Table of Contents

Introduction

Chapter One – Energy Performance Contracting: An Overview

Chapter Two – Energy Management: Options and Financing

Chapter Three – Energy Performance Contract Features and Structure

Chapter Four – Initiating an Energy Management Project

Chapter Five – Implementing an Energy Performance Contract

Chapter Six – The Energy Innovators: Summary of Benefits

---

Introduction

The Energy Innovator Ventures Initiative is a Green Plan initiative designed to help Canadian organizations look at energy efficiency as a means to cut costs and prevent pollution.

Already, many corporations, institutions such as schools and hospitals, towns and cities have sought the benefits of energy efficiency. The Energy Innovators Venture was created to lend organizations a hand by facilitating access to programs and by providing a comprehensive package of support services, such as information o n innovative financing arrangements, for energy management projects. Called energy management service contracting, this type of arrangement allows companies to fund energy efficiency improvements through energy cost savings. Energy Innovator support services are available to all members interested in implementing energy efficiency improvements in their facilities.

This Energy lnnovutors Primer provides a comprehensive description of the steps involved in assessing, developing and implementing building energy efficiency projects. It provides a detailed overview of the energy management service option. It explains the roles of the different parties involved in carrying out energy management projects, including corporations, energy suppliers or utilities and management firms. It also provides information o n the support services provided as part .of the Energy Innovators initiative, such as technical information, training, model documents and plans, and employee information.

This Primer provides a n important reference for members looking to achieve reliable energy savings and long term benefits of improved facility energy efficiency.

Chapter One – Energy Performance Contracting: An Overview

What is Energy Performance Contracting?

Energy performance contracting is a means of implementing energy efficiency projects and reducing operating costs with no up-front cost and no risk to the company. Energy performance contracting provides a full range of project services, which can include analysis, design, engineering, construction, commissioning, staff training, maintenance and monitoring, as well as the procurement of capital resources needed to implement the project. Payment to the management firm is based solely on the energy and other cost savings realized through the efficiency improvements. Most of the technical, financial and maintenance risk is the responsibility of the energy management services supplier.

What is an Energy Management Firm?

An energy management firm is an organization capable of providing a turnkey service for the implementation of building energy efficiency or energy management projects. It brings engineering and energy management expertise, project management experience and project financing capacities together as a package. Such firms may be energy management companies, property management firms, or o consortium involving consulting engineers and other players involved in the energy field capable of providing a range of energy management services. They are also known as energy performance contractors or energy service companies (ESCOs).

The services provided by an energy management firm are not new. It is the comprehensive range, including financing, and the delivery by one supplier that make energy performance contracting innovative and attractive to organizations. Furthermore, by tying the payment for the work to the energy savings, an energy management firm virtually gives organizations an edge over their competition since they do not have to pay more for the implementation of energy efficiency measures.

Energy Management Service Contracting: Benefits

• reduced energy operating costs;
• access to external funding;
• transfer of technical and financial risk;
• improved building performance;
• improved occupant comfort;
• opportunity to reduce environmental impact;
• staff training on energy efficiency;
• ongoing professional advice; and
• long term planning of energy use.

Chapter Two – Energy Management: Options and Financing

Introduction

Options for funding and implementing an energy management project in your organization should be carefully assessed. You should ensure that you get support, at the very start, from your senior key decision makers since the option you choose may have financial and tax implications for your organization. You will also need top level support to ensure that your energy management project is accepted and implemented by staff throughout your organization.

Remember that if you opt to postpone a project indefinitely because of lack of capital funds or skilled staff, you will still continue to pay for the inefficient use of energy, and that can cost you more in the longer term. So, evaluate the advantages and disadvantages of pursuing an energy performance contract against other alternatives to determine its feasibility in your organization.

The first section of this chapter is a short discussion on the most common options of implementing energy efficiency improvements in organizations. The second section looks at some financing options, including savings financing under an energy performance contract scenario.

Implementing Energy Efficiency Improvements in your Organisation: What are your options?

In-House

When reviewing alternatives for implementing a comprehensive energy management program in your organization, you should assess whether you have skilled in-house staff and the resources to carry out your project.

If funding is available to carry out a comprehensive project and if sufficient, skilled staff are available over the long term to manage the various contracts and to ensure the overall integrity of the system and monitor the project, using internal resources to comljlete the project should be considered. However, you may find it may still be quicker and more efficient in the long run to have the work completed through energy performance contracting.

Energy performance contracting will be more expensive, dollar for dollar, than using available in-house engineering, construction and project management personnel and budgeted financial resources.

Leasing Energy Efficient Equipment

Leasing corriponies and some equipment manufacturers and distributors are becoming increasingly interested in using leases to finance the purchase of large energy efficiency assets, such as computerized energy management systems.

Leasing is a financing mechanism only, with payment obligations set out according to a fixed schedule. Payments are thus not linked to the achievement of energy savings. In addition, leasing arrangements may not include provisions for general equipment repairs or ongoing monitoring activities, both of which are integral to energy performance contracting.

Manufacturer Guarantees of Energy Savings

Some manufacturers of energy efficiency equipment may offer guarantees of energy savings in addition to standard equipment performance warranties.

