energy performance contracts a guide for customers epc bpg... · 1.5 when not to use an epc 9 part...

ENERGY PERFORMANCE CONTRACTS

A GUIDE FOR CUSTOMERS

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EXECUTIVE SUMMARY Energy Performance Contracting1 is a way of implementing energy efficiency projects (and equipment/plant/maintenance upgrades in all types of facilities and buildings) in a professional way. It provides a transparent way to manage risks, while guaranteeing outcomes and results, creating better outcomes for service providers and their customers.

This Best Practice Guide (Guide) provides key information to enable parties to develop and implement Energy Performance Contracts (EPCs). It also provides a guide to the model contract that accompanies this guide.

The aim of a model contract is to provide a consistent basis from which energy service companies (ESCOs) and their clients (building and facility owners, managers, and their agents) can negotiate and implement an EPC. Our intention is that significant amendments to the model contract will not be necessary, but that the parties may choose to modify the model contract to address the specific circumstances of their project.

The structure of this Guide is as follows.

Part 1 provides an introduction to energy performance contracting. This includes a brief description of some of the concepts behind EPCs, the advantages EPCs can provide to a Customer, and the circumstances in which the EPC approach is likely to be of most use.

Part 2 sets out the energy performance contracting process—from the decision to consider an EPC arrangement, through to negotiating, signing and then implementing, and monitoring the results of the project. It provides a step-by-step process, which can be adopted as suggested or modified to suit the specifics of each situation. This Part also explains some of the options for funding and risk sharing. In the latter case, this involves the use of energy cost savings guarantees that cover less than 100% of estimated savings.

Part 3 contains a commentary on the model EPC that is the companion document to this Guide. The clauses of the model contract are explained in detail in the commentary, and deal with a range of issues from design and installation of the EPC Solutions, commissioning procedures, equipment maintenance, performance guarantee, and baseline adjustments, to intellectual property rights, and insurance and dispute resolution. Each key clause is explained in plain English and is, in many cases, illustrated with an example.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1!Energy Performance Contracts sometimes also capture savings in water usage.!!2!Copyright in the document vests in the Commonwealth of Australia. However the contents may

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CONTENTS PART 1: INTRODUCTION 5

1.1 About this guide 5

1.2 Who should use this guide? 5

1.3 What is Energy Performance Contracting? 5

1.4 Advantages of Energy Performance Contracting 6

1.5 When not to use an EPC 9

PART 2: THE EPC PROCESS 10

2.1 Deciding whether to go down the EPC road 11

2.2 Selecting an ESCO 11

2.3 Define the detailed project scope 14

2.4 Implementing and managing the EPC 15

2.5 Funding, Decision Making and Risk Sharing 19

PART 3: COMMENTARY ON MODEL EPC CONTRACT 25

3.1 Background 25

3.2 Definitions and interpretation (clause 1) 25

3.3 Design and installation of energy saving measures (clauses 2 – 7) 26

3.4 Additional EPC Solutions (clause 4) 35

3.5 Commissioning procedure (clause 5) 37

3.6 Equipment maintenance (clause 6) 39

3.7 Additional Customer obligations (clause 7) 45

3.8 Performance guarantee (clause 8) 46

3.9 Baseline adjustments (clause 9) 54

3.10 Intellectual property (clause 12) 57

3.11 Insurance (clause 13) 58

3.12 Liability or Indemnity (clause 15) 59

3.13 Suspension 59

3.14 Dispute resolution (clause 18) 59

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Also included in the guide, are a number of Appendices:

! Appendix 1: The Energy Audit Agreement (EAA) – Purpose and Key Elements;

! Appendix 2: Measurement and Verification; ! Appendix 3: Checklist – Is energy performance contracting right for you? ! Appendix 4: Typical EOI documentation; ! Appendix 5: EOI Evaluation worksheets; and ! Appendix 6: Standard contract definitions.

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PART 1: INTRODUCTION

1.1 About this guide The purpose of the Best Practice Guide is to introduce the concepts of performance contracting within the energy context and to provide practical advice on how to enter into an EPC.

This Guide has taken significant content from a Best Practice Guide developed by the Australasian Energy Performance Contracting Association (AEPCA) for the Australian Department of Industry Science and Resources in 20002. The Guide, while based on the AEPCA Guide, has been adapted to New Zealand and aligned with the model Contract, which was also adapted for the New Zealand context.

1.2 Who should use this guide? The Guide is intended for anyone responsible for the operating costs of their business, related to energy and other resource inputs such as water. This includes management professionals such as facility managers, building owners and managers, plant and process engineers, financial controllers and procurement officers. The guide has been written for the facility owner, operator or person responsible for managing the negotiation and implementation of an EPC. The term ‘Customer’ is used throughout this document to refer to this range of parties.

1.3 What is Energy Performance Contracting? Facility owners and agents (Customers) know that energy costs are significant, and that these costs could likely be reduced by investing in proven and cost effective energy-saving technologies, systems and procedures. However, they often face significant barriers to investing in improved energy performance, for instance, lack of technical knowledge or financial constraints, or reservations about the ability of energy-saving equipment to perform as promised. Existing Facilities Management contracts that do not incorporate energy performance in their set of deliverables are a common barrier to improved energy performance.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2!Copyright in the document vests in the Commonwealth of Australia. However the contents may be used, copied, supplied or reproduced without prior approval, provided it is done solely for the purposes of developing or implementing Energy Performance Contracts within Australia and with full reference to the Commonwealth of Australia and the Australasian Energy Performance Contracting Association.

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Energy performance contracting was developed to overcome the major barriers to delivering cost-effective energy efficiency. It is applicable to any facility in which energy is used, including all types of buildings and industrial processes (see Appendix 3 on “Is Energy Performance Contracting right for you?”).

Put simply an EPC is a contract where an ESCO is contracted to improve the energy efficiency (in its broadest sense) of a facility, with the energy cost savings expected to be achieved over time paying for the investment.3 The savings are guaranteed by the ESCO and backed by a guaranteed payment obligation in the case of non-performance. This makes it possible for an entity to access funding for an upgrade directly from contracted savings.

Savings generated under an EPC are shared between the client and the ESCO. This means EPCs incentivise ESCOs to look at energy performance and energy savings in a holistic way. An ESCO will offer a multi-faceted approach to delivering energy and cost savings. This includes energy and/or cost savings from technologies (e.g. lighting upgrades), systems (e.g. building management systems), procedures (e.g. driving behavioural change) and commercial arrangements (e.g. demand response through grid support contracts). In short, EPCs create and incentivise opportunities for innovation. When a project is successfully delivered, productivity improves and both the Customer and ESCO win.

Traditional EPCs involve the ESCO guaranteeing 100% of the estimated energy cost savings. This Guide however also discusses the potential for EPCs to provide a lower cost savings guarantee, for instance 90% or 80% of the estimated savings. This type of approach lowers the cost to the Customer and reduces risk for the ESCO, while maintaining the savings guarantee at a level that meets the Customer’s criteria.

EPCs are complex arrangements with relatively high transaction costs that reflect the professional approach to improving energy performance. Success requires the client and ESCO to understand and actively manage the technical and commercial risks and both parties to commit to a long-term relationship (5-10 years or more).

1.4 Advantages of Energy Performance Contracting EPCs can have many benefits over traditional contracting methods including:

! the Customer receives guaranteed performance over the term of the contract (reduced financial risk), together with the simplicity of outsourcing

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!3 While the phrase ‘energy savings guarantee’ is used, at times, in this Guide and the model contract, in practice, it means the energy cost savings that are measured, and expected to be achieved. Failure to achieve the specified level of energy cost savings may entitle a Customer to payment of the difference between the forecast savings and actual savings, but not to other legal recourse.

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to a single provider; ! it allows a value-based solution to a specific need to be delivered in

preference to a lower cost (but lower value) alternative. This relies on the EPC being set up so that it is self-funding from the savings produced;

! a well-managed EPC will generally produce savings more quickly, and will continue to deliver incremental savings over time (relative to a traditional tendering approach), as illustrated by Figure 1;

! the Customer can gain access to alternative funding sources, reduced operating costs, and reduced risks; and

! the Customer gains access to systems experts and partnership with ESCO, delivering facility improvement. An EPC approach creates incentives for the ESCO to consider alternate technologies and solutions, and to provide quality products and services over the lifetime of a contract.

Some of these benefits are inherent in the EPC process, while others will vary depending on the ESCO and the specific terms of the contract. More detail on the principal reasons to consider energy performance contracting is provided below.

