# Presentation: 733931

## Miami, FloridaJanuary 13-14, 2004

- Introduction to Energy Savings Performance Contracting (ESPC) and DOE Super ESPCs

## M&V Part 2: Risk Assessment &Responsibility Allocation

## Risk & Responsibility

- _Risk Assessment_
- Types of Risk.
- Allocating Risk.
- Cost Effectiveness.
- _Responsibility Allocation_
- Usage
- Performance
- Financial

## Definition of Savings

- Energy Savings = UseBaseline - UsePost-Retrofit

## Definition of Savings

- Energy Savings = UseBaseline - UsePost-Retrofit
- Energy Savings = (UseBaseline  Adjustment) 		- UsePost-Retrofit

## Definition of Savings

- Energy Savings = UseBaseline - UsePost-Retrofit
- Energy Savings = (UseBaseline  Adjustment) 		- UsePost-Retrofit
- Savings, $ = (Unit Cost) (Energy Savings)

## Calculating Savings

- There are two components to energy use and energy savings:
- Rate of energy use (Performance)
- Hours of use (Usage)
- Energy use is the product of the two.
- Reducing the rate of energy use and/or the number of hours reduces the total energy use.

## Performance and Usage: Ideal

- Rate, kW

- Hours per year

- Post-retrofit Energy Use	Baseline Energy Use

- Increased Performance

- Reduced Operating Hours

## Types of Risk

- Energy savings are based on:
- Performance
- Usage
- While cost savings are based on:
- Financial elements
- Uncertainty in the energy savings

**Notes:**
There are three primary factors that affect our ability to accurately quantify the savings. This inability to exactly quantify the savings introduces risk into a performance contract. These are 1) uncertainty, 2) performance, and 3) usage. 

## Performance Risk

- Performance may be compromised by poor design or implementation.
- Equipment performance may change over time due to degradation and/or poor O&M practices.
*These are factors that the contractor normally (but not always) controls.*

**Notes:**
Performance risk is related to actual equipment performance. Replacing old, inefficient equipment with new will usually generate savings. But new equipment will also become old and worn with time, decreasing its efficiency. Degradation can be hastened with poor O&M practices or severe duty. 
Occasionally, poor performance is due to poor design or selecting the wrong piece of equipment for the job. Typically, the ESCO is responsible for maintaining proper equipment performance and for proper design. Because the ESCO usually assumes the responsibility of maintaining adequate performance, they usually assume the savings risk. 

## Usage Risk

- Usage can be defined as:
- operating hours (lighting, equipment)
- occupancy or schedules
- heating & cooling loads (& setpoints)
- weather
- production
*These are factors that the agency (or no one) controls.*

**Notes:**
Usage risk is related to how or how often a piece of equipment is used. Equipment at peak performance generates no savings if it is not used. Usage is determined by operating hours, building schedules, occupancy rates. Equipment usage can also be affected by overall heating & cooling loads as a result of changing the temperature setpoints or by other human factors. 
The agency usually has control over how much a building is used, what schedules it keeps, what its vacancy rate is, and whether it is kept hotter or colder than originally intended. These factors significantly affect savings, yet the ESCO has little control over these issues. Because the ESCO has little control, they are reluctant to assume the risk that arises from these factors. 

## Financial Risk

- Energy savings must be converted to cost savings.
- What energy rates will be used?
- How might they change over time?
- What other savings will be claimed?

## Savings Uncertainty

- We don’t measure savings, we measure energy use before and after- the savings are the difference.
- We never know the exact energy use before and after- there is always some uncertainty in each.

## Performance and Usage: Real

- Rate, kW

- Hours per year

- Post-retrofit Energy Use	Baseline Energy Use

- Reduced Operating Hours

- Increased Performance

## Uncertainty Risk

- Claimed savings are always *estimates *because _savings cannot be measured_.
- Uncertainty is introduced through:
- Measurement and modeling error
- Sampling error
- Simplifying assumptions
*These are factors inherent in M&V.*
*Uncertainty can be reduced but not eliminated.*

**Notes:**
Uncertainty risk is simply the inability to exactly and consistently quantify the savings. Unlike energy, energy savings cannot be directly measured. Instead, savings are estimated by comparing a system to the way it operated before and the way it operated after a measure was installed. 
Even though a large number of parameters can be measured, there are still errors associated with measuring equipment. Since not every piece of equipment can be measured, sampling techniques are often used which can introduce additional uncertainty. Random variations occur in building energy use or equipment that may be related to human behavior, weather conditions, or other random factors. Simplifying assumptions are sometimes used when it is too difficult to measure or estimate a parameter, introducing additional uncertainty. 
All of these factors prevent obtaining a ‘true’ estimate of the savings. In measurement and verification, the goal is to minimize these uncertainties to acceptable levels, understanding that they can never be completely eliminated. 

## Savings Uncertainty: Large

## Savings Uncertainty: Small

## Allocating Risk

- For SuperESPC, M&V only needs to show that savings guarantee has been met, not determine ‘actual’ savings.
- M&V can reduce uncertainties to reasonable levels.
- M&V can allocate performance, usage & financial risks to the appropriate parties.

## Responsibility Matrix

- Items that influence savings are:
- Performance
- EquipmentPerformance
- Financial
- Energy Prices
- M&V Costs

- Usage
- Operating Hours
- Loads
- Weather
- User Participation

## Equipment Performance

- Equipment performance is affected by design and by long-term maintenance.
- Who is going to conduct the long-term maintenance?
- How will long-term performance be verified?

## Equipment Performance

- Equipment performance is often linked to operations & maintenance procedures.
- If agency conducts O&M, will contractor be responsible for poor O&M practices?
- If contractor conducts O&M, what services and at what cost?
- What about repair & replacement?
- What if equipment life < contract term?