Such guarantees, however, are not linked to the actual achievement of savings and are provided only for individual pieces of equipment, unlike the comprehensive retrofit program provided by energy performance contracting, which guarantees the results from the energy management system.

Consulting Engineering Services

Engineering consulting companies can carry out comprehensive energy efficiency projects on the basis of a fixed turnkey price. The payment, however, is not tied directly to energy savings achieved. The scope of services offered is not likely to be as extensive as that offered through energy performance contracting.

Energy Performance Contracting

The comprehensive service provided by an energy management firm incorporates engineering and construction expertise, as well as experience in identifying and eliminating all unnecessary energy costs in buildings. The service package can include:

• audits of your facilities;
• project design and systems integration;
• project financing and access to utility incentives;
• construction and installation;
• long-term performance monitoring;
• training operator and maintenance personnel;
• information on environmental changes for building occupants; and
• guaranteed results.

Getting senior management support for your project is key to ensuring its success. As with any major project expenditure, senior management would wish to consider the capital budgeting implications and tax considerations of energy management projects. In fact, no energy manage ment service contracting effort should progress beyond the exploratory stage without the support of your organization's key decision makers. Senior management and decision makers may need to be introduced to the concepts, benefits and limitations of savings financing and energy management service contracting. You may consider asking an energy management firm to make a formal presentation on the types of arrangements open to your organization, and follow up with a feasibility study on how this process may be profitable for your organization.

Also consider involving key operating personnel from the start. Their involvement is essential to the success of an energy performance contract.

Be sure that the resources needed to develop a successful energy performance contract are available. The Energy Innovators package of information, such as model documents and technical information, are available to help your in-house staff. Some of the required resources you need for an energy management service contract include:

• technical expertise to provide background information and operational data on the building, to help develop technical specifications, to evaluate proposals, and to work with the management firm to oversee implementation;
• financial expertise to evaluate the financial provisions of the options under review; and
• legal expertise to help draft and negotiate the contract.

The energy management firm carries out a building energy audit and outlines the potential for energy effi'ciency improvements. The following are usually considered base level require ments in assessing a building's suitability for energy management service contracting efficiency improvements:

• an annual energy bill of at least $100,000;
• potential energy retrofit of at least $100,000;
• a wide range of potenttol energy improvements; and
• an overall project payback of less than eight years, optimally four to six years,

It may be possible to group a number of buildings with smaller energy savings potential to make a larger, more attractive project. A complex of buildings under common management, located in one site, can be grouped to produce significant incentives for energy management service contracting.

The overall condition of the facility is also important. Buildings in poor repair are usually not considered good candidates for energy performance contracting. However, buildings targeted for major renovations (e.g. installation of air conditioning system or removal of ceilings) over a three-tofive year period may benefit from energy performance contracting.

The energy baseline is fundamental to energy management service contracting (see Chapter Three). If an occurate and meaningful baseline cannot be determined from existing records, it is more difficult to calculate potential energy savings. Two years of statistics are usually required to develop a stable baseline.

New facilities, less than two years old, do not have a long enough history of energy use to develop an accurate energy baseline. It takes at least that long for a new building to settle into a consistent pattern of energy use.

Methods of Financing Energy Improvements

The financing component of an energy performance contract is an innovative technique. Traditional methods of financing can also be considered to pay for energy efficiency improvements.

Consider a small commercial facility requesting an energy audit from an engineer to identify potential improvements to its energy-using systems. The engineer's report includes relamping, installing a high efficiency water heater, and installing a computerized energy management system to optimize heating and air conditioning equipment performance.

The estimate for materials and labour to carry out the improvements is $30,000. Because the measures will reduce the building's consumption of both electricity and natural gas, the engineer estimates that the owner would save $10,000 per year on energy bills, based on current rates. If rates go up, savings will be greater. The improvements are expected to last 10 years.

let's assume the annual savings from the improvements will remain constant at $10,000 over 10 years. The financing options are:

Internal Financing

At the projected savings rate of $10,000 per year, cumulative savings will reach $30,000 after three years. Therefore, with a $30,000 initial investment, the improvements have a three-year payback.

The savings should continue to accumulate at $10,000 per year through the tenth year and hopefully beyond. After 10 years, savings of $100,000 will be realized on an investment of $30,000, for a net cumulative cash flow of $70,000.

While this appears to be a worthwhile investment, several risks could reduce the attractiveness of the financing choice. The future savings depend on o number of variables, including the accuracy of the engineer's calculations, the performance of the equipment and the prices of natural gas and electricity. Changes in one or more variables could increase or reduce the cash flow.

In order to make an informed decision, the facility owner must assess both the expected return (cash flow projection) and the risk that the returns will not be achieved. These are often difficult to quantify

Many organizations use cash financing for all but extraordinary projects, such as acquiring a new building or constructing a ma)or addition. Organizations that invest only when cash is available avoid the risk of becoming financially overextended with repayment obligations.

On the other hand, total reliance on all-cash financing often meons that some worthwhile conservation projects never get done, which ultimately costs more.

Borrowing

Assume two-thirds of the cost of the project can be obtained as a bank loon of $20,000. The loon carries a 13 percent interest rate, has a three year term and requires monthly payments. At the end of the term, the full principal ($20,000) has been repaid, along with $4,261 in interest charges. Beginning in the fourth year, the owner's annual net cash flow increases to $10,000.

