Everyone Wins with an EPC–At Least that’s the Plan

energy_efficiency_2Two significant energy performance contracts (EPCs) were announced during the past few weeks.

The city and county of Denver entered into an agreement with Ameresco. The EPC, which has a value of almost $2 million, will focus on 88 energy efficiency improvements to 14 buildings in the city, the press release said. The contract calls for the buildings to average energy savings of 17 percent, with four of the buildings achieving reductions of more than 30 percent.

The savings will start during the first year and more than $1.4 million during the next 15 years, the release said. The partnership is between Ameresco and the Denver Environmental Health Department and the Strategic Initiatives Division of city’s General Services department.

In December, the Mount Vernon School District, which is just north of New York City, entered into a $44 million EPC with Honeywell Building Systems (HBS), according to The Mount Vernon Daily Voice. The agreement – which the story says is the largest in New York State history – will result in significant improvements in the system’s 15 buildings during the next 18 months. The contract calls for work on 34 boilers, more than 15,000 LEDs and associated lighting controls.

Ken Silver, the Assistant Superintendent for Business for the Mount Vernon School District, is a fan of EPCs. “I do not know how it works in other states but the financing here was very simple,” he told Energy Manager Today. “We have a bond attorney and a fiscal advisor. Even those expenses are included so there is zero cost here.”

Indeed, the district is making money on the deal. Silver wrote that the debt service will be paid by HBS and the company will cover any shortfall. That, combined with state aid, will put the district in the black. “In the first year, we anticipate a $1.5 million positive cash flow. After that, we expect about $300,000 a year for about 18 years.”

EPCs are growing – and may be an increasingly attractive approach for businesses, school districts and similar entities as consultants and alternative energy providers seek to expand.

A report last year prepared by the Pacific Northwest National Laboratory for the U.S. Department of Energy, took a close look at the EPC industry. The report tracks the structural and marketplace changes that EPCs – which started in the 1980s – have undergone. Today, the report says, 84 percent of EPCs are federal or institutional. State governments are big customers, the report says. The sector will grow as attention to energy efficiency increases and procurement rules liberalize. “The United States also has emerging opportunities to expand EPCs in the industrial sector as well as in residential and commercial buildings,” the report reads.

EPCs are very complex. A presentation last year by the U.S. Department of Energy entitled “Developing a Strong Energy Savings Performance Contracting Project” dove into these details. Michael O’Connor, the Physical Plant Director at Appalachian State University in Boone, NC, described best practices for facility owners planning an EPC-based project. His slide deck pointed out that keys include identifying a champion/getting leadership buy-in in the organization; developing a full understanding of the energy profile of the properties that will go under contract; clearly define the EPC’s goals; understand the approval process and create a schedule that includes all milestones and develop clear selection criteria. The organization should actively lead.

Another participant was Peter Berger, the Guaranteed Energy Savings Program Manager for the Minnesota Department of Commerce. His slides described EPC financing and included an image of a sample contract. Berger detailed formulas on how to determine how much of the EPC will be financed and the two (pre-qualifying and site-specific) requests for proposals.

Many of these steps are part-and-parcel of good business practices. Berger got specific on energy services company (ESCO) selection process. He suggested that costs and pricing should be integrated into the process, with markups and fees included; open book pricing and written approval on all work should be required; written approval should be required for any sole source products; a project cost reconciliation process should be prescribed; an investment grade audit process should be included and a way to amend the ESPC should be outlined. Competitive bidding for trade work and equipment is an option to consider.

The details are complex, as they are with any contract. The bottom line, though, is that EPCs hold tremendous potential benefits. “Why others do not take advantage of this is a mystery to me,” wrote Mount Vernon’s Silver. “This was the first thing I started when I got to Mount Vernon.”

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One thought on “Everyone Wins with an EPC–At Least that’s the Plan

  1. I’m on a small town’s conservation commission in CT. Tell me more about how small towns can consider this type of shared risk contract.

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