Jami Hall of PLASMA in Alliant Energy-Interstate Power and Light Co Performance Contracting Brochure

[Darren T. Kimura]

Feb 1, 2008 12:00 PM, By Beck Ireland, Staff Writer

In 2005, Kentucky procured a statewide LED traffic signal retrofit.
Not only did this project make it the second state — after Delaware —
to use LED modules in all its traffic signals on state-maintained
routes, but it also decreased the state's traffic signalization energy
costs by 95%, at an estimated annual energy savings of $1.7 million.
In addition, the retrofit decreased annual maintenance costs to the
tune of $1.5 million. And for all of this, the commonwealth wasn't out-
of-pocket a single taxpayer cent.

Kentucky's traffic signal retrofit required no up-front capital
expenditures because the funding comes exclusively from the energy
cost savings resulting from the upgrades. The decrease in maintenance
fees is just the cherry on top for the state. In fact, over the life
of its six-year energy savings performance contract (ESPC), the
project actually may save the state $10.2 million.

An ESPC is an agreement between an energy services company (ESCO) and
a building owner. The owner reimburses the ESCO for the project from
the energy savings on a monthly basis over the contract term (usually
between five and 10 years) and receives long-term energy savings and
new technology benefits. Once the contract is completed, the customer
is able to enjoy the benefits of lower energy costs as well as new
energy-efficient systems and equipment.

ESPCs have been used since the 1970s, but until recently, with
increasingly stricter state and federal mandates for energy efficiency
in public buildings and projects, they were considered a form of
“alternative” financing. It's only been within the last decade that
ESPCs have become more mainstream — especially for schools (see “Old
School” below) — but almost any project that saves energy or produces
energy can be funded through an ESPC.

“Of course traffic signals are government projects, but you usually
associate schools or municipal office buildings with ESPCs,” says Jami
Hall, certified lighting management consultant (CLMC) and president,
Stones River Electric, Nashville. “Many people don't think about the
traffic signals.”

Hall's firm, the subcontractor on the Kentucky traffic signal
retrofit, replaced 78,000 incandescent signals at nearly 3,000
intersections and almost 500 school flashers, flashing beacons, and
advance-warning flashers with LED technology within a period of six
months.

Projects built using ESPCs, Hall says, are just one of the many ways
for electrical contractors to expand their businesses. In particular,
firms with lighting experience have a distinct advantage over energy
management or design firms that participate in ESPCs. When Stones
River began working with ESCOs on these projects six years ago, its
roots in electrical contracting proved advantageous. The company was
able to position itself as one that could provide the energy audits as
well as the installations, self-performing most of its own work. Since
its entry into ESPC vertical markets, the company has worked on
lighting projects that average between $1 million and $1.5 million,
with its largest project to date totaling $4.5 million. “It's a good
opportunity for electrical contractors if they learn the business,”
but it's an entirely different business than your standard contracting
business,” Hall says.
Different strokes

Electrical contractors that work in the public sector are used to
strict bidding laws. Because ESPC regulations vary from state to
state, the agreements may be exempt from these laws, depending on
which state you work in. For example, Kentucky requires a procurement
process with a request for proposals (RFP), whereas Tennessee treats
ESPCs as professional services so projects can be negotiated. (Guides
and advice regarding RFPs by state are available from Rebuild America,
a network of community-based partnerships dedicated to saving energy
in buildings, at www.rebuild.org or at state energy offices, which can
provide RFP guidelines specific to their states.)

Variations on ESPCs include projects that can be negotiated down
through the subcontractors, a negotiated contract between ESCO and
facility owner with the subcontracts out to bid, or the contract
between ESCO and the building owner is bid out.

In most cases, ESCOs provide the financing and also may arrange for a
variety of other services, such as conducting a facility energy study,
identifying cost-effective projects, project design, project
management, commissioning, and the hiring of subcontractors. The form
of the contract may vary from a set price for a fixed scope of work to
a form in which the electrical contractor, as the ESCO's
subcontractor, would share some of the risk of project development in
order to negotiate a higher price for its work. “In all of the cases
I'm familiar with, the electrical contractor works as a subcontractor
to an ESCO in a performance contract,” says Donald Gilligan,
president, National Association of Energy Service Companies (NAESCO),
Washington, D.C. “But the ESCOs could be helped by an electrical
subcontractor, depending on the state.”