By borrowing, the owner can obtain the benefits of energy efficiency improvements even with a relatively small investment of its own funds. The tradeoff is that the owner receives lower cash flows while the loan is being repaid.

In addition, a loan for conservation measures can be structured to provide a positive cash flow throughout the repayment term. In each year of the loan, the value of the energy savings ($10,000 per year) exceeds the loan payment ($8,086 in principal plus interest), so the owner is ahead each year.

As with all cash financing, the owner bears the risk that the projected energy savings do not moterialize. In a loan situation, the owner must make loan payments, whether the energy savings are there or not.

Instalment Purchases

An instalment purchase agreement is a financing mechanism that is often available from manufacturers or installers of energy efficiency equipment and systems. An owner acquires equipment by making monthly or quarterly payments for a specified term. At the end of the term, the owner owns the equipment outright.

An instalment purchase agreement may also be referred to as a leasepurchase, a financing lease, or a conditional sale, none of which should be confused with a true lease, discussed below.

In general, instalment purchases carry somewhat higher interest rates than bank loans, as no down payment is required. Terms are typically three to seven years.

As with a loan, payments have principal and interest components. The payments may be made to the vendor or independent financing organization. However, the party thot provides financing retains CI security interest in the equipment until the contract is complete.

Lease

A lease is an agreement under which payments are made for the right to use certain equipment or property. No upfront investment is required. Unlike loans and instalment purchases, leases do not automatically provide for ownership of the leased equipment.

The term “true Lose” is sometimes used to distinguish this type of agreement from a lease purchase, lease-to-buy or financing lease, which refer to instalment purchase.

Typical lease terms are three to seven years. If actual savings fall short of projections, the lessee (user of the equipment] is still liable for payments and may experience negative cash flows. At the end of the term, the lessee usually has three options: purchase the equipment, renew the lease, or hove the leased equipment removed.

If the purchase option is exercised, the price is normally the estimated fair market value of the used equipment. The buyout price is usually not specified initially. Only after paying the purchase price, which is usually a lump sum payment, does the lessee take ownership of the equipment.

leasing can be structured to provide a positive cash flow through the term, although this may not always be possible. Organizations should confirm whether leasing arrangements are allowed for limited-use property (equipment that could not economically be removed from one building for reuse in another).

Energy Performance Contracting

An energy performance contract is an agreement for which an energy management firm furnishes a comprehensive package of energy efficiency services to a facility owner.

The energy management firm (or a bank affiliated with that firm) bears the entire initial cost of making improvements, In return, the owner makes monthly payments that are tied to the level of energy savings generated. The payments are structured so the owner does not experience a negative cash flow. The energy management company guarantees that actual savings will always exceed scheduled payments. If savings fall short, the energy management company absorbs the difference. The performance contract normally runs for four to six years, and can extend to 10 years for very large projects. The contractual arrangement is usually first-out or fast payout; shared savings; or chauffage. These types of arrangement are discussed in greater detail in Chapter 3.

Advantages of Energy Performance Contracting

A review of the following areas of facility energy management planning and implementation illustrates the value of the comprehensive energy management service approach in delivering building energy improvement projects:

Identification of Energy Inefficiency

Energy records, system characteristics and building operations are analyzed and interpreted to pinpoint areas of energy inefficiency. A management firm's experience with other projects is essential for proper evaluation of the analytical data.

Planning System Design Changes

Preliminary system improvements are planned during the analysis of facility energy use. The initial concept for improvements may be modified at this stage to take into account any site differences from the situation shown in the plans. This helps avoid surprises later, such as jurisdictional, zoning, labour, regional or provincial standards, as well as external, adjacent or linked physical factors.

Since the management firm is responsible for effecting energy savings and has a vested interest in those energy savings, it is committed to overcoming any difficulties or discrepancies either during the design phase or later during construction.

Revising Operating Procedures

Revisions to operating procedures are undertaken to ensure that a system retrofit operates as planned and at the predetermined cost. The systemic measurement of cause and effect relating to operational changes is unique to the energy management service type of engineering. It is this approach that recognizes the interdependence of the components, the key role played by operating personnel in achieving energy efficiency.

Construction and Commissioning

Equipment installation and commissioning are accomplished with as little disruption and inconve nience to facility occupants as possible. It is experience rather than theory that most often proves indispensable here.

Since the energy management firm provides a turnkey service, the company is not obliged to devote staff time to coordinating the work schedule, suppliers and contracts.

Effective Operating and Repair Procedures

Installed equipment is maintained to ensure that the energy management improvements perform as planned and at the predetermined cast. Under an energy performance contract, the facility will benefit from additional surveillance of equipment performance, both during and after contract completion. In addition, training of operations staff will help to ensure that effective operating and repair procedures continue beyond the contract term.

Proof of Savings

Utility metering is usually used to calculate energy savings in a building that has undergone energy efficiency improvements.

Where assumptions have to be made, due to a complicated or extensive distribution system, their use must be deemed reasonable by the company. Adjustments may be required to account for the effects of weather, occupancy changes, operation and maintenance needs in a base year compared to the current year. Changes in the utility rate structure and the resulting real cost of energy could require additional engineering and financial analysis.