Efficient allocation of technical risk

Generally the terms of an EPC will ensure that most of the technical risk sits with the ESCO. To a large extent the ESCO assumes the risk that:

! the project will perform as designed; ! the project will remain within budget regardless of technical difficulties; and ! the equipment will be maintained and operate properly after installation

(although the ESCO and Customer can choose to negotiate how the equipment is maintained).

Enables alternative approaches to project financing

The intrinsic value of EPCs to energy savings projects is demonstrated most clearly by cash flow. While historically most energy savings projects are funded like capital works upgrades, EPCs can be funded out of cash flow rather than capital expenditure. If the funding is structured as an operating lease, the project becomes fully self-funded rather than a debt on the Customer’s balance sheet. Funding of EPC projects is discussed in more detail in Section 5 of of Part 2.

Cost savings are guaranteed

EPCs involve an agreement by the ESCO that the estimated energy savings and energy cost savings (or, in some cases, a percentage of the estimated savings) will be achieved. This is normally structured so the loan repayment is less than or equal to the cost savings guarantee amount. In this way, the Customer is

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assured of being able to meet its loan or lease payment obligations from the savings generated by the project. This may also be important if the Customer is skeptical about the ability of identified improvements to achieve the energy savings claimed under a traditional tendered approach. Where the savings are not achieved the ESCO must pay the Customer the savings shortfall.

Customer obtains access to expertise

Since energy efficiency is its core business, the ESCO brings expertise to a project. While consulting engineers can offer similar expertise, and indeed are frequently employed by ESCOs, using a performance contracting arrangement enables you to streamline and deal with only one company. Also, because the ESCO is interested in a partnership with the Customer and is always looking to improve the performance of the project, it can bring a level of continuous improvement that would ordinarily not happen.

Note: because of the relatively new nature of energy performance contracting in New Zealand, it may appear to be a more difficult and drawn out process than more traditional approaches. The use of an independent and experienced facilitator (who provides guidance to the Customer) can greatly reduce upfront time requirements during a Customer’s first experience with performance contracting.

Supports measurement of environmental benefits

Environmental benefits achieved by reduced energy consumption include a reduction in energy and therefore marginal burden on infrastructure, greenhouse gas emissions, reduced water consumption, reduced chemical use and reduced solid waste. While these benefits do not only arise from performance contracting arrangements, these benefits can be easily measured and reported as part of the measurement and verification (M&V) under an EPC, for inclusion in company reporting.

Incentivises continued improvement

An EPC incentivises the ESCO to deliver continuous improvements over the lifetime of the contract. As shown in the following chart, a well-managed EPC would be expected to have ongoing benefits relative to the alternatives.

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!Figure 1: Expected profile of energy savings over time under various contractual arrangements (illustrative only)

1.5 When not to use an EPC While energy performance contracting has numerous benefits, it is not the best option in all situations. The following factors need to be considered by the Customer when deciding whether an EPC is the best option for its facility.

! Timeframes: The Customer must be comfortable with the need for a long-term relationship with the ESCO, and the benefits this will provide. One possible drawback is the loss of flexibility associated with signing a contract with a single contractor for a lengthy time period – this is an obvious corollary of the benefits of using a single source contractor for the entire project.

! Scale of Project: The EPC is a turnkey arrangement, and as such, will include a variety of costs faced by the ESCO, for example, capital investment, engineering audits, project management, and ongoing monitoring and maintenance. Smaller projects may be less economically viable as a result of these costs. The simple checklist at Appendix 3 may help you decide if your facility will be suitable for an EPC.

! Customer processes: The EPC arrangements may not be consistent with a Customer’s internal procurement rules, and considerable education may be required to overcome possible reservations regarding this unconventional approach. Part 2 of this guide includes a standard approach to procurement, which could be used or adapted to alleviate difficulties in this regard.

EMANZ 2014 Energy Performance Contracting – A Guide for Customers

PART 2: THE EPC PROCESS The major steps in establishing and implementing an EPC, as outlined in Part 1, involve making an initial assessment as to whether there is likely to be energy saving opportunities worth pursuing, and if so, deciding to use energy performance contracting, selecting a preferred supplier and undertaking an Energy Audit to help determine the specific scope of the project, negotiating and awarding a contract, and implementing the project and undertaking M&V. The numbering on the diagram below reflects the steps in the subsequent discussion.

!Figure 2: The EPC Process


2.1 Deciding whether to go down the EPC road If a Customer considers there are opportunities for cost effective energy savings, it may undertake some high-level studies (such as a NABERSNZ assessment) to assess the potential value to be gained, and consider options to pursue any opportunities that are identified. Alternately, a Customer may be approached directly by an ESCO or other provider.

As discussed in Part 1, energy performance contracting is not a good fit for all situations, but can be very beneficial in many. However, EPCs are not (yet) a standard form of procurement tendering in New Zealand so it is extremely important that potential Customers have a clear understanding of what is involved from the outset.

Thoroughly reading and understanding this section, reviewing the model contract, discussing EPCs with other companies that have used them, and using the checklist at Appendix 3 should help potential Customers decide whether an EPC is the right way forward. The use of an independent party directly experienced with EPCs is likely to be helpful in making this decision and providing guidance through the process.

Note that potential legal or institutional hurdles must be considered at this stage in the process. For example, experience with performance contracts, particularly in the public sector, highlights that the process of obtaining approval from decision makers can be long and drawn out. As such, securing the support of key decision-makers early in the process – before any effort is made to progress beyond the initial exploratory stage – is vital.

2.2 Selecting an ESCO Once a Customer has decided to proceed with an EPC, the next step involves selecting an ESCO. The approach to doing this will vary by organization. A fairly standard competitive process of requesting, evaluating proposals and finally selecting a preferred ESCO is set out below. Following this process or one like it will ensure that Customers obtain the benefit of competition through the procurement process. Non-governmental organisations may choose to follow a more informal process.

The ESCO-selection process is used to determine if there are opportunities worth pursuing with potential ESCOs. Preparation of proposals by ESCOs is normally at no cost to the Customer.

The process of entering into an EPC and seeing it through to its conclusion is an extended one with a number of exit points. In particular once a Customer has assessed the results of the Energy Audit it may decide not to proceed with an EPC even if its technical and financial conditions are met. In this case the Customer would normally pay for the Energy Audit. Where the Customer decides


to proceed with the project, the cost of the Energy Audit will normally be added to the project cost.

Step 1: Customer issues a public call for Expressions of Interest (EOIs), prepares EOI documentation, and issues it to potential providers

The purpose of the EOI process is to enable the Customer to identify all the contractors able and willing to offer proposals for its project.

An example of EOI documentation is provided in Appendix 4, and includes all the key requirements of such documentation, including: overall objective, general statement of scope of work required, requirement for any third party financing (if known), and requirements for pre-qualification. It will request information from ESCOs on required capabilities, general performance contracting methodology and approach to performance guarantees, and the finance options it can offer.

Step 2: ESCOs prepare EOI responses

Step 3: Customer prepares Request for Proposal (RFP) documentation (concurrently with Step 2)

The RFP is the mechanism for selecting a preferred provider to negotiate an EPC with. It is not a detailed specification of work and does not request a fixed price for work that is defined in detail; rather it: a) sets out: facilities under investigation, identified asset management issues,

projects already identified, funding restrictions or requirements, proposed phases of work, maximum contract duration (if applicable), maintenance and operational requirements, and selection criteria and financial targets and evaluation criteria; and

b) requests a proposal setting out:

! how the ESCO would carry out the work, how fees would be structured, and estimates of likely costs and savings (based on information provided in the RFP and a simple ‘walk-through’ audit undertaken by the applicant);

! detail on technical aspects of the proposal: fixed cost of the Energy Audit, estimated annual energy savings (plus or minus 20 percent), broad outline of recommended energy saving measures, proposals for operations and maintenance and training, latent site conditions, greenhouse gas abatement, minimum savings, NPV or IRR criteria, and any maintenance and/or upgrade issues;

! detail on financial aspects of the proposal: the method of measuring savings, the method of determining payments and term of payments, the length of contract, ownership of equipment, estimated cost of energy savings measures (plus or minus 20 percent), purchase options, and insurances; and


! background and qualification information including capabilities, relevant experience, financial information, and references.

Step 4: Customer undertakes EOI evaluation and selects a shortlist

Evaluation is undertaken against the methodology described in the EOI, by a small group, which normally includes the person responsible for the project, a technical manager, and a commercial manager. The highest scoring 3-4 ESCOs are shortlisted. Sample EOI Evaluation documents are provided in Appendix 5.

