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Private Energy Performance Contracting

Background

Energy performance contracting (EPC) is perhaps one of the most powerful tools available to identify, prioritize, finance and construct energy efficiency and other facility improvements. Since the mid 1990s, Colorado’s state agencies, institutions of higher education, counties, municipalities, school districts and special districts have saved close to $29 million in annual utility costs. That savings is gained through projects that update lighting fixtures, HVAC systems, boilers, pumps, fans and motors; install lighting and equipment controls; and otherwise improve building envelopes, water  efficiency, street and traffic lights, or install renewable energy systems. As of June 2014,143 public sector clients have invested $447.4 million in 182 projects. Those projects can be found in communities across 75% of Colorado counties. According to the Energy Services Coalition national Race to the Top, Colorado’s public sector EPC program is ranked #3 in the nation in total project investments and #5 in project investments per capita.

 

Colorado’s success has been attributed to several key elements of its EPC Program:

  • Standardized, proven, state-approved contracts, protocols, guidance, processes and documents.

  • A list of pre-qualified energy service companies (ESCOs).

  • Free project consulting from the Colorado Energy Office during the entire life cycle of a project to ensure the client is comfortable with legal, technical and financial decisions at every step in the process.

  • Market-based financing.

 


Venturing into a New Market

In 2011 the Colorado Energy Office applied for and received a Competitive Award from the U.S. Department of Energy to explore new market territory for EPC: the private sector. A Lawrence Berkeley National Laboratory study suggested that less than 9% of private sector facilities have benefitted from EPC.

Colorado’s pilot project is designed to answer several questions: How would private facility owners respond to EPC? How well would the key elements of Colorado’s success in public sector EPC translate into the private sector, in particular commercial and light industrial facilities? What market barriers and benefits would present themselves as company owners were introduced to EPC, committed to technical energy audit contracts, and considered their ESCO’s proposal for energy efficiency projects?

 


Engagement

The pilot project initially sought to engage 10 companies in the EPC process, starting with technical energy audits. Over time, the project team spoke with 27 companies to determine whether EPC would be an effective tool to meet company goals. Those 27 companies represented a variety of market segments:

6 Owner-occupied and leased office buildings.

4 Medical (assisted living & hospital).

3 Manufacturing.

3 Mountain resorts (lodging + ski operations).

2 Retail space.

9 Miscellaneous: Multi-family, TV, bank, warehouse, community center, ice rink, car dealership, charter school and oil & gas production.

In the end CEO approved 16 company applications to participate in the pilot project. CEO leveraged a portion of its federal competitive award to provide a 75% cost-share (up to $25,000) to each company for technical energy audit services. About 2.1 million square feet of commercial and light industrial facility space was audited.

 


Energy Savings Identified

Each company received a technical energy audit report and performance contracting project proposal. Together, those 16 audit reports identified potential annual savings as follows:

12.8 million kWh electricity.

450,000 therms natural gas.

3434 kgal water.

$1.45 million utility costs.

 


Company Project Status

As of June 2014, three companies have executed a performance contract with their ESCO; they will realize energy savings as soon as construction is complete. Ten companies are considering the scope of work proposed for performance contracting. Three companies have elected to implement energy conservation measures internally.

All companies will continue to receive free project consulting services through the life cycle of their projects. Those companies choosing to self-implement will be interviewed later this year to learn about progress made in implementing audit recommendations.

 


Lessons Learned

Hands-on coaching and technical assistance to sixteen companies in a variety of industries provided an opportunity to observe their response to performance contracting. The project team learned several lessons over the course of this first phase of the pilot project:

Term of property hold: In the public sector, school buildings, county courthouses and community centers are held for decades. Companies may or may not hold onto buildings that long. Sometimes the “term of hold” may be just a few years.

Financial: Private facility owners may demand a much shorter payback period than public facility owners. In addition, a company budget cycle should be considered when timing the energy audit report and capital project proposal.

Incentive: The audit incentive was an offer unique to the pilot project.  

Companies prefer simpler contract documents, whereas public jurisdictions are more risk-adverse and therefore need more detailed contracts.

Companies may have complicated internal review and approval processes, as well as conflicting internal interests as to whether energy savings should accrue to the parent company or local facility.

 


Market Benefits and Barriers

(+)  ESCOs proposed and clients considered projects that often offered deeper retrofits than usually experienced in the private sector.

(+)  Several companies approached their pilot project experience as a litmus test of EPC: should a project proceed well, facility owners would advocate EPC use at other company facilities.

(+)  ESCOs saw significant opportunity in client relationship-building with a successful project.

(-)  There was some variation between companies, but overall a short payback is needed to make a performance contracting project move forward.

(-)  Program contracts should be made more business-friendly.

 


Next Steps: Due Diligence in Program Design

Through 2014, CEO will be conducting due diligence in determining what a permanent private sector EPC program might offer. That includes:

Continued support for the original 16 companies that received audits.

Networking with commercial and light industrial real estate brokerage, investment and management interests.

Research market potential and characteristics of an ideal EPC client.

Tailor a set of program contracts for the private sector.

Tailor program documents.

Make other decisions about permanent program design.

 


For Further Information

For further information about the pilot project or to discuss program design, please contact Jeanna Paluzzi, Energy Performance Contracting Program Manager at 303.866.3464 or jeanna.paluzzi@state.co.us.