Summary

To be successful, energy management service contracting depends on a strong commitment to partnership over a relatively long term between the company and the management firm.

Energy management service contracting can require complex negotiations. It is more than just a financing mechanism. It is a management agreement between the company and the manage ment firm that transfers responsibility for many of the details of the energy efficiency improve ments to the management firm. It is also a form of risk management, because the management firm assumes the technical and financial risks that the energy efficiency improvements will not perform as expected.

Flexibility is fundamental to the energy management service contracting approach. Within the buildings retrofit industry, the conventional design construct sequence does not always apply because design modifications, on site, are often necessary to resolve unexpected problems. Energy performance contracting provides a more flexible, interactive approach to solve these problems.

By its very nature, energy performance contracting cannot be all analytical. There is considerable room for experience and specialized skills, learned over time, when modifications are needed.

The lack of reliable or complete data on the design and operation of existing buildings con tributes in large part to the risk borne by the management firm. It also points to the strength of energy performance contracting.

The goal is to arrive at a mutually profitable partnership between the management firm and the company based on a mutually acceptable sharing of the benefits of a management firm's intervention.

Chapter Three – Energy Performance Contract Features and Structure

Introduction

An energy performance contract is a customized, complex, long-term agreement with embedded, commensurate costs. The client company must recognize the personnel costs inherent in negotiating a contractual arrangement and in working with a management firm.

Scope and Services

An energy performance contract outlines the scope of services to be delivered by the management firm.

Prior to submitting a proposal in response to a Request for Proposal (RFP) issued by a client company, the management firm will undertake a walk-through study of the facility to assess the scope of the project. The management firm will also study utility audits and other facility operating and assessment documentation. Before negotiating a final contract, a detailed engineering audit and analysis is performed to develop a complete proposal of the energy management services to be provided, the equipment to be installed or modified, itemized costs and protected savings.

The client company and the management firm must both agree on all the details of the planned energy management program. The scope of the improvements depends on both the company's requirements and the management firm's judgment and experience as to what measures are economically viable in terms of the contract being established. The payback period (energy savings over time) is a consideration for the management firm as well as the company. A project might combine a package of shorter term and longer term paybacks that average out to pro duce an acceptable contract term. It should be noted that the total cost of the energy service should be included when calculating the payback period.

Calculating Energy Savings

All energy management agreements require a method to determine how much energy is saved. This figure is used either to calculate the periodic payments to the management firm, or to determine if the terms of a guarantee to save a specific amount of energy or to provide a positive cash flow have been met.

Energy savings are calculated by comparing actual energy costs after implementation of the energy performance contract to a baseline estimate of energy costs. Variables such as weather, building use and occupancy levels, energy cost escalation and price changes are identified in order to isolate their effect and allow fair adjustments.

Baseline Estimate

The baseline estimate can be expressed in either dollar or physical energy terms. Developing the baseline estimate involves analyzing the facility's historical energy use data.

The baseline estimate of the amount and cost of a facility's energy sources is calculated by the management firm during detailed engineering study prior to final contract negotiation. Typically, an average of the past two years is taken as the base year. Where required, adjustments are negotiated for unusual circumstances affecting energy consumption.

The result can be as simple as a schedule listing the baseline energy use by month, or as complex as a multiple regression formula that estimates energy use as a function of weather, building activity levels and changes in basic building use.

The actual energy savings are calculated by subtracting the current energy use from the baseline estimate. Dollar values are attributed by multiplying the energy savings by energy cost. In most energy management service contracts, dollar savings are calculated using current energy prices. Sometimes a floor price is established as the energy price in effect when the agreement is signed. This protects the management firm from potentially large energy price decreases.

During the contract, circumstances might dictate the need to recalculate the baseline. For example, the company might make renovations that further improve the building's energy efficiency; or increase the number of hours the building is in use; or change the use, such as from warehouse use to a service sector facility. The compony might set up new computer rooms or increase the use of terminals, micro-computers and other electronic equipment.

The company should recognize the potential for changing energy requirements and sources before entering into the energy performance contract. Allowance for adjustments to the baseline estimate should be incorporated into the energy performance contract to ensure that the estimated savings attributable to the energy improvement measures can be separated from increases or decreases in energy use caused by other factors. The contract should specify the circumstances that would trigger a re-estimation of the baseline. Companies must advise the manage ment firm of changes in building use, equipment additions and other events that might affect energy use and the energy savings.

The adjustment mechanism is straightforward. The management firm estimates the effect of the anticipated changes on energy consumption and then, with the company's agreement, makes corrective recommendations if the savings are lower than anticipated. The management firm might also suggest additional retrofit measures to increase savings. In such instances, the cost of the project may increase but the guaranteed pay out term would probably not be extended.

Calculating Energy Savings: An Exemple

In a period of stable energy prices, the energy budget of an all-electric office building is $50,000 per year (1,OOO,OOO KWh @ $.OS/KWh]. L ow cost energy improvement measures, such as de-lamping and adjusting the building's temperature control, reduce its energy use by 20 percent (200,000 KWhJ. Th e savings in the first year omount to $10,000.