A typical ESPC has a single RFP covering all aspects of the project
and one set of contract documents with the selected ESCO. The process
begins with an evaluation of a facility's potential for energy-
efficiency improvements by the facility staff. If the potential seems
promising, the agency prepares an RFP. This RFP covers engineering,
equipment purchasing, construction, and commissioning. The agency
awards the contract to a single contractor who is accountable for all
services and guarantees a level of savings to the facility.

Management of the design and construction phase of the performance
contract is essentially the same as the management of a large design/
build retrofit or repair and maintenance project. However, performance
contracts incorporate several other elements that are not associated
with conventional retrofits — which Hall refers to as “low-hanging
fruit” — and aren't nearly as comprehensive. Stones River Electric's
approach to a standard lighting retrofit project is to assess the best
lighting upgrade at the best price to meet the client's needs. Those
clients aren't interested in energy management systems or controls.
“They already know what they want, and you're just going to price it
up for them,” she says.

Performance contracts require a comprehensive program. “We look for a
real turnkey approach to everything about their electrical system,”
says Hall, explaining that this includes a room-by-room detail of the
light fixtures, controls, transformers, emergency generators, energy
management systems, and exterior lighting and the potential energy
savings from the retrofit. The firm provides a complete investment-
grade audit with the various energy calculations on each energy
conservation measure.

An electrical company that doesn't understand the nature of
performance contracting could be in over its head when starting out,
according to Rhonda Courtney, business development manager, Stones
River Electric. The mistake lies in treating the project as if it were
a time and materials (T&M) issue instead of from a design standpoint.
“We can look at that scope of work and cost it up, and then also we
look at the energy savings side of it,” she says. “We understand the
payback requirements and the things that are important to end-users as
well as ESCOs.”
Check, please

Performance contracting is a safe method for government agencies,
particularly schools, to get work done. ESPCs are rarely funded with
capital, and the money the agencies pay to the ESCOs is already
earmarked for previous higher utility costs or maintenance and
repairs. So once the project's developed, the agencies merely realign
those funds within their existing budgets. They don't have to ask
taxpayers for more money.

However, the method is not totally risk-free. The ESCO has guaranteed
the owner a certain amount of energy savings with which to pay for the
project. “The ESCO owns it from a guarantee standpoint, that if the
savings are not achieved as they've laid out in the contract to the
client, they have to write the owner a check,” says Courtney.

Essentially, the ESCOs are selling a financial proposition in the form
of a performance contract. Unlike bid and spec, the responsibility of
pricing and performance is off the owner and lies directly with the
ESCO and the electrical contractor hired as the subcontractor. The
design is created with high-performance and commissioning in mind. “We
have to live and die by our design,” Courtney says. “When we design a
project, unless the client wants something new or over and above
what's been designed, there are no change orders. We deliver to our
design.” Therefore, if the electrical contractor doesn't do an
accurate count of lights, or if the design doesn't meet the lighting
requirements, the contractor or the ESCO could pay for it — literally.
Howdy, partner

Because the ESCOs could be the ones paying for mistakes, their
engineers verify and approve the final package for the retrofit.
“They're the ones guaranteeing it, so of course they're going to make
absolutely sure that they agree with our calculations,” Hall says.
“But they're depending on us to know about the electrical system and
what the energy savings per each piece of equipment is.”

Therefore, working for ESCOs in this capacity is more like cultivating
a relationship than a business agreement. “Many ESCOs won't just pick
up the phone and work with any electrical contractor they run into,”
Hall says. “They have to really trust the proposal given to them.”

In this sense, a performance contract is a much more cooperative
arrangement than many construction contracts, which are sort of
adversarial, according to Gilligan. ESCOs looking to hire an
electrical contractor want qualifications such as flexibility and an
ability to understand the cooperative nature of the contract. “This is
not really the kind of zero-sum game that a normal construction
project is,” Gilligan says. “There's more flexibility, particularly in
developing the scope of work and negotiating that with the building
owner.”

The real trick to success in working with ESCOs may be to forget
everything firms have learned working for general contractors (GCs).
Courtney warns that ESCOs don't run things the same way as the
familiar GCs. They depend on the subcontractor to track material, even
when it numbers into the hundreds of thousands, and employ workers who
understand energy audits and the systems and software used to generate
the savings reports. In addition, you have to be willing to wait. “You
have to be able to go through some highs and lows waiting for your
proposal to go to contract,” she says. “You'll do a survey and then
that might not go to contract for months or a year. You don't have the
control over when they go to contract, and that's very difficult for a
company. You hire people, you get geared up to do some work, and you
can't control when that contract is coming.”