Step 5: Customer issues RFP documentation to selected ESCOs

Step 6: ESCOs prepare RFP proposals

ESCOs will require access to the facilities and time with staff in order to develop quality responses. Normally all of the shortlisted ESCOs would attend site visits together, and as far as practical, questions from any ESCO should be answered and circulated to all shortlisted ESCOs.

Step 7: Customer prepares Energy Audit Agreement

This step is carried out concurrently with ESCO preparation of proposals (step 6).

Within the Energy Audit, the ESCO would normally investigate all opportunities that would deliver a project within the Customer’s required return on investment or the overall capital budget (as set out in the RFP), or both. The strength of an EPC is that ESCOs identify all potential opportunities, not only those within the pre-defined scope of work. While the Customer still has the final say, a more complete picture of opportunities can now be evaluated. Appendix 1 discusses the key issues that would normally be covered in the EAA.

Step 8: Customer undertakes RFP evaluation and selects preferred ESCO

Evaluation of RFP responses is against the proposal evaluation criteria, and is usually undertaken by the same group that evaluated the EOIs. As detailed costing cannot be carried out until the next stage (the Energy Audit), considerable weighting is given to the originality, understanding, and technical soundness of proposals. Interviews are often undertaken to clarify aspects of proposals; due to the long-term nature of the EPC contract, it is essential to meet at least the preferred provider before the final decision is made.

Steps 1-8 would be expected to take 12-14 weeks in total.


2.3 Define the detailed project scope By the time the preferred ESCO has been selected both the Customer and the ESCO will have undertaken a preliminary assessment of potential opportunities.

The next step is to develop and agree the detailed scope of the project. The Energy Audit forms the basis of the scoping process as it enables the ESCO to scope the proposed project by identifying energy upgrade measures (that under the contract become the EPC Solutions) likely to deliver energy savings and energy costs savings. The results of the Energy Audit provide the basis for establishing baseline values from which energy savings are to be calculated, and defining the scope of energy upgrade measures (including energy, water and other associated utility cost savings) and any other improvements.

The outcome of the Energy Audit will inform the Customer’s decision on whether entering the EPC is financially and technically viable and it will be the basis of the works specification to be agreed under the EPC.

Steps in defining the detailed scope of work are set out below (numbering of steps continues from previous section).

Step 9: Customer and selected ESCO enter into an EAA

Energy Audit Agreements are negotiated and entered into where both parties have a commitment to proceeding to a full EPC provided that the Energy Audit demonstrates that minimum conditions (set by the Customer) will be met, for example, minimum IRR or NPV, maximum capital investment, maximum contract length, minimum savings4. Specific requirements such as temperature ranges, humidity tolerances, levels of CO2 or illumination, hours of operation etc. must be clearly stated at this stage. The customer must allow sufficient time to spend with the ESCO to tour the building, and to discuss operations and procedural matters. The Customer must also be ready to provide the ESCO with access to specialist staff or contractors such as mechanical or electrical tradespeople, BMS technicians etc.

Step 10: ESCO undertakes the Energy Audit

This step involves the ESCO investigating all opportunities to deliver projects within the required IRR and capital budgets, including both equipment and maintenance upgrades. This process will involve spending considerable time in the facilities and with relevant staff of the Customer. More detail on the Energy Audit is set out in Appendix 1. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4 A traditional EPC guarantees achievement of cost savings equal to or greater than estimated cost savings for the bundle of measures. If this level of savings is not achieved, the ESCO must compensate the Customer. In an alternative to the traditional EPC, Customers and ESCOs may choose to contract for a lesser cost savings guarantee in order to alter the risk sharing and reduce the cost to the ESCO (and thus the Customer) of managing the risk.!


Step 11: Customer and ESCO negotiate EPC and contract is awarded

The EPC sets out the process for agreeing the works specification which details the project works and describes Customer and ESCO obligations, guaranteed savings, exact costs, M&V methodology, warranties, liabilities, insurances, etc. The key clauses of the model EPC are discussed in Part 3 of this Guide. Further discussion on funding and guaranteed cost savings options – two key parameters of the negotiation – is provided towards the end of this Part.

Note: an important part of the process is having the final contract developed in a partnership between the Customer and the ESCO. This partnering approach will ensure that the Customer’s needs can be addressed as the scope of its project is being defined, and enables the ESCO to inform the Customer about special considerations and offer additional value throughout the contract development phase, while ensuring that the Customer retains control of what it wants out of the contract. With an EPC a number of issues will be raised during the term of the contract that may not have been considered at the time of issuing the tender. A good working relationship is therefore important. Through this type of open process, the Customer can ensure it is getting the best value and best possible results.

2.4 Implementing and managing the EPC Once the EPC is signed, it is time to manage its implementation. This process includes:

! The ESCO finalising the EPC Solutions5 and agreeing the works specification with the Customer;

! Delivery of the EPC Solutions by the ESCO – this includes procuring equipment, managing the construction process and designing relevant procedures and training staff in those procedures; and

! Managing the savings period, including measurement, verification and reporting, maintenance, and continuous improvement.

! Steps in implementing and managing the EPC are set out below (numbering of steps continues from previous section).

Step 12: Finalising designs, agreeing the works specification and getting under way

Most ESCOs will not have completed all final engineering designs at the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5 EPC Solutions means the energy upgrade measures (including energy, water and other associated utility cost savings) which will deliver energy cost savings. EPC Solutions comprises the installation of equipment and the development and delivery of procedures. !


conclusion of the Energy Audit, and prior to signing the EPC. This is to avoid unnecessary up-front cost and reduce commercial risk should the project not proceed. Once the EPC is signed, the ESCO finalises design details and agrees the works specification with the Customer. Preparation of, and agreement to, the works specification is a critical step in the life of the EPC. The works specification describes the tasks and timeframes for delivering the EPC Solutions, prices the works, specifies guaranteed energy savings and lists equipment that needs to be upgraded or purchased, etc.

With the detailed works specification and schedule in place, the ESCO proceeds with hiring sub-contractors as necessary and organising the site for work on the project. All these activities must be coordinated with the Customer, to ensure any special requirements or restrictions are taken into account (planned shutdowns, critical periods of operation, holidays, etc.).

Step 13: Project commissioning

This task is typically performed by the ESCO, but it is strongly recommended that the Customer’s operations staff participate also, to learn more about the performance aspects of the project. Commissioning is typically not a static process, particularly when several EPC Solutions are involved. In addition, the commissioning process of EPC projects is often one of ‘fine-tuning’ until the EPC Solutions deliver on the expected energy cost savings. As in the construction phase, the commissioning process should be well-documented and scheduled according to Customer requirements as well as the ESCO’s.

Note that, the commissioning process is an ideal opportunity for the Customer to have its operations staff trained on the details of each of the EPC Solutions – this could be a requirement of the works specification.

Step 14: Managing the savings period

Once the Customer has accepted the EPC Solutions, the performance guarantee period6 ‘energy cost savings period’ begins. During this period, three basic tasks are performed: M&V and reporting, maintenance, and continuous improvement.

Measurement, verification and reporting of the savings (M&V) M&V and reporting is typically performed by the ESCO according to the terms laid out in the contract, but may also be performed by a contractor or – if required by the Customer or in the event of dispute by either party – independently verified, by an independent firm. Savings reconciliation will typically be performed at least once per year.7

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!6 Refer to contract definition in Appendix 6. 7!Often during the first year or two of the contract, the ESCO will undertake more frequent M&V for its own purposes of fine-tuning savings from the EPC Solutions. The Customer will not


Because EPC’s involve guarantees of energy cost savings, and financing arrangements often rely on cost savings to make repayments, M&V needs to be rigorous. The International Performance Measurement and Verification Protocol (IPMVP) is a widely accepted standard approach, the application of which is supported by Certified Measurement and Verification Professionals (CMVPs). In New Zealand, training and competency to achieve this certification is managed by EMANZ who recommends the use of a CMVP for all EPC’s.

The savings reconciliation will identify if any payment relating to the savings achieved should be made to the Customer or the ESCO. Such payments typically occur annually. The options for sharing savings are discussed in Part 2.

The Customer should monitor the actual levels of energy saving achieved and compare these with the forecast levels set out in the proposals. In addition to monitoring the actual level of savings, the Customer should examine the method of calculating those savings to ensure it complies with that agreed to in the contract. In particular, it should ensure that changes in tariff structures are fairly treated and included in any calculation of monetary savings.

Maintenance and service Generally both the Customer and the ESCO will have maintenance obligations, which should be fully described in the contract. Normally the ESCO is responsible for the maintenance and servicing of new equipment installed and frequently the maintenance of existing energy-using equipment is also taken on by the ESCO. Both parties need to ensure they are familiar with the respective maintenance obligations and that maintenance programmes are clearly reported on. Non-performance of required levels of maintenance will affect equipment performance and the level of energy savings achieved.