This example makes three assumptions: a single energy source; a forecast of stable energy prices; and the reduction of demand and energy charges by the same percentage.

It makes no allowance for changes in degree-days and other variobles, such OS use and occupancy, energy cost escalation, tariff schedule and inflation.

In reality, a more extensive approach is used to determine savings for a facility. Energy quantity and cost savings are calculated monthly. Three steps are usually involved:

• the weather-sensitive components of the baseline consumption levels are adiustea' to account for degree-day differences between the baseline month and the current month;
• the adjusted fuel and electricity consumption is costed at current energy prices to calculate what energy costs would have been without the energy improvement initiatives;
  
  and
• savings attributable to the energy improvement projects are calculated by subtracting actual energy costs from estimated costs, had no improvements taken place.

Standards of Service

One important principle underlies energy efficiency improvements: they should involve neither discomfort nor sacrifice. Merely turning down the thermostat to 10 degrees C. in the winter saves energy, but it is not a true efficiency improvement.

Hence, energy performance contracts normally specify the standards of service to be met, such as the temperature and humidity levels that must be maintained during heating and cooling seasons, lighting levels and hot water temperature minimums and maximums.

Equipment Ownership

The question of equipment ownership is of particular concern to the private sector because it can affect the amount of income tax paid. Private companies can capitolize assets for which they have title and claim annual capital cost allowances (CCA) for income tax purposes. The ability to claim CCA can affect the attractiveness of an energy performance contract arrangement.

Structuring the Contract: An Overview

The energy management service contract documents the responsibilities of both parties during the lengthy relationship.

The inclusion of precise clauses dealing with the mafor anticipated issues will provide the basis for resolving any unexpected problems.

Accounting personnel must be informed and kept up-todate about the payment procedures and any extraordinary invoicing components and their date of commencement, such as labour savings or any form of deemed savings.

It should be noted that the size of the investment is primarily the concern of the management firm. The investment value is determined by the potential return measured by energy savings and it must be paid for from savings.

The management firm has a vested interest in a completely satisfied customer, as customer cooperation is vital to sustaining a workable relationship.

The specifics of a contract are based on the proposal presented by the management firm, following its detailed engineering audit and analysis.

The client company retains the right to approve changes that take place in the facility, even though the management firm is contracted to design and install changes.

Once there is a basic agreement on the nature of the energy management service contract, the management firm must be able to proceed promptly through design to installation, since costs can only be recovered from savings within a limited period of time.

Within the contract itself, the design and installation process can be broken into discrete packages and an approval time specified for each.

Savings Financing Arrangements

First-Out

In a first-out contract, the energy management firm receives 100 percent of the cash generated from the savings until it is completely paid out or until the contract term expires, whichever comes first. The client company's obligation to the management firm stops as soon as the total proven energy cost savings equal the total project costs, including the negotiated profit for the manage ment firm. The client company will then retain 100 percent of the energy savings and ownership of all the energy management equipment installed, as established in the contract.

During the contract period, the monthly energy services bill paid to the management firm cannot exceed the energy bill that would have been incurred had no energy management service contract been in place.

A performance guarantee can be negotiated, giving the management firm a finite period of time in which to recover its investment.

The management firm guarantees that at the end of the contract period the obligation of the client company ends, even if the actual cost savings generated are less than expected and the project is not fully paid out.

The management firm's profit is fixed. Greater savings than originally forecast reduce the risk to the management firm by reducing the contract length, but they do not increase return.

In negotiating a first-out contract, the management firm is required to provide some degree of disclosure of its investment in order for the parties to measure the point at which the investment has been retired.

With this arrangement, there is less time for the energy management company to train staff and share energy efficiency expertise.

Shared Savings

Shared savings is most appropriate when a facility owner is concerned with obtaining the quickest possible positive cash flow.

Under this option, the energy management company and the facility owner share all the savings generated from the retrofit project on an agreed percentage split for a fixed period of time (the life of the agreement). The percentage of dollar values may vary from year to year, but the savings are shared over the life of the contract. The total value of payments to the management firm is not known in advance. There is an automatic benefit to the facility owner from greater-than-forecast savings, and an immediate negative impact from lower-than-forecast savings.

The energy management company must recover all of its costs, such as equipment, installation, maintenance and financing charges, out of its share. The energy management company is not obliged to disclose its costs or mark ups in a shared savings agreement.

A central feature of shared savings is keeping score of the savings and who benefits. The facility owner will wont to differentiate between savings resulting from his time, effort and money and those generated by the energy management company. Over lengthy contract periods, there is the potential for strain on the business relationship. This option does, however, allow for the assessment of performance prior to capital expenditure.

The division of the shared savings may be constant throughout the contract period or it may vary. It is common for the split to favour the energy management company in the early years, e.g. 80 percent to the energy management company and 20 percent to the facility owner, shifting to favour the facility owner in the remaining years. The share of the savings kept by the facility owner rarely exceeds 50 percent throughout the life of the agreement.

An advantage of this option to the energy management company is the opportunity to maximize profits on the spread between its costs and the share of savings. The energy management company controls the level of investment and will maintain o strategy of short payback measures: minimum investment to produce maximum savings levels.

