher-quality environment for its occupants.   Energy-efficiency does not have to come at ahigh price; all it requires are leadership and commitment.

7.1 Introduction


Energy performance contracting is aninnovative method for purchasing energy-saving improvements in buildings.Energy performance contracting has three distinguishing features that addressthis and other common problems:

·      A single procurement is used topurchase a complete package of services in which one contractor is accountablefor design, purchase, installation, maintenance, and operation of the equipmentto ensure optimum performance;

·      The package of servicesincludes financing of all the project costs, so no up-front money is needed;and

·      An energy performance contractis structured so that payments to the performance contractor are contingent onthe actual level of savings achieved (or energy produced). Normally, thesavings produced by the project are greater than its cost. A performancecontract pays for itself. Since payments to the contractor are contingent onthe savings achieved, it is in the contractor’s interest to maximize the energysavings. The program is supported by utility bill savings which are used to payfor the improvements.





EPC is a turnkey service, sometimescompared to design/build construction contracting which provides customers witha comprehensive set of energy efficiency, renewable energy and distributedgeneration measures and often is accompanied with guarantees that the savingsproduced by a project will be sufficient to finance the full cost of theproject. A typical EPC project is delivered by an Energy Service Company (ESCO)and consists of the following elements:


·      Turnkey Service – The ESCOprovides all of the services required to design and implement a comprehensiveproject at the customer facility, from the initial energy audit throughlong-term Monitoring and Verification (M&V) of project savings.

·      Comprehensive Measures – TheESCO tailors a comprehensive set of measures to fit the needs of a particularfacility, and can include energy efficiency, renewables, distributedgeneration, water conservation and sustainable materials and operations.

·      Project financing – The ESCOarranges for long-term project financing that is provided by a third-partyfinancing company. Financing is typically in the form of an operating lease ormunicipal lease.

·      Project Savings Guarantee – TheESCO provides a guarantee that the savings produced by the project will besufficient to cover the cost of project financing for the life of the project.


7.2 EPC Mode


EPC is a turnkey service, sometimescompared to design/build construction contracting which provides customers witha comprehensive set of energy efficiency, renewable energy and distributedgeneration measures and often is accompanied with guarantees that the savingsproduced by a project will be sufficient to finance the full cost of theproject.


7.2.1 Turnkey Service

In an EPC, an ESCO can provide the fullrange of services required to complete the project, including:

·      Energy audit

·      Design engineering

·      Construction management

·      Arrangement of long-termproject financing

·      Commissioning

·      Operations & Maintenance

·      Savings Monitoring &Verification

Not every EPC project includes all of theseservices; the choice of the exact mix of services in a project is made by thecustomer.


7.2.1Comprehensive Measures

In an EPC, the ESCO tailors a comprehensiveset of measures to fit the needs of the customer, including any of thefollowing:

·      Lighting

·      Heating, air conditioning andventilation

·      Control systems

·      Building envelope improvements(insulation, roofs, windows, etc.)

·      Cogeneration and CHP

·      Demand Response

·      Renewables and biomass

·      Water and sewer – metering and usereduction

·      Sustainable materials andoperations

ESCOs are constantly adding new measures totheir projects, in response to customer requests, but ESCOs should not beconsidered vehicles to push new technologies into the marketplace. ESCOs andtheir customers tend to be fairly conservative when selecting technologies forprojects, because the total cost of most ESCO projects are paid from energysavings, often secured with financial guarantees.

7.2.3EPC Project Financing

Most EPC projects are financed withlong-term debt or leases, though some customers are able to pay a portion orall of the cost of an EPC project with capital budget allocations. In the earlydays of EPC, ESCOs typically provided both project technical services andproject financing, because financial institutions did not understand EPC andwere unwilling to finance EPC projects. Some ESCOs also acted as productdistributors, because normal construction distributors were not willing tostock newfangled devices like electronic ballasts for fluorescent lightfixtures. But ESCOs no longer provide EPC project financing, because there isnow a robust, competitive marketplace of major financial institutions thatprovide it.


7.2.4Project Savings Guarantees

Many EPC projects involve guarantees madeby the ESCO to the customer that the project energy savings will be sufficientto pay the full cost of the long-term project financing. The form of theguarantees varies between projects, because the guarantees are designed to fitthe requirements of particular customers, as well as federal and statelegislation and regulations.