The Customer must ensure its maintenance staff is properly trained to operate and/or maintain the installation where those obligations lie with the Customer, and that they carry out the operation and maintenance as required in the agreement. Training to be provided by the ESCO to Customer staff will be detailed in the works specification.

Continuous improvement As the M&V and maintenance tasks are being performed, the ESCO will be constantly fine-tuning the savings from the EPC Solutions to reduce risks (of not achieving the guaranteed cost savings), and maximise savings (particularly where savings above the guarantee level are shared). This task may include identifying EPC Solutions that are not performing as planned, and introducing new EPC Solutions to make up for any loss in savings. This continuous improvement will also frequently identify new savings opportunities in Customer facilities, which the ESCO may present to the Customer from time-to-time. This is !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!normally receive these more frequent reports unless agreed under the EPC.!


one of the main advantages over a traditional tender process.

Once the contract has been signed, the Customer must ensure that the ESCO is meeting the terms of the agreement – both the services provided and the energy cost savings achieved. EPCs typically run for 5-10 years and the Customer will need to stay involved at some level throughout the term of the contract. Regular meetings and reviews are recommended throughout the term of the agreement.

Timing The Customer’s needs regarding timing of the delivery and installation of EPC Solutions should be reflected in the timeframes set out in the works specification. For example, where a plant shutdown is required for installation this would generally be scheduled for during a maintenance shutdown. During implementation it is the Customer’s job to ensure that the timeframes set out in the works specification are adhered to, including the actual installation of equipment and the submission of documents and reports, or the ESCO notified and accepts any timing or schedule changes.

In a limited number of circumstances the model contract provides for project delay. For example where there is a ‘force majeure’ event such as an earthquake or an extreme weather event a project may be delayed for the duration of the event. The ESCO has an obligation to take all reasonable measures to overcome or remove the problems as quickly as possible. Chapter 3 discusses this in more detail.

Technical aspects The Customer should ensure that any equipment delivered and installed matches the specifications set out in the works specification. The standard of service that the ESCO is obliged to provide (e.g. temperature levels within the building, hours of service) should also be monitored.

Guaranteed savings An essential part of an EPC is the guarantee of energy savings and energy cost savings. Sometimes projected savings fall short of initial estimates. To enable the ESCO to maintain its guarantee, the model contract enables the ESCO to change the EPC Solution where it has prior written approval from the Customer. Where the changes are at the ESCO’s cost the Customer must not unreasonably withhold its agreement. This issue is discussed in greater detail in Part 3.


2.5 Funding, Decision Making and Risk Sharing

Funding options

Funding is a critical part of any EPC. Customers generally understand that the energy savings are used to pay for the equipment and services provided by the ESCO. Paying for the investment from savings is a function of the total investment costs, the terms of the contract, financing, and the savings generated. If the cost of the projects installed under the contract is to be paid from savings, the accumulated savings over the life of the contract must be at least equal to the total cost of the project, including financing costs.

Once the project costs have been determined, and the level of savings agreed, the funding source, terms and structure must be considered. Funding can be structured in a number of ways and arranged either by the customer or the ESCO. Funding arrangements will often, but not always, involve a third party. Under any scenario funding will only be available on normal credit terms. In other words funders need to be assured that their investment is secure and that they will receive payments ‘come hell or high water’. The key element for a lender/lessor will be to identify a creditworthy party to the arrangement who can provide security against the lending or (as applicable) sufficient comfort as to the lease payment stream. !The model assumes that the contract is self funded by the customer. Arrangements involving a third party funder are more complex and the model contract may need to be amended to align the terms of the funding arrangements with the terms of the EPC. There is a range of funding arrangements available. Parties will want to understand and consider the advantages and disadvantages of the various funding arrangements for their particular set of circumstances. The notes below describe three possible approaches and set out possible advantages and disadvantages of each arrangement.

Customer financing – commercial loan

This is the most common method of financing. Depending on the Customer’s credit status, it is typically the cheapest (lowest interest rate) and easiest to negotiate (because the financier typically already knows the Customer’s business).

Issues that may arise include the need to educate your financier about the technical aspects of the project and the EPC concept; and the difficulty often encountered in securing the necessary extended repayment terms. One possible issue is whether the relevant assets and savings stream will provide sufficient collateral to the lender and whether additional credit support will be required.


If the loan agreement can be structured such that the guaranteed savings stream exceeds the loan repayment obligations, this will produce a positive cash flow and result in immediate and real benefits from a project.

Note that under this option, it is the Customer that has the direct relationship with the bank or financier; the relationship between the bank and the ESCO is largely indirect, and primarily for the benefit of the bank to assess the stream of the guaranteed savings. The bank is however likely to require an assignment of the Customer’s rights under the EPC.

Operating leases

Operating leases are arrangements that allow for the use of an asset, but do not convey rights of ownership to the Customer. The financier (a bank or leasing company) owns the assets and leases them to the Customer, who is responsible for maintenance and insurance. For the Customer an operating lease is not capitalised and is accounted for as a rental expense in what is known as ‘off balance sheet financing’. For the lessor, the asset being leased is accounted for as an asset and is depreciated as such. Often at the expiry of an operating lease the customer purchases the assets.

Advantages of an operating lease for the Customer include: ! Having the operating lease ‘off balance sheet’ can have a positive impact

on the customer’s financial ratios; ! Operating leases are funded out of opex rather than capex, which can

make energy efficiency investments possible for Government agencies with limited capex;

! Potential tax incentives; ! Potential for a longer term funding structure where the lease can be

broken and renewed to allow for subsequent expenditure and next phase planning. This allows the parties to have a dynamic relationship where they continue to work for greater savings, rather than implementing a one-stage process which does not enable future innovations; and

! Provides certainty of outgoings, and allocated funding cannot be ‘poached’ by another area of the organisation if there is a demonstrable ongoing obligation to make payments out of a particular funding stream.

Disadvantages of an operating lease are: ! They are relatively complex arrangements with initially high transaction

costs and potentially higher funding costs; and ! Due to their complexity, operating leases are unlikely to be suitable for

small-scale investments.


Finance leases

A finance lease is a commercial arrangement where the Customer selects an asset, the lessor (financier) purchases the asset and the Customer has the use of the asset during the lease. The lessor owns the asset, while the Customer pays rent for the use of the asset for the duration of the lease and is responsible for maintenance, insurance and taxes. The Customer must record the leased item as an asset on the balance sheet and record the present value of the lease payments as debt. The lessor recovers the cost of the asset plus interest through the rent. Typically at the end of the lease the Customer has the option to purchase the asset for a nominal price.

The key advantage of a finance lease is that it is less complex than an operating lease and therefore potentially cheaper for the customer. The disadvantage is that the assets will sit on the Customer’s balance sheet – with tax implications.

Risk Sharing

When an ESCO provides a guarantee of energy savings and energy cost savings from a bundle of EPC Solutions, this is based on its knowledge of the technologies, and its confidence that it can be cost-effectively applied in the Customer’s facility.

For some technologies the savings are relatively ‘linear’ – as in the case of a simple lighting upgrade where high efficiency lamps are substituted for existing ones – the expected cost to the ESCO of non-performance risk is very low to nil.

However, where technologies are applied in more complex systems savings are less certain and the cost of providing a Customer with a guarantee of energy savings will be substantially greater. An example of this is a continuous commissioning of a building management system for a multi-storey office building. In this situation, the ESCO may have applied the technology many times across a variety of situations, but due to the nature of the application (and reliance on weather conditions, etc.), still faces some degree of uncertainty regarding the expected level of energy savings. In this case, guaranteeing 100% of the estimated savings will increase risk and may result in considerable cost to the ESCO, which would be reflected in the pricing of the EPC.

In this instance, an alternate approach is to guarantee a lower level of savings, say 80 or 90% of the estimated cost savings, at a lower cost to the Customer. In effect, the Customer takes on some of the risk of the estimated savings not being achieved. However, provided the Project meets the Customer’s financial criteria (defined in terms of maximum cost, minimum savings, and cost-effectiveness), the Customer should be willing to consider this partial-guarantee contract.

The list below sets out the level of certainty that an ESCO would normally be expected to have around achieving savings for different project types, and which


may be reflected in the level of performance guarantee in the EPC: ! Class A: Projects with highly predictable savings, such as lighting. A

savings guarantee of 100% should generally be offered at little or no premium for this type of project;

! Class B: This class includes moderately complex EPC Solutions such as changes to heating systems;

! Class C: This comprises more complex EPC Solutions where the savings are difficult to calculate or are heavily influenced by factors outside the control of the ESCO such as visitor numbers, or outside air conditions. An example is controls work on humidity. A lower level of savings guarantee may be applicable for these complex types of projects.