The longer term of a shared savings contract (up to 10 years) provides a good solid period for the training of operating staff and the sharing of energy efficiency expertise.

Chauffage (Guaranteed Benefits)

In this type of financing agreement, the management firm guarantees that the facility owner's energy costs will be lower than they would have been without an energy performance contract.

The energy management company assumes responsibility for paying the facility energy bills over the term of the agreement. The facility owner pays the energy management company a specified percentage of the energy costs that would have been incurred, discounted from an agreed base year of energy costs (e.g., historical energy costs less a discount of up to 15 percent).

The base year is developed and agreed to by both parties at the time of the contract signing, Iaking into consideration use and occupancy, unit energy costs and many other factors affecting the total energy costs.

The chauffage contract is usually very extensive, often involving a total energy management plan, including retrofits and maintenance. It is generally considered appropriate only for large scale energy users, where the value of potential savings is substantial, such as hospitals, universities, and large office complexes. This kind of ogreement is often used in Europe to contract municipal services. The length of a chauffage contract is usually between seven and 10 years.

Out of the payments received, the energy management company must recover all of its expenses for equipment and services, as well as pay the energy bills. The energy management company's gross margin is derived from the difference between the payment it received from the customer and the reduced energy costs it pays the utility. The energy management company must reduce actual energy costs significantly below what it charges; its profit equals this gross margin less the costs to design, install and maintain the retrofits.

The facility owner is able to budget utility costs with absolute certainty throughout the term of the contract and is assured of a positive cash flow during the term. This cash flow would most likely be less than that in a shared savings arrangement, because the energy management company is assuming more risk. As in shared savings, the facility owner would have little incentive to invest in savings without a separate energy-use 'score' being kept. Hence, there is o tendency to opt for lower capital cost improvements.

Chapter Four – Initiating an Energy Management Project

This chapter outlines the preparatory work required to establish an energy management project within the Energy Innovators framework. While individual companies may approach each differently, the basic considerations remain the same.

Step 1. Ordering a Preliminary Energy Audit

The client company must determine what potential the building under consideration has for energy efficiency improvements. To this end a preliminary energy audit is often done to obtain a brief, initial assessment of a building's potential for efficiency improvements.

A preliminary audit usually provides an inventory of energy-using equipment, a basic analysis of energy records and energy consumption patterns and a set of recommended measures to improve efficiency. Included with the recommended energy efficiency measures would be a summary of the energy cost savings, implementation costs for improvements and estimoted pay-back period. A preliminary energy audit might also identify applicable utility programs, high lighting incentives for certain technologies or rebates for demand or consumption reductions.

A preliminary audit is not always necessary. A company may have a recent building energy audit on hand or may have a reasonable expectation that certain energy efficiency opportunities exist in the facility. In these circumstances, a company may wish to proceed directly to initiate a request for proposals from prospective energy management firms. The energy manage ment firm chosen to carry out the energy project usually undertakes a more detailed engineering analysis before negotiating the contract.

Sources of Preliminary Energy Audits

Utilities

Many utilities across Canada offer preliminary energy audits, at no cost, as a first step in help ing customers identify energy efficiency measures. Where utility incentives are applicable, the audit will provide calculations of the estimated savings and the payback period involved in implementing specific energy efficiency measures.

As part of the Energy Innovators program, Energy Mines and Resources Canada has negotiated with a number of Canadian utilities to streamline access to utility programs for Innovator companies.

Typically, the process begins with the naming of a contact for the utility auditor and the company providing energy and building data. The trained energy ouditor conducts a site visit, compiling building energy data and an equipment inventory. Following the site visit, the information is submitted for computer analysis and generation of an audit report. When completed, the audit is provided to the company for review and implementation consideration.

For more information on utility audit programs refer to the “Energy Innovators Listing of Utility DSM programs”, contact utilities directly or consult the Canadian Electrical Association publication “Demand Side Management in Canada”.

Energy Management Firms

Not all utilities offer audit programs. Companies can invite a management firm to conduct a preliminary facility energy audit. The management firm would conduct an assessment and deliver similar information and data as that provided in a'utility audit. The fee for this service might be paid up front or recovered along with other costs in an energy management service contract.

Step 2. Assesing Suitability

Energy Performance Contracting Suitability

Armed with the preliminary audit results, the company must decide if an energy performance contract is an attractive and realistic option for improving the energy efficiency of the building under consideration.

It is important at the outset to have a reasonably clear idea of what energy performance conhacting involves and to be comfortable with its typical provisions and constraints.

The company officials involved should obtain as much information as possible from colleagues. They should attend seminars and conferences on implementing energy efficiency improvements and seek out opportunities to meet management firms and users of energy management service contracting.

Site Suitability

Using the elements described in Chapter Two, the company must assess whether the building in question is suitable for energy management service contracting. There are no hard and fast rules about what type or condition of facility is best suited for energy management service contracting, although some base level requirements are often used to assess a building's suitability.

Step 3. Issuing a Request for Proposal (RFP)

Once a decision has been made to pursue identified energy savings opportunities using an energy performance contract, the next step is to develop and issue a Request for Proposal (RFP).

Developing the RFP Document

A model RFP is rhe starting point. The Energy Innovators program has developed a model RFP document to be used as a pattern.

