Chapter 11 Energy Savings Performance Contracts
C. The Investment Grade Audit
Typically, one ESCO is selected during the bidding process to proceed to the stage of conducting a detailed energy audit, which is often referred to as an “investment grade”
audit. On the basis of the detailed energy audit, the parties typically attempt to negoti- ate a final ESPC contract. Depending on the terms of the request for proposals, the client may be obligated to pay the ESCO for the audit, if the parties are unable to reach agreement on an ESPC.
The investment grade audit is important for two reasons. First, the client’s decision to proceed with an ESPC project is often based on information obtained during this audit. Second, the investment grade audit supplies the information for defining the baseline scenario that will be one of the two critical components in determining whether the ESCO achieves the guaranteed level of energy savings. For these reasons and others, the detailed energy audit should be conducted in a thorough and careful manner, and be based on complete and accurate information.
As part of the detailed energy audit, the client typically furnishes records of its energy usage and energy-related maintenance, including utility records, occupancy information, descriptions of all energy-consuming or saving equipment, and energy management procedures. Unpredictable weather patterns can make records from a single year unrepresentative, as can irregularities in building usage, occupant behavior,
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or electricity prices. Therefore, the data period should span at least two years, and a longer data period is preferable. The historic data is used by the ESCO to develop a baseline energy consumption scenario. Once the baseline scenario is established, the ESCO can calculate projected savings based on various technology upgrade scenarios.
These savings projections are used to develop the cost-savings guarantee and financial package.
The importance of compiling accurate and complete baseline data cannot be over- emphasized. At the very least, both the client and the ESCO should be heavily involved in collecting the baseline data. Ideally, the client will also engage an independent engi- neer to assist the client in interpreting and understanding the baseline data, as well as the options available to decrease energy consumption. If the baseline data is not accu- rate and complete, any estimates of future savings will be erroneous. If inaccurate baseline data causes the estimate of future savings to be unrealistically high, the client may purchase upgrades that cannot be paid for out of future cost savings. Such situa- tions can lead to disputes between the client and the ESCO that cannot be resolved without a loss to one side or the other.
1. Predicting Savings The amount of energy cost savings realized by a client from an energy effi ciency upgrade depends on four variables: (1) the level of energy con- sumption before the upgrade, (2) the per-unit cost of energy before the upgrade, (3) the level of energy consumption after the upgrade, and (4) the per-unit cost of energy after the upgrade. In order to estimate and guarantee cost savings before an upgrade is completed, an ESCO must calculate values for each of these four variables.
While comparison of such “before” and “after” data might seem to be a straightfor- ward exercise, in practice the comparison can become quite complicated. In general, the kind of large energy consumers who are interested in ESPCs pay for electric power in accordance with rates that are highly variable and complex. This means that the per- unit cost of electric power in both the “before” and “after” scenarios can vary widely, depending on many variables that have nothing to do with energy effi ciency.
Variable electric power rates give an ESCO two different ways to save a client money on its future energy costs. One is to reduce the level of energy consumption through retrofits or upgrades. The second is to manipulate energy usage and rates to reduce the client’s costs without actually reducing consumption. This section will briefly explain some of the more common rate structures for electric power, as well as the concept of “cost only” savings.
A. CONSUMPTION AND DEMAND CHARGES
Unlike residential users who pay for power based on a fixed rate per kWh of electricity consumed, the price paid for power by a large consumer typically includes both a con- sumption (or usage) component and a demand (or capacity) component. The two com- ponents are often analogized to a road trip in an automobile. Consumption is the number of kWh used during a month and is analogous to the total distance driven on a particular trip. Demand is the peak amount of electricity used during an hour and is analogous to the top speed reached during the trip. Both consumption and demand determine the amount paid by large electric power consumers.
The price paid for consumption is computed by multiplying electric power usage, measured in kWh, times a rate for each kWh. The demand charge is a more complicated concept. Utilities charge large users for the peak rate of kW usage for each facility, which is generally the highest use during a one-hour period over the course of a month. Because the demand charge is based on the highest rate (usually measured at fifteen-minute inter- vals) at which a facility actually uses energy, it will typically vary from month to month.
Utilities use this method because they must have the capacity to supply the total amount of energy demanded at any given time, which requires investment to build the generating assets to provide that capacity. The demand component of electricity is priced higher for those consumers that require higher peak loads, which compensates the utility for build- ing the additional generating assets necessary to meet peak demand.