The following Table outlines the different aspects of typical different types of EPC. The guarantee scale refers to the percentage of estimated savings to be guaranteed as part of the EPC8. The sharing of any cost savings beyond the guarantee level will be agreed as part of negotiating the EPC.

Class Risk Share Funding Type

Project Scale Guarantee Scale

Contract Term

A1 No risk share Third party $>500k 100% 5+ years

A2 Some risk share

Third party $>500k 100% 5+ years

A3 Some risk share

Customer financed

$>500k 100% 5+ years

B1 No risk share Third party $>200k 90% 3+ years

B2 Some risk share


B3 Some risk share

Customer financed

$>200k 90% 3+ years

C1 No risk share Third party $>200k 80% 2+ years

C2 Some risk share


C3 Some risk share

Customer financed

$>200k 80% 2+ years

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8 The EPC will include the actual cost savings amount that is guaranteed rather than this being expressed as a percentage of estimated savings.


Decision Making

On the customer side, when dealing with any large contract, a number of decision-makers will normally be involved before the final approval is given to implement the project. This is even more relevant if the organisation is large.

For the project to develop and be implemented smoothly with minimum delays, it is important to secure corporate buy-in at all levels. In general, this means that:

! Management at the level required to approve the necessary investment must be fully supportive of the initiative, understand the economic and business impacts of the project on their business, and provide leadership;

! The Facilities Manager must be involved in the technical development and provide endorsement to whoever will sign the final approval, ensuring that all technical and operations risks are appropriately managed;

! The Financial Manager must assess the economic outcomes of the project to the business and provide the required support to obtain final approvals from management, ensuring that all financial risks are managed, the economic benefits outweigh costs, and the financial priority of the project can be assessed against other business options; and

• There is proper integration with existing maintenance arrangements.

An ESCO may be working with many different levels of management within the Customer business, simultaneously. Therefore, assigning a project ‘sponsor’ for overall coordination of the project is essential. The sponsor would be responsible for ensuring that all company procedures for project approval are followed and that all the right people at the appropriate levels are involved as required. It is common for ESCOs to ask the sponsor for meetings with senior management and financial controllers, to ensure that this type of coordination is in place, as the ESCO accepts a large amount of risk during the project development phase. The ESCO will normally want to assist, wherever possible, with the development of material to support the sponsor to obtain internal commitment and approval.

From the ESCO side, a number of people will be involved in the project development. Normally, the ESCO will assign a Sales or Customer Service Manager to take overall responsibility for Customer contact and managing the Customer’s expectations. This person will normally liaise with others within their ESCO who carry out the development and then implementation of the project. These may include:

! Engineering Manager: responsible for the project development audits including the Energy Audit;

! Legal Manager: responsible for the language and intent of the EPC; ! Project Manager: responsible for the construction and commissioning; and ! Operations Manager: responsible for the guaranteed energy savings.


The Engineering, Project, and Operations Managers may be the same person depending on the organisation of the ESCO and resourcing for the specific project. Other key ESCO people may be involved, and some will be required to interact with the Customer.

External assistance with EPCs

The EPC process is new to most Customers and may appear complex. Our experience has shown that the use of an independent facilitator or project manager directly experienced with EPCs can have significant value for Customers in terms of reducing timeframes and time commitments.

Customers may wish to use independent consultants throughout the process or for specific tasks, such as:

! Defining the general scope of works; ! Performing a preliminary ‘screening’ audit to identify potential for savings

and estimating costs; ! Preparing procurement documents such as the EOI, the RFP and

evaluation procedures and assisting in the evaluation of proposals; ! Reviewing the approach and results of the Energy Audit; ! Reviewing the proposed works specification including their fit-for-purpose; ! Facilitating the negotiation process; ! Reviewing the draft final EPC; ! Reviewing the proposed Measurement and Verification Plans (MVPs)9

including the proposed M&V audits and reports (and how they will be used), to ensure they will meet EPC and corporate requirements;

! Dispute resolution; and ! Promoting partnering between the Customer and the ESCO.

In some cases, an ESCO may also engage the services of consultants to help with some of the above, or recommend their use to clients where the consultant’s independence from the ESCO is beneficial to successfully negotiating an EPC. It is also strongly recommended that both parties seek legal advice before entering into an EPC. The model EPC is intended to provide clear guidance on how an EPC can be structured and drafted but each situation will need to be considered according to the particular facts and circumstances of the Customer and the ESCO.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!9!Measurement and verification of the energy savings and energy cost savings is typically one of the most difficult issues for any Customer to deal with, due to the combination of technical and commercial issues involved. Many Customers will not have the experience to know what to expect or watch out for during the preparation of the contract.!


PART 3: COMMENTARY ON MODEL EPC CONTRACT

3.1 Background The model EPC that is the companion to this Guide is intended to reduce the burden on the Customer and the ESCO of developing a unique contract each time a project is developed. The model EPC is also used by the performance contracting industry to ensure a standard approach in the contract process.

This Part provides a discussion and review of the major clauses of the model EPC. Note that not all areas of the model contract are discussed as some are considered standard legal issues that would need to be addressed in any construction or service contract. As such, it is the responsibility of the Customer, to satisfy itself that all aspects of the agreement meet its needs and expectations.

Modifying the model EPC

The model EPC can be used in its current form for most guaranteed cost saving projects (where the Customer is financing the measures). However, due the unique nature of each project, there may be a need to modify the contract. We encourage these negotiations to ensure that the final EPC meets the needs of all parties, but recommend that the model contract remain whole, with negotiated changes documented within a schedule attached to the contract. This preserves the intent of the model contract, ensures that the EPC process remains consistent, and allows the unique aspects of each project to be easily identified and addressed within the schedule of contract amendments.

Some common issues that might be the subject of negotiation are funding, maintenance, performance guarantees, baseline adjustments and measurement and verification (M&V).

3.2 Definitions and interpretation (clause 1) The definitions and interpretation section of any contract is designed to assist the parties to understand the context in which words and phrases are used, and set out basic rules for interpreting a contract, which are designed to avoid confusion.

Legal terminology is used in this contract quite extensively. While it is preferable to use plain English as far as possible in any contract, this document is intended to cover the rights and obligations of parties in an industry that is still very young in New Zealand and which remains largely unlitigated. As a result, it is difficult to use plain English as there is no law on the meaning of plain English phrases within the context of the energy performance contracting industry.


3.3 Design and installation of energy saving measures (clauses 2 – 7) The negotiation of the works specification is a key aspect of the EPC process, because development of it requires the parties to clearly understand:

! In the case of the ESCO, what results it is required to produce. Its principal consideration is to design EPC Solutions that can achieve a guaranteed level of energy savings over the life of the contract, within the parameters set by the Customer (on the basis of which the ESCO produces the Energy Audit). The ESCO may produce a list of equipment to be installed that achieves this the level of energy savings, but that does not necessarily fulfil the ‘fit-for-purpose’ test;

! In the case of the Customer, what it can expect to achieve from the process, a key aspect of which is the extent to which the equipment to be installed is fit for the intended purpose. As such, the Customer is responsible for assuring itself that the equipment the ESCO proposes to install meets its site requirements. For example a new lighting system that is set on a timer to save energy obviously will not meet the needs of, or be ‘fit for purpose’ for an operating theatre in a hospital.

Once the parties have agreed to sign an EPC and the terms and conditions have been fully laid out, the ESCO must meet its first obligation under the contract – preparing the works specification. The terms and conditions are based on the Energy Audit developed by the ESCO under the scope defined by the Customer10. The negotiation of the works specification is one of the most important aspects of the EPC, and must be done carefully to ensure that the Customer knows what it will be getting and so the ESCO clearly understands what it will deliver. If no scope changes were required, the ESCO performs the straightforward task of documenting the details previously agreed. If the scope has changed from the final Energy Audit, additional negotiation will be required to agree on the revised scope, and the work specification must clearly identify changes relative to the recommendations in the Audit, new work added, and work deleted. It is highly recommended that the ESCO prepare details of new work or changes, to the same level of detail as the final Energy Audit, plus what is required to comply with the works specification.