The RFP document should:

• describe generally the building and the types of improvements and services being sought;
• provide data on the facility and any standard assumptions (e.g. energy prices) that should be used for financial projections;
• indicate contract type and clarify any required contract provisions;
• specify a standard format for proposal submissions in order to facilitate comparisons and evaluation;
• provide a timetable for submissions (usually a minimum of five weeks), selection of a management firm and installation of improvements; and
• outline criteria to be used for proposal evaluation.

When specifying work requirements, any necessary cost information should also be outlined.

Before issuing an RFP, a company must clarity its expectations. Factors to be considered include the scope of energy efficiency improvements, the energy baseline, the mix of services to be provided, the ownership and management of equipment, health and safety guidelines, employee information and training.

Any requirements for project monitoring and reporting should also be specified, as well as those for a joint review of the contract one year after the work is completed.

Adjustments should be made for unexpected activities that affect energy consumption, such as increased hours of operation or installation of new energy-using equipment.

Companies should specifically request that management firms indicate in their proposals whether any additional (or reduced) operating costs would result from the recommended energy improvements.

Companies should also indicate what, if any, internal contracting costs exist.

Issuing RFP to Energy Management Firms

Client companies can access the Energy Innovators Energy Management Firms Source List.

Evaluating Proposals

The client company should assemble an evaluation team to review proposals in response to the RFP and to make a selection. Evaluation criteria are established to ensure selection of the proposal offering the best overall value to the company.

Generally, the criteria are developed within several broad categories, including:

• contractor qualifications (all firms on the Energy Innovators Source List meet minimum qualifications);
• technical approach;
• implementation planning;
• maintenance and operating approach; and
• financial merit.

A combination of qualitative and quantitative criteria will ensure thot the relative strengths and weaknesses of each proposal are exposed.

Benefits should be interpreted in the broadest sense, including monetary benefits (e.g. net present value) and other benefits not easily measured in dollars (e.g. flexibility of a buyout provision). Risk factors might include the management firm's ability to secure financing and whether the measures proposed can be expected to yield the expected savings.

The technical evaluation should assess whether the proposed decreases in consumption are reasonable and whether the improvements form a comprehensive package. Companies can use the technical information provided through the Energy Innovators program to help with the evaluation. Interviews with bidders also help answer any questions.

An outline of criteria that might be used as a basis for selection is provided as an appendix to this chapter.

Step 4. Negotiating and Finalizing a Contract

Following the evaluation, a contract must be negotiated and signed with the selected energy management firm.

The final contract should include, as attachments, a list of energy-saving measures to be implemented, data on the quantity and value of projected energy savings, details of the payment schedule and any guarantees.

All these items should be explicitly marked “preliminary”. They may require revision following the detailed engineering analysis of the building, which is the first step in contract implementation.

The contract should stipulate dispute mechanisms for resolving problems that cannot be negotiated. Binding arbitration is the usual next step if negotiation fails to resolve a problem.

In addition, withdrawal provisions should also be outlined to protect both the company and the management firm. One of the unavoidable risks of energy management service contracting is that the results of the detailed energy analysis may be less attractive than the proposed results based on a preliminary audit and site information. This outcome is less likely if the steps outlined in this chapter are followed.

Appendix to Chapter Four – Suggested Assessment Criteria

When evaluating the proposals submitted in response to an RFP, the following criteria should be considered.

Financial Merit

• proposed term or length of contract;
• method used to determine payments;
• frequency of payments;
• anticipated interest rate to be charged;
• type and cost of any guarantee on energy savings;
• nature and amount of applicable grants and incentives (e.g manufacturer, utility, etc.);
• annual energy savings potential (dollars and energy), by fuel type;
• simple payback for each improvement and for total project net of incentives; and
• breakdown of total project costs.

Technical Merit

• justification for energy baselines (pre-improvement) to be used to calculate savings;
• methodology used to establish base year energy consumption and energy demand;
• justification for energy baselines (post-improvement) to be used to calculate savings;
• cogeneration potential;
• overoll technical and engineering approach, including alternative measures proposed;
• proposed improvements, including no-cost changes in operations and procedures;
• estimated consumption and/or demand reduction of each improvement; and
• estimated service life for each energy efficiency improvement.

Implementation Approch

• detailed implementation plan and time frame;
• training for staff;
• facility occupant information;
• provision of updated and new operating documents, manuals, drawings and instructions;
• minimizing disruptions during implementation;
• reporting and communication protocols; and
• strategy and policy for equipment procurement

Operation and Maintenance Approch

• estimated incremental (or reduced) operating and maintenance costs for each improvement;
• preventive maintenance approach for existing, modified and new equipment and systems;
• approach to monitoring and ownership of monitoring systems over contract life; and
• approach to equipment and system maintenance.

Project Management Approch

• qualifications of project manager and key personnel;
• personnel update and qualifications from pre-qualification file; and
• external resources to be used.

Chapter Five – Implementing an Energy Performance Contract

Detailed Energy Audit

Implementing an energy performance contract begins with a detailed energy audit of the facility to verify the site information provided with the RFP and to confirm the viability of the measures proposed by the management firm in its response to the RFP.