## Operating Hours

- Energy use and savings fluctuate with equipment and facility operating hours.
- If the agency reduces operating hours and savings are not realized, is the contractor responsible?
- If the agency increases operating hours, utility bills will increase. Will savings increase or decrease?

## Operating Hours

- _If hours are stipulated:_
- How were values estimated?
- Are they reasonable?
- What happens if agency changes schedule or facility usage?
- _If hours are measured:_
- When were they measured?
- What precision and confidence?

## Operating Hours

- Office Space
- M-F 9-5:  2,080 hours/year
- M-F 9-9:  3,120 hours/year
- Continuous operation
- 24/7: 	8,760 hours/year
- Nighttime Lighting
- Photocell control: 4,380 hours/year

## Loads

- The agency may make changes that affect equipment loads (e.g, additional air conditioning).
- If loads increase and savings increase, who benefits?
- If loads and savings decrease, who is responsible?

## Loads

- _How will savings estimates be affected if:_
- The agency adds or removes loads?
- Adds building space?
- Removes building space?
- Changes thermostat settings?

## Loads Constant

**BaselineEnergy  Use****(of affected systems)**

**ReducedEnergy  Use**

**Agency Savings**

**ReducedEnergy  Use**

**Contractor Payments**

**Before ESCP****	****	****During ESPC ****	****After ESPC****   Contract****	****	****   Contract****	****	****   Contract**

**Payments**

**Other Loads**

**Other Loads**

**Other Loads**

**Notes:**
Performance contracting financing is a ‘pay for savings’ arrangement. An initial investment made by the ESCO is designed to reduce utility bills,providing sufficient savings so that the ESCO can be paid from the savings during the performance period. After the performance period, the agency (customer) realizes all savings. In a guaranteed savings arrangement such as the ESPC program, M&V is used to show that savings meet or exceed the guaranteed amounts. 

## Loads Increase

**BaselineEnergy Use****(of affected systems)**

**ReducedEnergy USe**

**Agency Savings**

**ReducedEnergy Use**

**Contractor Payments**

**Before ESCP****	****	****During ESPC ****	****After ESPC****   Contract****	****	****   Contract****	****	****   Contract**

**Payments**

**Other Loads**

**Other Loads**

**Other Loads**

**Notes:**
Performance contracting financing is a ‘pay for savings’ arrangement. An initial investment made by the ESCO is designed to reduce utility bills,providing sufficient savings so that the ESCO can be paid from the savings during the performance period. After the performance period, the agency (customer) realizes all savings. In a guaranteed savings arrangement such as the ESPC program, M&V is used to show that savings meet or exceed the guaranteed amounts. 

## Weather

- No one controls the weather.
- How shall the baseline be adjusted for weather conditions?
- What happens in mild seasons when promised savings may not materialize?
- What happens in severe seasons?

## Weather

**1  2  3  4  5  6  7  8  9  10  11  12  13  14****	****	****Contract Year**

**Savings**

- Actual
- Estimated
- Guaranteed

- Savings can be adjusted to account for mild weather conditions.

**Notes:**
Performance contracting financing is a ‘pay for savings’ arrangement. An initial investment made by the ESCO is designed to reduce utility bills,providing sufficient savings so that the ESCO can be paid from the savings during the performance period. After the performance period, the agency (customer) realizes all savings. In a guaranteed savings arrangement such as the ESPC program, M&V is used to show that savings meet or exceed the guaranteed amounts. 

## Weather

- _Typical normalization procedures:_
- Regression modeling on HDD & CDD.
- Building simulation.
- Sources of weather data:
- Typical Meteorological Year (TMY).
- Data from Nat’l Climatic Data Center.
- Site measured.

## User Participation

- Some measures require users to interact with equipment for proper operation (or at least not override it.)
- If a measure does not workbecause the users do not use something as intended, is thecontractor responsible?

## User Participation

- How will user interaction be maintained (or minimized)?
- Training?
- Annual verification and reporting?
- Lockboxes (e.g., on thermostats)?

## Energy Prices

- Energy prices fluctuate. In a long-term contract, how will the saved energy be valued?
- On current rates fixed for the contract?
- On real rates that fluctuate over time?
- On fixed rates that escalatefor inflation?

## Energy Prices

- Fixed rates are easiest to understand, but may not be realistic in 15+ year contract.
- No one can predict what future rates will do. Sudden price escalation can make savings seem to disappear.
- Escalating rates for assumed inflation minimizes risk and reflects real economics.

## Energy Prices

## Energy Prices

## Energy Prices

## Energy Prices

- Use marginal rates*, not blended or average rates.
- Rate or fuel changes:
- Value baseline use at old rate, new use at new rates.
- Demand charges:
- Demand savings calculations not trivial.
- Beware of ratchet clauses!
- *Cost of last kWh or therm.

## Energy Prices

- _Baseline:_
- Use 1 to 3 years of utility rates plus common sense.
- Treat price spikes and anomalies carefully.
- _Escalation:_
- Use NIST Guidelines (BLCC) for energy price escalation.

## M&V Costs

- The agency pays the contractor for M&V services rendered. Need to balance M&V rigor with project risk.
- Law of Diminishing Returns applies.
- Typically, initial M&V costs will be 3% to 15% of the capital cost; annual M&V costs will be 3 to 15% of the savings.

## M&V Costs

**M&V Rigor**

**M&V Cost**

**Value of information**

**$**

## Review Questions

- Why might utility costs increase despite a successful SuperESPC project?

**Notes:**
Answers

1) Two possibilities, alone or in combination: 
a) Load growth external to the project. 
b) increased utility costs. 

2) Any two of the following:
Energy Prices
M&V Costs
Operating Hours
Loads
Weather
User Participation
Equipment Performance