The works specification is not prepared as part of the Energy Audit because: ! if the ESCO and the Customer cannot agree to negotiate an EPC, then

this work will not be required; and ! this would not allow for last minute considerations which will more than

likely have large impacts on the final works specification, such as final EPC negotiation details, EPC negotiation delays, choice of EPC Solutions,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10!While additional conditions can be added at this stage, the scope should be been agreed prior to finalising the Energy Audit.!


availability of financing, contract commencement date, occupancy schedules, equipment delivery planning or availability of trades.

The EPC will contain a clause requiring the submission of the works specification by the ESCO (clause 3.1). The model EPC defines the works specification as the scope of works submitted to the Customer by the ESCO for the design and delivery of energy saving measures.

The works specification:

! Sets out the tasks involved (and a timetable for completing them) in relation to the design and installation of the EPC Solutions. This should be viewed as a master project management flowchart showing all installation milestones for each EPC Solution. It will act as the road map for the ESCO in managing installation and as a plan against which the Customer can monitor progress. It should provide a listing of all major pieces of equipment and specify details of procurement that are important from the Customer’s perspective. For example, if a measure involves replacing an existing chiller and the new chiller must match the make of the others in the plant, then the Customer must specify this. Levels of quality and performance should also be specified.

! Specifies the EPC Solution purchase price, broken down into a schedule of progress claims, corresponding to the task relating to installing the measures. The specification should provide a clear schedule of payments to the ESCO, mapped against the project plan and milestones from (a).

! Specifies the works specification fee for additional EPC Solutions. If the Customer and the ESCO have negotiated additional EPC Solutions after the Energy Audit was completed and submitted, this provision allows the ESCO to recover costs that would have been included in the Energy Audit had the original scope of work included the agreed additions.

! Specifies the guaranteed energy cost savings for the EPC Solutions, as identified in the Energy Audit. This provides primarily for increases in the guaranteed energy cost savings if additional EPC Solutions are added during the preparation of the works specification, i.e. it protects the Customer from additions that would effectively reduce the energy cost savings guarantee.

! Includes any other information the ESCO considers necessary, including plans, specifications, engineering designs and drawings relating to the proposed facility upgrade. Different Customers will have different requirements of their ESCO in this regard. From the ESCO’s perspective, it is being contracted to deliver the measures and achieve an agreed level of performance (guaranteed energy cost savings). However, the Customer is primarily interested in the delivery of new equipment that is to be funded from the promised savings. Although some ESCOs would like to ignore the issue of capital acquisition and sell the ESCO concept on a cash flow and net return basis, capital is being procured and Customers will want to


ensure they are getting what they paid for – equipment, services, and performance.

! Includes a listing and description of the equipment that needs to be upgraded, replaced and disposed of. Normally clarified in the Energy Audit, this list is of the equipment the ESCO will remove, modify or replace during installation of measures.

! Includes a detailed listing of all maintenance programs, training programs and schedules for the equipment. Full maintenance programs should be specified for all required equipment including which of the parties will be responsible for that work. Depending on the finance arrangements, a financing party may also have an interest in the maintenance programs. In practice, the parties will need to work together to define the appropriate method of maintenance, so that any new maintenance can be appropriately integrated into current practice. In many cases, professional maintenance is the key to the ESCO achieving sustained savings. As a result, for maintenance that the Customer is responsible for carrying out, the ESCO will insist that it is carried out to specification and that documented evidence to this effect is provided. For its part, the ESCO should carefully specify these maintenance procedures, including providing forms and instructions on how maintenance will be verified. In cases where savings are lower than expected, the ESCO may investigate the maintenance practices to see if this has had an impact.11 Equipment schedules and operating practices must also be fully detailed and provided. These will also need to be updated by the ESCO if they change over the course of the contract. These details are critical for the Customer to be able to operate the equipment effectively and as per original design during, and following termination of the contract. Lastly, the ESCO should define a comprehensive training program appropriate for the Customer’s needs so it is able to manage the continued operation of the equipment beyond contract completion. Depending on whether the Customer uses its own internal operations staff or outsources these services, it must ensure that it is adequately prepared to manage everything as the EPC finishes.12

! Includes a detailed list of criteria prepared by the Customer to control and define performance of the works by the ESCO, as specified in the Request for Proposals (RFP). This list provides the ESCO with the Customer’s performance requirements regarding the services provided by the equipment, including specifications such as the temperature of water leaving a chiller, room control temperatures, operational schedules, compressed air pressure and volume capacities, hot water temperature set points, and lumens per application for lighting. In most cases, the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!11!See the discussion below on equipment maintenance for further details.!12!See the discussion below on training for further information.!


ESCO will provide recommendations for these values, which the Customer will need to review and agree to. The Customer and ESCO will use these performance details to determine that the equipment is saving energy and performing according to expectations.

Works specification meetings

The work specification as detailed above is a complex process that may result in a large number of documents, procedures and forms for parties to manage during the EPC. The best way to begin this first step is for the parties to hold a works specification meeting.

Using the Energy Audit as the starting point, the Customer and your ESCO need to agree on the following:

! what will be included, as described and analysed in the Energy Audit; ! what was in the Energy Audit that will not be implemented; ! what amendments need to be made to work described or analysed in the

Energy Audit; ! whether additional work not described or analysed in the Audit should be

included in the works specification; ! any changes to the MVP as a result of changes of scope (4 bullet points

above); ! maintenance issues (e.g. which party is responsible for each task, level of

service, timing); ! commissioning issues and performance criteria for EPC Solution

acceptance certificates; ! training requirements and schedule; and ! the estimated budget and installation timing implications of the above

decisions. Once the parties have agreed in principle on the scope of works, it is up to the ESCO to prepare the detailed works specification. Again, because this document may be long and contain a large amount of detail, it is recommended that the Customer and ESCO meet to review the details. This meeting should, for the most part, be a reconfirmation of previously agreed items, though in some cases (new or changed work relative to the Audit) there may be a need for a more comprehensive and detailed review.

The Customer then needs to review the new documents produced, including: ! the full project milestones – carefully consider this in terms of planning

requirements for the business or operation, to allow the project to be successfully implemented;


! equipment purchase price and disbursement plan; ! equipment specifications; ! equipment performance requirements; ! Measurement and Verification Plans (MVPs) – carefully review baseline

adjustment criteria and any data collection procedures that the Customer will be required to undertake on behalf of the ESCO, e.g. providing utility bills, occupancy data, production data. The MVP should specify the baseline energy use and provide detailed descriptions of existing equipment13;

! energy cost savings guarantee – to verify that this has not diminished and that the financial criteria of the project still hold;

! commissioning procedures – the Customer needs to agree that the proposed commissioning procedures are sufficient to demonstrate that the equipment has been properly installed, is functioning according to its original intent and to the required performance specifications, and is achieving the desired energy savings); and

! maintenance, equipment operation and training schedules.

Increased scope/increased cost?

Typically, when new or additional work is included at the stage of preparing the works specification, it will mean additional costs that may include:

! the ESCO’s cost to analyse, design and plan for the new work; ! incremental equipment costs (there is also the possibility that changes

could remove some redundant equipment and hence reduce costs); ! increased installation, commissioning, M&V, maintenance, and training;

and ! increased project management cost. The ESCO is responsible for

identifying where costs will increase and why. The Customer should be aware of potential cost reductions and request these where appropriate. Both parties must agree to the final increase or decrease in scope, before implementation.

Submission of works specification

While somewhat obvious, it is important that, in assessing the adequacy of the works specification, the Customer considers whether the equipment the ESCO proposes to install meets site requirements. That is, the Customer must be

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13!See later section for further details on M&V and baseline adjustments.!


confident that the equipment not only delivers energy savings as projected by the ESCO, but that it is fit for the purpose for which it was originally required. Similarly, the Customer must be satisfied that the proposed EPC Solutions will not only deliver guaranteed energy savings and perform according to expectations, but that they will also meet the its operational requirements.

It is important to remember that the ESCO is guaranteeing energy cost savings and performance; it is up to the Customer to ensure that the EPC Solutions to be implemented and equipment installed to give effect to those the EPC Solutions are adequate for the business’s needs.

Changes required to works specification

The ESCO will design the works specification with due regard for the nature of the site and the Customer’s business and operational requirements, and to ensure minimum impact on the Customer’s normal operations. Nevertheless, a proposed installation timetable may interfere with the Customer’s operations in a way that cannot be accommodated. The EPC will include a provision for the Customer to notify the ESCO of changes it requires to the works specification (clause 3.2).

It is important to understand that these changes may impact the costs of installation, project management, and various other costs of the EPC. To the extent possible, in order minimise the costs of changes, the Customer should carefully consider the proposed timing and estimated duration of installation works set out in the Energy Audit, and notify the ESCO of alterations it is likely to require to that schedule, before the ESCO drafts the works specification.