7.3 Process andScope




Business Process

Target (Identify & Prioritize)

Using SMIS, Sales identifies and evaluatespotential ‘Solutions’ Customers (e.g., existing PSA base, newcustomers/markets). Using the Sales Tool Set for targeting and prioritizing,these opportunities are short-listed and prioritized. Customers are contactedand appointments scheduled.

Qualify (Gain Commitment)

Sales identifies and evaluates theCustomer’s performance criteria using the 3 key business metrics (image and reputation,financial performance and risk mitigation) and reviews the SolutionsDevelopment process. Facility information is collected and benchmarked foridentifying improvement potential. A Go/No Go decision is obtained based onboth commercial and technical aspects. Commitment is obtained prior toconducting a preliminary assessment (e.g., purchase order or, at a minimum, anMOU, LOI).

Discover (Preliminary Analysis)

The PDE conducts a preliminary site surveyand determines the improvement measures (FIMs) which include the cost, savings,work scope and risk. The Sales/PDE creates a concise proposal and reviews itwith the Customer, and determines whether a performance guarantee is required.Sales obtains a mutually signed Project Development Agreement (PDA) prior tocommitting future PDE resources for the more comprehensive Detailed Analysis&/or Engineering of project development.

Verify (Detailed Analysis)

Sales submits the standard Retrofit/PCagreement document for Customer’s review. PDE conducts a detailed assessmentemploying staff and external experts (e.g., consultants, design & buildcontractors, etc.) to create a list of improvement measures that meet the Customer’sperformance criteria. The Solutions Team develops and reviews the deliverables,according to DOA, clarifying the scope of work, responsibilities, price,financing, performance standards,

etc. and obtains approvals and boundary conditions in order to finalize aproposal.

Present (Customise Offer)

The Solutions Team reviews and tailors theoffer with the Customer to verify that the performance criteria have been met,i.e., financial models, scope of work, installation methods/clarifications,performance assurance, etc. Requested changes are formally documented andcompiled for later negotiations, i.e., commercial, technical and legal (i.e.,terms and conditions, performance indicators, etc).

Close (Contract Negotiation)

The Solutions Team reviews the requestedchanges from the Customer, both commercial and legal and revises theoffer/contract according to DOA approvals. The proposed (revised) terms arethen reviewed and negotiated with the Customer Team until an agreement isobtained and a contract is ratified.


7.3.2Work scope

A clear scope of work is a key element ofany Request for Proposals. For a performance contract the scope of work isdefined by three items:

·      The extent of the variousservices required (e.g. feasibility evaluation and recommendation of measures,design, construction, financing, operations and maintenance, training,measurement and verification);

·      The buildings included in theproject; and

·      The technologies or end-usesincluded.






Perform a detailed studyof energy cost savings measures and renewable energy opportunities atcontractor’s sole expense. The energy study shall identify all feasible energyconservation, load management, and renewable resource options with benefitsexceeding costs over the contract term.

Design, furnish, andinstall energy efficiency improvements, the Contractor shall be responsible forquality control during the installation of all Energy Efficiency Measures(EEM). Contractor shall inspect and test all work performed to insurecompliance with Contract requirements.

Provide repairs,maintenance, and training for Contractor installed equipment for the term ofthe agreement. Contractor, at its sole expense, shall be responsible forperiodic inspections, tests, adjustments, and repairs required to sustain and/or restore energy systems to as-designed permance and performance requirementsof this contract. Contractor shall provide operations and maintenance trainingand manuals for owner’staff. The Contractor may also propose to provide repairsand maintenance for energy equipment.

Finance all of theequipment and services provided on terms such that the level of payments by theowner is contingent on the measured energy cost savings (or energy production).This means that the total payments by the owner for utilities, fuel and theenergy performance contract do not exceed the amount that the owner would payfor fuel and utilities without a performance contract. Continuation of thecontract is contingent upon the appropriation of funds to fulfill therequirements of the contract by the applicable funding authority.

The term of any energyperformance contract shall not exceed fifteen years. The owner prefers anagreement term that will maximize the energy-savings and maintenance servicesthat can be provided under the contract. The contract will provide that theowner shall reciece title to the energy-saving measures being financed.