The audit will include the following activities, at a minimum:

• exhaustive physical inspection of the design and condition of all energy systems;
• measurement of air-flow rates, combustion efficiency and other variables;
• review of standards of service and comfort, i.e. temperature and air quality required by building occupants and a comparison of existing conditions with these standards; and
• an analysis of energy-use patterns, applying computerized simulation models.

At the end of the audit, the management firm will provide the company with a report summarizing its findings and recommending a comprehensive set of system improvements and related activities, such as training, monitoring and maintenance.

Some examples of efficiency improvements that may be recommended include:

• high efficiency lighting and energy saving ballasts;
• installation of automatic controls for heating, air-conditioning and lighting systems;
• variable speed drives on motors and pumps;
• high efficiency motors;
• ventilation or air-system design changes;
• heat pumps and/or exchangers;
• building envelope retrofits; and
• increasing boiler plant efficiency and boiler tune-ups.

The energy savings forecast following the audit must approximate the savings and efficiency improvements initially proposed (at least 90 percent of the savings forecast).

If the results of the audit are less attractive than the original proposal, the company may seek contract renegotiation or withdrawal. At this point, the company would likely be liable for the cost of the audit.

The management firm may also retain the right to terminate the contract at the end of the detailed energy audit phase, if it finds that the forecast energy savings will not cover its costs. This right should be specified in the contract.

Project Implementation

Following acceptance of the audit and the final recommended set of energy efficiency measures, the management firm gets to work. The installation of approved energy efficiency measures can take up to a year, depending on the complexity of the project.

Project implementation follows an agreed-to schedule that covers:

• implementation of operational changes;
• acquisition and installation of equipment;
• accessing utility incentives;
• establishment of energy monitoring procedures;
• establishment of training for operating staff and building managers; and
• provision of information to building occupants,

Throughout the implementation phase, it is in the interest of all parties involved to work in partnership, recognizing that technical glitches and delays are inevitable and manageable.

Although the management firm assumes overall responsibility for a protect, it does not have carte-blanche to do other work. If the management firm is not to undertake work in certain areas of a building, this should be specified at the outset. The contract should also specify that the company has final sign-off approval for any equipment installations.

This is the time for the client company to keep building occupants informed about the impact of efficiency improvements, in order to gain support and help ensure the long-term effectiveness of the improvements.

Monitoring

Project monitoring is fundamental to energy management service contracting. The contract will outline monitoring procedures and reporting requirements, such as monthly updates on energy consumption/demand for the company and the utility, and reports on energy savings.

Installation of monitoring equipment is part of the project implementation. The management firm has a vested interest in ensuring that forecast energy savings are achieved and will monitor projects closely.

One Year Review

The energy management service contract will be reviewed at the end of the first year of operation, following the commissioning of all energy efficiency improvements, in order to accommodate any changes or modifications that took place during the year.

By mutual consent, the management firm will estimate the effect of any changes such as occupancy, personnel, facility use and times of operation and the effect such changes might have an energy consumption. Any corrective adjustments to the energy management service contract and the payment schedule are made at this time.

Beyond this review, it is important to have a mechanism in place to adjust the energy baseline to reflect any new condition that could have an impact of more than two per cent on energy consumption.

Post-Implementation

At contract completion, payments to the management firm cease and the client company gains the full benefit of the energy efficiency, technical and operational improvements implemented over the term of the energy performance contract.

The client company will then be paying less for energy than it would have, had the protect not taken place.

Long-term Energy Management Plan

Energy efficiency investments in building stock require an ongoing commitment to long term planning and implementation.

A model long-term energy management plan will help organizations identify and incorporate energy efficiency investments and practices into their post-implementation building operations.

Chapter Six – The Energy Innovators: Summary of Benefits

Through the Energy Innovators Initiative, member organizations can take advantage of improved energy efficiency, despite the obstacles that traditionally have limited investment in efficiency improvement projects.

Companies have access to energy management service contracting, utility energy management programs, and a comprehensive package of support services, all designed to facilitate investment in energy efficiency improvement projects.

The benefits of using Energy Innovators to implement facility energy efficiency projects are wide-ranging and long-lasting. Companies can:

• lower operating costs;
• free up capital resources allocated to maintenance and repairs for other needs;
• increase flexibility to respond to budget cuts;
• improve building performance; and
• provide a more productive and comfortable working environment for building occupants.

In addition, organizations can improve technical information for facility operations and maintenance, improve training for facility managers and operators and gain the strategic knowledge needed for effective long-term energy management planning. Companies using the creative mechanisms of Energy Innovators to facilitate the implementation of energy efficiency improvements will demonstrate leadership in cost cutting, environmental sensitivity and facility management.

The Energy Innovators provides further benefits, including:

• access to external financing;
• access to external sources of expertise;
• opportunity to transfer risk (technical and financial) inherent in efficiency improvement projects;
• availability of ongoing professional advice; and
• improved building operations and maintenance information.

Through Energy Innovators, companies can gain access to the capital and expertise required to implement efficiency improvements. They can receive technical information, model bidding and contract documents and ongoing support and advice. Energy Innovators is in place to help Canadian companies take action now to reap the long-term benefits of facility energy management.