Delivery of EPC Solutions

At this point, implementation of an ESCO project proceeds much like any standard construction project. The ESCO must follow the works specification laid out in the contract, and the Customer manages its participation according to the terms of the EPC. As with previous steps in the process, the Customer should appoint a project manager to oversee and interact with the ESCO, its personnel and sub-contractors throughout installation. One important role the project manager must undertake is to ensure that the company’s relevant policies and procedures are provided to the ESCO prior to commencing work, and that the ESCO is monitored to ensure these are followed.

The construction schedule is likely to be the most important issue to manage. As described above, the schedule should have been developed with careful consideration given to the operation schedule of the facility, in order to minimise disruption to the business during construction. The Customer and the ESCO must work together to agree on how best to schedule the construction work. This is particularly critical in businesses that operate 24/7 or provide critical functions, such as a hospital. Construction in a facility such as this requires careful


coordination with the operations staff of each affected department and area of the building, to ensure that essential services are not disrupted and that other services and construction needs can be managed. Accommodation of difficult or unusual schedules will normally add to the cost of the installation of the measures.

If new work is required due to errors or omissions by the ESCO in preparing its works specification, then it is normally the ESCO’s responsibility to rectify the situation at its own cost. However, if additional work is required as a result of a failure of the Customer to correctly perform its duties under the EPC, then the Customer will pay for these additional works.

Safety procedures and identification of contractors on-site

The Customer must provide the ESCO with details of policies or procedures on safety and identification of contractors on-site as early as possible, ideally before the EPC begins, but at least before the ESCO begins drafting the works specification. Coordination of sub-contractors and delivery of materials and equipment is a cost-control exercise that is made much more difficult if crucial planning items are not available at the beginning.

The Customer should ensure that, in addition to safety and identification factors, the ESCO is made aware of other policies, procedures or requirements that contractors must comply with while on-site, such as non-smoking, confidentiality, security or background checks, health issues that may arise in hospitals, aged care facilities or other health care environments, or stipulations regarding working hours (clause 3.5).

Customer obligations to disclose relevant information (clause 11)

The Customer provides a warranty that it has or will disclose all information that impacts implementation and operation of the EPC Solutions, including achievement of cost savings. This is of considerable importance because the ESCO will base its assessment of the energy cost savings in part on information provided by the Customer. Changes in the use or condition of the premises or other factors can impact on the ESCO’s ability to achieve the savings. Similarly, if the Customer is aware of a factor that will impact on the potential energy savings and does not disclose this to the ESCO, it will not be reasonable to expect the ESCO to have accurately assessed the potential savings or to continue to meet the savings targets if circumstances have materially changed. Both parties should work on the basis that all parties need complete and accurate information in order for the energy cost savings to be achieved.

A list of changes to premises that should be considered ‘material’ is set out in the model EPC in clause 9 within the context of adjustments to the baseline for calculating guaranteed savings. That list applies in this context as well.


Latent conditions (clause 3.6)

Latent conditions are physical conditions on the premises or its near surroundings (including artificial things but excluding weather conditions or physical conditions occurring as a result of weather conditions) which differ materially from the physical conditions that could reasonably be anticipated by the ESCO at the time of its tender, and which would affect its ability to complete the installation.

If the ESCO becomes aware of a latent condition that will affect its ability to complete the installation of the EPC Solutions, the standard EPC requires that it notify the Customer as soon as possible and preferably before the latent condition is altered. The notice that the ESCO provides must specify the nature of the problem, what work will be required to fix it, how long it will take, what it will cost, and other relevant details. Delays experienced as a result of dealing with a latent condition may then justify a formal extension of the installation timetable.

If a latent condition is going to cause extra work/time/expense, which the ESCO could not reasonably have anticipated, the Customer is obliged to pay an agreed additional amount or – in the absence of agreement – the actual, reasonable costs incurred by the ESCO. However, if after receiving a latent condition notice the Customer does not want to proceed with rectifying the latent condition, it must notify the ESCO of that decision immediately.

Example: importance of the Customer warranty

A university has a wing it has traditionally used infrequently as a conference facility, and advises the ESCO of this when the Energy Audit is being prepared. After completion of the Audit, a decision is taken to set up the wing as seminar rooms to be used 50 hours a week, 40 weeks a year.

The ESCO is to replace a boiler in the basement underneath this wing. It schedules the most disruptive installation works during a vacation period. However, the installation timetable commences during the semester so that all works can be completed before the start of the next semester. Replacement of the old boiler must occur early in the works timetable, and this originally presented no problem since there were no conferences scheduled during this time and the wing was not expected to be in use. However, with the change in usage, the ESCO cannot now access the wing until midway through the semester break, which means it cannot complete the works until a month into the new semester. This is not acceptable to the university.

As a result, implementation of the EPC must be postponed nine months, and the ESCO advises that the Energy Audit must be re-done to account for the substantial variation in load factors and energy costs arising as a result of the delay. The university must find funding for the new DFS for which there is no provision in its budget because it failed to disclose a material change to the premises.


If the parties cannot agree on an alternative method of solving the problem, the issue is treated as a dispute and becomes subject to the dispute resolution procedures set out in the EPC.

The key point for Customers to understand is that the ESCO will not be responsible for circumstances outside its control, that arise as a result of encountering a latent condition – provided that the ESCO could not reasonably have foreseen the situation and its impact on the performance of the EPC.

If, during installation, the ESCO encounters a latent condition not accounted for in the tender or Energy Audit, and it constitutes an insurmountable problem (which means the EPC cannot proceed), the matter of costs must be addressed. The EPC covers the procedure for dealing with costs where the Customer decides to abandon the EPC because of a latent condition (covered within the context of termination of the EPC for any reason).

In the event a customer receives a notification of a latent condition, it must decide whether to proceed with, or terminate, the contract. If the parties agree to terminate, the Customer will be liable for costs incurred to that point, including the Energy Audit fee, the works specification fee and as much of the purchase price for the EPC Solutions being implemented as has been incurred to the date of termination.

Fees (clause 3.7)

Payment of fees such as progress claims by the Customer to the ESCO should be clearly set out in the Works Specification of the contract. These fees, must relate specifically to the EPC solutions they apply to. In the situation where the EPC solutions are Customer financed, the Customer will need to be able to make payments to the ESCO before any savings are realised. The Customer will need to consider how repayments etc. on that funding may need to be made prior to achieving any savings from the EPC – borrowing is one option. In contract clause 3.7 (e) the fees listed (not including the maintenance fee) are such that the ESCO acknowledges that they cannot change these fees at a later date should they have got their pricing wrong.

Sub-contracting (clause 3.8)

Sub-contracting is common in the EPC industry, with almost every contract having some level of sub-contracting because ESCOs rarely have all the resources or skills to implement a full project themselves. Using sub-contractors does not relieve the ESCO from its obligations under the EPC. This is similar to the construction industry, where the main contractor must use numerous sub-


contractors and suppliers to fulfil its obligations. It is common practice for an ESCO to put its suppliers or contractors under the same obligations. This allows the ESCO to manage its performance risk by sharing it, but does not relinquish its responsibility to the Customer. If necessary, the ESCO would have to pursue restitution from its suppliers or contractors independently.

The ESCO should disclose names and details of all sub-contractors prior to the signing of the EPC.

Approvals and consent (clause 3.9)

The Customer may need to obtain some form of approval or consent from a third party before the measures can be installed. Examples include building approval or development consent from a local council, authorisation from a parent company or government department and consent of a mortgagee to the premises.

The standard EPC appoints the ESCO as the Customer’s agent for the purpose of obtaining necessary approvals. This issue must be canvassed as early as possible to avoid or minimise delays in obtaining approvals or consents. The ESCO will provide assistance in advising what consents will be necessary, as the ESCO will often have greater knowledge than the Customer.

3.4 Additional EPC Solutions (clause 4) Although contractually the EPC (through the works specification) defines the equipment and measures to be installed, the ESCO’s primary focus is delivering energy cost savings – with the equipment and EPC Solutions being a means to achieve that end. If savings are not being generated to the expected level, the ESCO can take certain actions to rectify the situation.

The Additional Measures clause in the EPC allows the ESCO to change, replace, remove, alter or add to any equipment or procedures introduced as part of the project, without reducing the guaranteed energy cost savings. The ESCO is required to fully clarify in writing the rationale for the change and obtain the Customer’s acceptance before proceeding. The parties will agree which party will cover the cost of the changes to the EPC solutions. Some equipment that is installed may also meet other intrinsic needs related to the facility’s operations. In this case, that equipment could be identified within the contract as excluded from this clause.


