This is a Guest Blog from Walter Simpson, CEM, LEED AP, retired 26-year University at Buffalo Energy Officer and Director of UB Green.  Walter is working with AASHE and the American College & University Presidents Climate Commitment to provide guidance to assist signatories of the American College & University Presidents Climate Commitment. We encourage readers to post comments and questions for Walter.

Hello Campus Climateers!

I am a big believer in energy performance contracts and I make a point of promoting them whether I give lectures or presentations on campus energy conservation or green campuses. While not all of these projects turn out stellar, the concept of performance contracting is a good one. These projects have the potential to accomplish a tremendous amount of energy conservation in a very short time compared to what schools can internally accomplish on their own. Projects of this type can also beself-financing and require no upfront money– which sounds too good to be true but it’s true! Moreover, for campus lacking energy expertise or enough facilities staff, a good ESCO working on a performance contract can be like the cavalry arriving with just the help you need.

In the mid 1990’s I learned about performance contracts first hand by managing a large, very successful $17 million performance contract for my school, the University at Buffalo. At the time, New York’s statewide public service commission began requiring electric utilities to develop demand side management (DSM) programs that would incentivize energy conservation in order to reduce electrical demand and thus make the construction of expensive new power plants unnecessary. DSM was and continues to be a great idea.

I am a real believer in the maxim thatthe cleanest, cheapest BTU or kilowatt hour is the one not needed. And, thankfully, performance contracts have the ability to eliminate the need for a great many BTUs and kilowatt hours!

Typically, an energy performance contracts begins with an energy service company (ESCO) selection process. Once you have selected an ESCO, this company audits your campus with the help of campus facilities staff and then identifies and quantifies prospective energy conservation measures. That audit is then carefully scrutinized by campus representatives to determine which measures to undertake. After a scope of work is agreed upon, a contract is signed, and financing arranged, the ESCO designs and installs the measures. Depending on your contract, the ESCO may also be obliged to monitor, guarantee, or share savings after the installation is complete.

In my opinion, the best performance contracts are extensive and comprehensive. I suggest asking your ESCO to investigate all possible conservation measures. Throw in everything plus the kitchen sink! And be sure to consider both long and short payback measures.

There is a great danger in cherry-picking just the so-called “low-hanging fruit” because -- if you do that – all you will have left is the “high-hanging fruit” and no way to reach it! A comprehensive performance contract is an opportunity to let the quick payback measures leverage or pay for the longer payback measures. That way you get both and do more, ultimately achieving much higher levels of efficiency on your campus. This is especially important for ACUPCC institutions that wish to avoid eventual over-reliance on carbon offsets. ACUPCC institutions should set their sights on what I call “deep conservation.” That means identifying, considering, and undertaking building energy conservation measures and projects that have long 10, 15, or 20 year or more paybacks. Performance contracts make it easier to finance these projects.

Performance contracts are also a vehicle for financing longer payback renewable energy projects. An on-site renewable energy project can be imbedded in a comprehensive energy performance contract and paid for by savings produced by energy conservation measures. We did that at my school with a 73 kilowatt PV array.

You can also build a larger self-financing project by financing the project over a longer time period or telling your ESCO to design the project with little or no positive cash flow, i.e. a project which pays for itself out of energy savings but does not produce energy savings or cash flow beyond that. The latter idea is to put all the savings your project produces to work doing more projects. You can also increase the capacity of your project by arranging low interest rate financing yourself instead if allowing the ESCO to provide financing at a mark up.

What about “guaranteed” or “shared savings”?

If you have the technical ability on campus to properly assess the savings potential of proposed energy conservation measures (or can hire an expert consultant to do that for you and help you supervise the ESCO – which I recommend), then structure your contractwithout a guaranteed savings provision. That will reduce your costs because an ESCO must charge more for a savings guarantee (it means more risk for them); you can then take that savings and build a larger project.

I would also avoid a contract with a shared savings provision because these provisions can be contentious later on when you find yourself in disagreement with the ESCO on exactly how much savings have been achieved – and thus how much you owe the ESCO.

Energy performance contracts are typically “fixed cost.” That means that your school would pay the ESCO a fixed amount for energy conservation measures X, Y and Z irrespective of what they actually cost to install. A better way, in my opinion, is a “cost plus” contract where you pay for the actual cost of the measures – which is only known after bidding and installation – plus fees of design and an agreed upon mark-up for overhead and profit. The “cost plus” basis involvestotal transparency-- obviously a good thing -- though it also involves more of your time since facilities staff need to be involved in all product selection, material and labor bidding, and project decision-making. If you go that route, you need sharp people on your team who understand the process and can work cooperatively and efficiently with the ESCO while protecting your school’s interests.

The question of mark-ups is an interesting one. Due to the nature of the performance contracting industry, ESCOs in this field need higher mark-ups than conventional architectural and engineering (A&E) firms do when the latter, for example, install a new chiller. Higher mark-ups are needed because a competitive ESCO selection process typically involves many ESCOs bidding on a project by demonstrating their abilities with mini campus energy audits of buildings selected by the campus. A mini-audit can cost an ESCO tens of thousands of dollars to conduct yet only one ESCO is selected and the rest receive no compensation whatsoever for their effort. Those that lose have to cover these “development costs” somehow, and they do so by having a higher mark-up for the jobs they do win. So that needs to be understood. But, even so, these projects make a great deal of sense and can be emphatically “win-win.”

This is not to say you give away the store on mark-ups. Just expect them to be higher than what you would pay A&E firms for conventional capital projects. And while you generally want to negotiate the mark-ups downward, if you cut them too close, the firm you hire may not have enough of a financial cushion or incentive to investigate all possible measures (including ones that require careful and painstaking analysis but can yield big savings) and give you the “everything + the kitchen sink” comprehensive project you are looking for.

The question of mark-ups and ESCO profit making raises another issue. While some ESCOs specialize in smaller projects, many need large projects to survive and prosper and thus might not be interested in doing a project at a smaller school. Or if they do, the financial terms might be less advantageous to the school.

Next week I’ll finish up my discussion of performance contracting and include guidelines for hiring a good ESCO.

‘till then climateers!

Walter Simpson
enconser@buffalo.edu