Consider two facilities, both of which use 2000 kWh of electric power per month. If Facility A uses 2000 kWh of electricity per month, but does so in twenty short 100 kW bursts, then the utility must be capable of providing 100 kW of capacity to Facility A at all times. This means the utility must build and maintain power generation assets capable of generating that 100 kW of power, whether Facility A uses the energy or not. 23 The utility bill to Facility A will include a usage charge for 2000 kWh that it consumes and a demand charge for the 100kW peak demand capacity that the utility maintains to meet Facility A’s peak energy requirements. In this case, assuming US$.10/kWh for consumption and US$5/kW for demand, Facility A’s bill would be (US$.10/kWh x 2000 kWh) + (US$5/kW x 100kW), or US$700.
If Facility B also uses 2000 kWh each month but never uses more than 10 kW at a time, then the consumption charge will be the same as for Facility A, but the demand charge will be much lower. Facility B’s bill would be (US$.10/kWh x 2000 kWh) + (US$5/kW x 10kW), or US$250. Facility B is less costly for the utility to serve, because the utility only needs the generating assets necessary to produce 10 kW. The lower cost to the utility is reflected in a lower demand charge to the customer.
B. TIME-OF-DAY CHARGES
In some areas, the demand and/or consumption charge varies depending on the time of day or night that electricity is used. Peak demand usually occurs during the day, and lower power demand at night. Utilities commonly charge lower rates during off-peak hours because it gives customers an incentive to spread their power consumption over a twenty-four-hour period. By spreading out energy usage, a utility can minimize the amount of unused capacity it carries at night and avoid building new generating capac- ity to meet peak demand.
C. COST-ONLY SAVINGS
Due to the complexity of many users’ rates, it is sometimes possible for an ESCO to suggest changes to a client’s consumption patterns that will significantly reduce energy costs without reducing the amount of energy used. As suggested by the above example, it is possible for a client to lower its demand charges by eliminating consumption peaks.
23 Alternatively, the utility could purchase the additional capacity from the spot market, but doing so could be signifi cantly more expensive.
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One relatively simple way to do this is to schedule equipment that uses large amounts of power, such as boilers and chillers, to operate at different times. An ESCO could also prescribe changes to the time of day that a client uses energy and thereby reduce cost by moving energy usage to off-peak rates.
Clients are often wary of such methods because they are dependant on a rate struc- ture that is subject to change, rather than on actual reductions in energy use. Additionally, if part of the client’s goal is to reduce its environmental impact, such as reducing carbon emissions, cost-savings measures alone will not achieve that goal.
2. Stipulated Savings Many ESCOs also promote their ability to achieve savings that are independent of conventional energy cost-savings measurements determined by “before” and “after” usage or cost of electricity. These are often called “stipulated savings.” Stipulated savings are typically savings that cannot be measured easily, or are not tied directly to changes in energy usage. Common examples of stipulated sav- ings are reductions in workforce salaries due to the increased automation of building systems, or reductions in light bulb purchases due to the use of longer-lasting bulbs.
Stipulated savings are usually not verifiable, and may or may not be realized. For example, even if an ESCO predicts that ten hours per week in maintenance can be saved, the client’s maintenance staff may not be reduced. While a reduction in maintenance hours may be of some benefit to the client, it will not be possible to use that saving of maintenance time to secure financing for the ESPC project.
3. Defi ning a Percentage of Achievable Reductions Once an ESCO completes its detailed energy audit, it calculates the expected amount of savings for each energy efficiency option the client may wish to implement. 24 The amount of expected savings calculated by the ESCO is typically 15 to 25 percent higher than the amount of savings the ESCO will guarantee. The difference between the estimate and the guarantee provides the ESCO a buffer, in case the project does not perform as planned.
The level of the guarantee and the corresponding amount of the buffer has significant ramifications for any project. Using a conservative approach to calculate the guaranteed cost savings helps prevent a shortfall against the guarantee, which protects the ESCO.
The client may decide to forego upgrades that are likely to be cost-effective, and which it might otherwise implement if the guarantee were more comprehensive.
Ultimately, the client must decide what level of up-front capital it is willing to invest in a more extensive project, and the level of risk it is willing to assume if the savings guarantee does not cover the entire cost of the project.