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Business: Industrial

Energy Performance Contracting Process

The following chart and glossary from the Office of Energy Efficiency demonstrates the various phases and activities of energy performance contracting. While individual organizations may approach each step differently, the basic considerations remain the same.




Early Planning

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Decision to Proceed

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Assessing Suitability of Energy Performance Contracting

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Request for Proposal Development

  • Develop and issue a Request for Proposal.

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Proposal Assessment and Contract Award

  • Review and evaluate ESCo proposals.
  • Select ESCo and award project.

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Finalize the Design, EPC and Construction

  • Conduct a Feasibility Study and finalize all concepts and designs, as well as the pre-construction baseline energy consumption and demand.
  • Coordinate the construction schedule.
  • Negotiate and sign a final energy performance contract (EPC).
  • Follow monthly review meetings and monitor all developments throughout the construction period.
  • Offer comprehensive training for buildings operating and maintenance staff.
  • Implement an employee awareness program.

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Performance Period
  • Conduct an annual review of the energy and cost savings. Resolve required changes to the baseline (i.e. changes to building use, hours of operation, etc.)
  • Conduct ongoing opportunities for improvement throughout the life of the contract.
  • Monitor and verify project performance on a continuous basis.

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From the outset, obtain senior management approval and commitment for the energy efficiency project, since the funding and implementation option you choose may have financial and tax implications for your organization. In fact, no energy efficiency project should progress beyond the exploratory stage without the support of your key decision makers.

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The Project Team should consist of all key personnel responsible for the management and operation of the building. The team should also include representatives from the physical plant, finance, human resources, engineering and legal resources. They are responsible for providing the:

  • technical expertise to provide background information and operational data on the building, to help develop technical specifications, to evaluate Proposals and to work with the energy service company to oversee implementation;
  • financial expertise to evaluate the financial provisions of the options under review; and
  • legal expertise to help draft and negotiate the contract.

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You need an Energy Champion to head your Project Team. This primary contact person must have the authority to make decisions and articulate the organization's needs. This person should be high enough in the organization to be able to call in engineering help for brief periods to review plans, designs, commissioning reports and statements of savings proof. The individual should also have access to contract management and legal advice.

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An opportunity assessment or preliminary audit, offers a brief, initial evaluation of a building or a group of buildings' potential for efficiency improvements. This assessment usually provides an inventory of energy-using equipment, a basic analysis of energy records and energy consumption patterns and a set of recommended measures to improve efficiency. A summary of the energy cost savings, implementation costs for improvements and estimated payback period are included with the recommended measures. An assessment might also identify applicable utility programs, highlighting incentives for certain technologies or rebates for demand or consumption reductions.

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Energy performance contracting can provide your organization with a financing arrangement that uses private-sector dollars to pay for new equipment and other modifications needed to cut your operating costs and reduce your building's energy and water consumption as well as greenhouse gas emissions.

The comprehensive range and the delivery by one supplier make energy performance contracting innovative and attractive. As well, by tying the payment for the work to the energy savings, this implementation method can give you an edge over your competition since there is no need to use capital funds to pay for the project.

Typical projects include lighting, control systems and heating, ventilation and air conditioning improvements or new equipment and system installations such as boilers, chillers and cogeneration units. More innovative, longer-term contracts can include solar wall heaters, photovoltaics, living walls, and low consumption plumbing.

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Under an energy performance contract, your organization enters into a formal agreement with what is known as an energy service company or ESCO. The ESCO brings engineering and energy management expertise, project management experience and project financing capacities together as a package. Services can include analysis, design, engineering, construction, commissioning, staff training and monitoring. The ESCO is also responsible for most of the technical, financial and maintenance risks.

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The feasibility study should verify the site information provided by the opportunity assessment and confirm the viability of the energy efficiency improvements proposed by the energy service company (ESCO) in its response to the Request for Proposal.

The feasibility study includes, at a minimum, a thorough and professional physical inspection of the design and condition of all energy systems; a measurement of air-flow rates, combustion efficiency and other variables; a review of standards of service and comfort (existing space conditions); and an analysis of energy-use patterns, applying computerized simulation models, as required.

At the end of the study, the ESCO provides a report recommending a comprehensive set of system improvements (indicating the respective savings, costs and payback periods) and related activities, such as training and monitoring, as well as detailed analyses and data in support of these findings and a justification of the Baseline Energy Consumption and Demand. The written report is based on extensive field measurements and interviews with the operating personnel.

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The pre-retrofit energy consumption and demand, also referred to as the baseline energy consumption and demand (Baseline), involves analyzing the building's historical energy use data. The energy service company (ESCO) calculates the Baseline during the feasibility study prior to final contract negotiation. Typically, an average of the past two years is taken as the Baseline. Where required, the ESCO negotiates any adjustments for unusual circumstances affecting energy consumption.

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The two most popular types of energy performance contracts or EPCs in Canada are the “First-Out” or “Guaranteed Savings” “Performance Contract” and the “Shared Savings” Performance Contract (though these may vary from EPC to EPC).

In a “First-Out” or “Guaranteed Savings” EPC, the energy service company (ESCO) receives 100 percent of the cash generated from the savings until the contract is completely paid out or until the term expires, whichever comes first. If the EPC is paid out before the contract expires, the contract terminates. If the EPC is not paid out before the contract expires, the contract terminates in any event, and payments to the ESCO cease (i.e. the ESCO is responsible for any short-fall). You then retain 100 percent of the energy savings and ownership of all the energy-efficient equipment installed, as established in the contract.

Under a “Shared Savings” EPC, you and the ESCO will share all the savings generated from the energy efficiency project on an agreed percentage split for a fixed period of time. The division of the shared savings may be constant throughout the contract period or it may vary (e.g. 95 percent to the ESCO and 5 percent to the organization).

Because the percentage of dollar values may vary from year to year, the total value of payments to the ESCO is not known in advance. Regardless, you still share the savings over the life of the contract and the ESCO must still recover all of its costs, such as equipment, installation, maintenance and financing charges, out of its share.

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