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ESPC Intro & ESPC/PPAs for RE

DHS Renewable Energy 

Roundtable

Doug Dahle

March 26, 2012

NREL/PR-7A40-54592
2

Overview

• Energy Savings Performance 

Contracting (ESPC) Principles

o Understanding the money trail

• Energy Service Companies (ESCOs)

• Risk Management

• Tools for ESPC Customers

• Consider Master ESPCs

• Business Principles

• ESPC/Power Purchase Agreements (PPAs) for 

Renewables
3

Energy Savings Performance Contracts (ESPCs)

• Long-Term Partnerships (15-25 years)

• Persistent Performance is Success Factor

• Customer Champions & Commitment Critical

• “Reallocating Excess Energy Expense into 

Infrastructure”*

• No Capital Cost – Contractor Revenues from $ 

Savings*

• Determine Energy and $ Savings*

• Risks & Responsibility – Key focus for both parties

• Measurement & Verification – Verify Savings

* Figures in following slides
4

ESPC Principles

• Reallocating Excess Energy Expense into 

Infrastructure

 Pay a lower utility bill

 Pay the contractor

 Achieve cost savings for the government
5

Where the Money Comes From and Where it Goes

Agency Energy and 

O&M Bills

Cost Savings

Customer Funds for 

Energy and Related 

O&M
6

The Project Cost Stack

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

28% Performance Period 

Services

69% Debt Service

42% 

Amount Financed

(Principal)

3% Up-front payments

Percent of Agency Payments Over Contract Term

28% 

Interest

4% Financing Procurement 

Price (FPP)

*Data from Super ESPC projects awarded from 2005 to May 2008. 

Figures may not add to exactly 100% due to rounding.

31% 

Finance-related costs

41% 

Project investment
7

Energy Services Companies (ESCOs)

• A long term energy management partner

• Customer focused service & communications

• Listen to understand customer needs

• Offer solutions to best address customer needs

• Propose and document potential ESPC project

• Good faith negotiations to meet mutual needs

• Motivated – Financial return from long term 

revenues
8

Energy Services Companies

• Expertise in Energy Efficiency & Supply Solutions

• ESCO delivers in ESPC

o Audits and Baseline Energy Status & Data

o Design & Installation of Energy Measures

o Arrange Financing

o Commissioning & Post-Installation measurement

o Customer training on installed measures

o Operations & Maintenance (O&M)

– Responsibility for O&M negotiable

o Continuous verification of savings
9

Energy Conservation Measures

• Lighting

• Heating, Ventilation, and Air Conditioning 

(HVAC)/Variable Air Volume (VAV)

• Energy Management Control Systems

• High Efficiency Motors

• Variable Frequency Drives

• Boilers/Chillers

• Renewables

• All Other Energy Consumption Sources

• Customer input:

o Energy/water use & cost, energy related O&M costs

o Energy goals & wish list of projects
10

Facility Requirements

• Customer sets standards for building operations

o Lighting levels, indoor comfort (HVAC)

o Energy system controls

– Shut down HVAC during unoccupied hours

• Commissioning 

o Customer/ESCO develop design intent

o ESCO prepares Commissioning Plan after project 

design

– Tests to ensure facility requirements are met

o Commissioning equipment tests & report
11

Energy/Water Savings

Measurement & Verification (M&V) Goal – Verify 

Annual Energy & $ Savings

• M&V Plan (set at contract award)

o Develop pre-installation energy baseline

o Measure post-installation performance

o How energy savings is calculated:

– (pre-installation baseline) – (post-installation performance)

– $ Savings = Energy Savings x Energy Rates

• Post Installation M&V Report 

o Demonstrates potential guaranteed savings/year

• Periodic M&V Report (typically annual)

o Verifies annual guaranteed saving achieved
12

Determine Energy & $ Savings: Energy Efficiency

kW

Hours per Year

Post-Retrofit Energy Use Baseline Energy Use

Increased Performance

Reduced 

Operating 

Hours
13

Determine Energy & $ Savings: Renewables

Cost

$/kWh

Hours per Year

 Reduced Utility Purchase Baseline Energy Requirements

Renewable Energy Supply
14

Risk Management

• Goal: Persistent savings over long term

• Example: Building owner assumes O&M

• Risk:

o Resources for building owner O&M to deliver savings

o If performance degrades, ESCO expects full payment

• Benefit:

o Building owner to consider and manage project risks

o Increased infrastructure investment

• Risk & Responsibility Matrix (assess range of risks):

o http://www1.eere.energy.gov/femp/financing/espc_resources.

html

o See 2.3 (MS Word doc)

• Financial, operational, performance issues
15

Tools for ESPCs

M&V Document Templates:

• M&V Plan

• Post Installation M&V Report

• Periodic M&V Report

Renewable Energy Screening (no cost)

• Pre-project analysis of cost effective RE opportunities:

o Solar (thermal & electric generation)

o Wind

o Biomass (biofuels, thermal, waste-to-energy)

o Combined Heat & Power

o Geothermal
16

Master ESPCs

• Includes common ESPC terms and conditions

• Modify scope of work for specific sites

• 16 ESCOs awarded Master contracts

• Designed for federally owned facilities:

– Ameresco; Chevron Energy Solutions; Clark Energy Group; 

Consolidated Energy Solutions; Constellation Energy Projects 

& Services Group; FPL Energy Services; Honeywell Intl.; 

Johnson Controls Government Systems; Lockheed Martin 

Services; McKinstry Essention; NORESCO; Pepco Energy 

Services; Schneider Electric Systems; Siemens Government 

Systems; The Benham Companies; Trane
17

Public/Private Partnerships

• Agency ESCO selection:

o Qualifications/interviews > down select

o Short list & submit preliminary assessment

• Conducts at risk, facility survey to identify energy 

projects:

o If not economically viable, no cost to customer

o If economically viable, develops ESPC project

o If customer rejects, customer reimburses ESCO costs

o If customer accepts, ESCO effort part of project cost 

• ESPC project developed and negotiated

• Customer acquires infrastructure improvements and 

facility energy efficiency at no capital cost
18

Business Principles

• ESCO Project Investment Thresholds:

o Transaction Costs vs. Rate of Return

– Markup (15-20%), Profit (6-10%)

o Common target ≥ $1 Million investment

o Economy of Scale 

o ESPC Scope Considerations

1. Bundling energy efficiency (EE) & renewable projects

2. EE & private owned RE projects

A. Capture tax incentives & state incentives

3. Non-infinite delivery, infinite quantity (IDIQ) ESPC 

request for proposal (RFP) for RE Only
19

ESPCs/Power Purchase Agreements (PPAs) for Renewable Projects

• Key: 25-year contract authority less construction time

• RE Project developers seek minimum 20-year PPA

• Office of Management and Budget (OMB)/Council on 

Environmental Quality (CEQ) 8/16/11 endorses ESPC/PPAs

• FEMP Support to Agency & ESCO

• Private Ownership & Operation of RE Energy Conservation 

Measures (ECMs) works

o IDIQ allows ESCO to grant ECM private ownership (H.2)

o Private party - Federal Tax Incentives (ITC & MACRS)

o ESPC/PPA terms & conditions 

– Guaranteed Production Requirements

– Termination schedule

– Agency License/Easement – Key to financing
20

ESPCs/PPAs for Renewable Projects

• ESPC/PPA Terms & Condition (cont’d)

o Owner Warranties 

– PV (25 years), Inverters (10 years)

o RE Asset Title Issues

– Government Purchase Option

 Asset Appraised Value required by IRS

 Recommend not before 7 years (vest tax incentives)

– Remove at ESPC expiration (wear &tear accepted)

– Cannot acquire Asset at $0 cost

o Consider owner retention > follow on PPA (10 

years)
21

Cash Flow & Parties for Renewable Energy ECMs in ESPC

7

Agency

ESCO

Financier

Utility

Payments

RE Incentives

Debt Service 

Utility

Savings

Financing

Energy

Services
22

Cash Flow & Parties for Leveraging Tax Incentives for RE in ESPC

Agency 7

ESCO

Lessee

Financier

Lessor

Utility

Payments

RE Incentives

Debt Service & 

RE Lease

Payments

Utility

Savings

Financing &

RE Asset Lease

Energy

Services

Private Sector Lease
23

Cash Flow & Parties for Leveraging Tax Incentives for RE in ESPC

7

Agency

ESCO

Lessee

Financier

Lessor

Utility

Payments

RE Incentives

Debt Service

& RE Lease

Payments

Utility

Savings

Financing &

RE Asset Lease

Energy

Services

IRS

RE Investment

Power Production

Tax Credits

MACRS

IRS Tax Tests:

• Lease Term < 80% useful life

• At lease end asset value >= 20% initial value

• Lessee purchase option – protect Lessor ROI

• Lessor must have 3% cash on cash return

Meeting IRS Regulations
24

Cash Flow & Parties for Leveraging Tax Incentives for RE in ESPC

7

Agency

ESCO

Lessee

Financier

Lessor

Utility

Payments

RE Incentives

Debt Service 

& RE Lease

Payments

Utility

Savings

Financing &

RE Asset Lease

PPA

Energy

Services

IRS

RE Investment

Power Production

Tax Credits

MACRS

PPA – Deliver RE Power at <= current cost
25

Cash Flow & Parties for Leveraging Tax Incentives for RE in ESPC

7

Agency

ESCO

Lessee

Financier

Lessor

Utility

Payments

RE Incentives

Debt Service

& RE Lease

Payments

Utility

Savings

Financing &

RE Asset Lease

PPA

Energy

Services

Utility or

REC Market

IRS

RE Investment

Power Production

Tax Credits

MACRS

Private Party Owns RECs
26

Panel Discussion- PPAs within EPSCs

• How to Replicate DHS Success – Day 2 1:30 pm

• USCG – Puerto Rico, Awarded 12/16/10 (3 MW PV)

• FLETC – Cheltenham, MD, Awarded 12/29/11 (2MW 

PV)

• Panel

o James Richardson – DHS

o Bill Bresnick – DHS

o Wilson Reynolds – Energy Management Engineering, Inc.

o Doug Dahle – NREL