Keeping the firm at a maintainable size is also key. The way Stones
River approaches this challenge is by cross training its lighting crew
with its electrical crew. For the most part, this is not the type of
work journeymen electricians want to do, Courtney says. “They will do
it on occasion to fill in a gap here or help out to finish a project,
but we employ more lighting techs than we do journeymen electricians,”
she says.

It's only after the project is completed that it starts to feel like
more of a typical construction project. Despite several attempts to
include a maintenance program with some of its projects, Stones River
has been turned down. Instead, it closes out of the contract and the
document and offers a one-year warranty period. By contrast, the ESCO
stays with the client for the duration of the contract, sometimes
between 10 and 12 years. “We don't do any monitoring once our
project's done,” Hall says. “But what we will do is take light-level
and wattage readings and give them all that information so they know,
just as part of their measurement verification, these were the savings
before and after.”


Sidebar: Old School

When the economy falters, the maintenance budgets of K-12 schools are
often the first to feel the squeeze. According to the U.S. Department
of Energy's Energy Efficiency and Renewable Energy's brochure,
“Performance Contracting: Financing Better Schools Through Energy Cost
Savings,” many schools respond by deferring maintenance to the
detriment of the learning environment. This is bad news given that the
average school in the United States is 42 years old. Fortunately, many
school districts are hearing the word about performance contracting as
a way to reduce energy costs without up-front payments for the
products and installation. For more information on performance
contracting in schools and to read some case studies, download the
full text of the DOE's brochure at
www.asbointl.org/ASBO/files/CCPAGECONTENT/docfilename/0000003168/Performance_Contracting_in_K-12_Schools.pdf
or read “Sign Up For Savings” by Mike Kennedy in the October 2002
issue of American School & University at
http://asumag.com/Maintenance/business/university_sign_savings/


Sidebar: Glossary of Performance Contracting Terms

*

End-use: A general category of energy use within buildings
(e.g., lighting, space cooling, water heating, etc.)
*

Energy baseline: A calculation or measurement of each type of
energy that would have been consumed in existing facilities or
technologies, if the contractor had not installed energy-efficiency
measures. The baseline is used in the measurement of energy savings
from the project.
*

Energy efficiency measure (EEM) or energy conservation measure
(ECM): The installation of new equipment, modification of existing
equipment, or revised operations or maintenance procedures to reduce
energy costs by improving efficiency of use or conservation.
*

Energy performance contract: An agreement between a private
company and a facility for the provision of energy services and
equipment, including (but not limited to) building energy conservation
enhancing retrofits and alternate energy technologies. The private
company agrees to finance, design, construct, install, maintain,
operate, or manage energy systems or equipment to improve the energy
efficiency or produce energy in connection with the facility in
exchange for a portion of energy cost savings, lease payments, or
specified revenues. The level of payments is made contingent upon the
measured energy cost savings or energy production.
*

Energy service company (ESCO): A private company providing
energy management equipment and services, including feasibility
studies, design, installation, maintenance, and financing.
*

Guaranteed savings: A type of performance contract under which
the facility pays a lump sum price (usually in monthly installments)
for the energy-savings improvements, and the contractor guarantees
that energy cost savings will equal or exceed this payment.
*

Municipal lease: A contract granting use of property during a
specified period in exchange for a specified rent. When a public
agency is the user of the property, the income from the lease is
exempt from income taxes. These tax savings are passed on to the
agency by a reduced interest rate.
*

Priority-listed proposer: Those responsive and responsible
proposers who are selected for the priority list when numerous
proposals are submitted.
*

Shared savings: A type of performance contract in which the
facility and contractor agree to share the measured energy savings on
a pre-determined basis. Under a shared savings contract, the agreement
to share savings may be for a fixed time period or until a fixed
amount has been paid. Shared savings contracts are not recommended by
the State of Hawaii.
*

Simple pay-back or pay-back period: A measure of project
economic effectiveness, the pay-back period is calculated by dividing
the initial project cost by the annual project savings.

Source: Alliant Energy-Interstate Power and Light Co., “Performance
Contracting Brochure”