Example: an ESCO using the Additional Measures clause

An ESCO recommends and implements a solar hot water heating system to supplement an electric water heating system used for a recreation centre swimming pool. Energy savings were estimated and set out as a guaranteed energy savings in the EPC, but after four months net savings are well below the guaranteed savings. If no action were taken, the ESCO would have to pay to the Customer the difference between guaranteed and actual savings (approximately 25% of the guaranteed savings). Several factors are found to have contributed to the shortfall, including:

1. over-estimation by the ESCO of the performance of the solar hot water heater;

2. under-estimation of the usage of the pool; and

3. over-estimation by the ESCO of the temperature of replacement pool water (to keep the pool at the required level).

If the ESCO took no action, it would be required to make an annual shortfall payment to the Customer. To avoid this loss, the ESCO looks for other options, and decides to apply a pool cover when the pool is not in use, which has the benefits that: it acts as a passive solar heater during daylight hours; it reduces evaporation (and consequently latent heat loss); it reduces convective heat loss; and it reduces pool cleaning costs.

Through analysis, the ESCO has determined that the pool cover will more than compensate for the net shortfall in guaranteed energy savings from the solar water heater. Further analysis shows that the added investment will be less than the savings shortfall the ESCO would otherwise have to pay to the Customer. The ESCO approaches the Customer with the problem and the solution and asks for approval to implement the change. The Customer is assured that the cover can be easily managed by pool staff and will not present any significant barrier or inconvenience to use of the pool. However, the Customer may need to have staff start earlier/finish later or amend other staff arrangements in order to manage covering and uncovering of the pool. The Customer gives approval to proceed.

Following installation, staff are trained in how to apply, remove and maintain the cover. Because the savings from the cover are directly related to the cover being used, the ESCO monitors its use carefully. After three months monitoring, the ESCO estimates that the energy savings on the pool heating costs will now exceed the EPC guarantee level. Because the pool cover does not in itself consume energy, the energy cost saving calculation procedures in the MVP did not require modification. However, because energy savings are now directly dependent on the use of the pool cover, careful monitoring of its use and the pool’s use must be correlated.

The Customer monitors the pool’s use with its standard pool scheduling forms, while the use is monitored by a simple and inexpensive electronic timer on the underside of the cover, which is activated when placed under water. By verifying that the pool cover’s cover is used when the pool is not in use or closed, the ESCO can verify compliance with operations procedures. In this instance, the Customer has agreed to follow the prescribed operations procedures as set out by the ESCO.!


3.5 Commissioning procedure (clause 5) Following installation of each measure, the ESCO will undertake a ‘commissioning process’ (according to the works specification) to verify that:

! the equipment has been installed according to specification and can achieve the performance requirements of the intended task; and

! the equipment (or measure) is performing to expectations in the sense of being able to achieve the expected level of guaranteed energy savings.

After this commissioning process, the ESCO provides the Customer with an ‘acceptance certificate’, certifying that the equipment has been installed according to the works specification and is reasonably expected to achieve the

Example: a Customer wishing to protect itself against the Additional Measures clause being used

An ESCO recommends and implements changes to a food processing plant, which will increase production output and result in significant energy savings. The ESCO, unable to control the Customer’s production, only offers guaranteed energy savings based on a particular unit of production, and allows the Customer to solely benefit from the increased production.

The ESCO experiences a number of technical difficulties, including feedback and control issues when fine-tuning equipment resulting in lower than expected energy savings. However, despite the reduced energy savings, production increase expectations are met and the Customer is benefiting from this aspect of the project.

The ESCO has assessed its options and identified a change to the system at a modest cost that will allow it to achieve the guaranteed energy savings. However, if implemented, the Customer will lose the benefit of increased production capacity.

Because the ESCO and Customer have identified production capacity as a performance requirement under the EPC, the ESCO must discard this option and search for an alternative. Had this not been written specifically into the works specification, the ESCO would have had the right to implement this change and the Customer would have lost an intrinsic benefit, which may have been a key factor in the decision to proceed with the EPC.

The essence of the Additional Measures clause is to allow the ESCO to continually evaluate the financial impact of the EPC, and take action that will result in the best financial position while still achieving the guarantees. If the ESCO is losing money because the project is not achieving the guaranteed energy savings target, the ESCO will evaluate what minimum investment is required to reduce its losses. If the ESCO is paid a performance bonus for exceeding the guaranteed energy savings, then this is a continuous process by the ESCO to see how it can maximise its returns.

Because equipment installed by the ESCO is the property of the Customer (or possibly a third party financier) under the model EPC, the ESCO must seek approval to remove, modify, change or dispose of any property.

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guaranteed energy cost savings. The Customer must to sign off on this certificate within the timeframe nominated in the EPC, or reply in writing to the ESCO about deficiencies in the installation.

In practice, the Customer should be directly involved in the commissioning process of each measure to better assess that the measure and equipment complies with the works specification and certify the acceptance certificate with little, if any, delay. The Customer needs to ensure that everything has been supplied as required before signing off.

It is in the best interests of the Customer to sign off on the acceptance certificate so that the performance guarantee commencement date is as soon as possible and it can realise the benefits of the energy savings as quickly as possible. Depending on the MVP in the EPC, sign-off of acceptance certificates may not constitute a commencement date until a group of certificates has been signed off.14 This should be clearly identified within the MVP (of the ESCO project and associated measures) as part of the works specification. Where installation and commissioning completion dates for individual measures are scattered over the construction period of the entire ESCO project, it may be easiest – for energy and financial accounting purposes – to agree on a final acceptance certificate for all measures and have one common performance guarantee commencement date. This avoids annual reporting of savings related to each measure on the anniversary of individual performance guarantee commencement dates. Under a common commencement date, the Customer is usually provided the benefit of energy savings from measures that were operating prior to the commencement date being accepted, without any benefit to the ESCO. However, this approach could lead to project delays in finalising all measures, as it may be to the ESCO’s benefit to fine-tune energy savings in lieu of issuing the final acceptance certificate. The aspect of the project that guards against this delay is final payment for the equipment (by the Customer), which cannot occur until the final acceptance certificate can be issued. As a result, the disbursement plan and method of managing holdbacks should be carefully considered.

When the Customer (or potentially its financier) accepts and signs off the certificate, it takes ownership of the equipment and further responsibility for it, including any agreed maintenance requirements. If the Customer agrees to take responsibility for maintenance it must ensure it is fully prepared to meet its operations and maintenance obligation by coordinating any required training with the ESCO.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14!This would apply in the case of MVPs based on the methodologies of Option C or D under the International Performance Measurement and Verification Protocol (IPMVP). Option C provides for a utility billing analysis of energy cost savings of one or a combination of measures. A commencement date under this option would not apply until all measures have been fully installed and commissioned. Option D provides for a simulated approach to energy savings and also would not apply until all measures impacted by the simulation algorithms have been fully installed and commissioned. For further information refer to the IPMVP.!


The ESCO also has the option of specifying a performance guarantee commencement date that precedes completion of the installation of all measures, or a staged performance guarantee commencement date that nominates a series of dates during the installation. In either case, the ESCO must nominate the date or dates it intends to use (as the performance guarantee commencement date) in writing prior to installation beginning. This should be clarified in the works specification.

Note that issuing the acceptance certificate deals with completion of the measures’ installations. It does not equate to a ‘defects sign off’, in that it does not affect expiry of a ‘defects liability period’.

Transfer of risk and insurance

Once the equipment is installed on site, the risk of loss or damage transfers to the Customer, notwithstanding the fact that title to the equipment does not pass to the Customer until the purchase price for the measures has been paid in full. It is important that the Customer’s existing insurance includes coverage for the newly installed equipment, or that a suitable extension of coverage is in place.

The equipment is intrinsic to the measures which are delivering the savings, and the savings are paying for the equipment. Adequate insurance coverage is likely to be a fundamental requirement of the Customer’s financing arrangements.

Note that Clause 5.4 is drafted from a Customer financed perspective. This clause will need to be amended depending on which party will own and be responsible for the equipment, which will in turn depend on what financing arrangements are chosen.

3.6 Equipment maintenance (clause 6) Maintenance under an EPC is frequently a difficult issue for the ESCO and Customer to negotiate. It is often assumed (but only sometimes true) that the ESCO obtains the largest benefit from taking on this responsibility. For the Customer this is often an issue of continuing with status quo (retaining responsibility for maintenance), which from an economic point of view may not be in its best interests. Depending on how the EPC is financed, there may also be a financier with an interest in the equipment, and therefore an interest in how it is maintained.

Maintenance issues are complicated by a number of factors, including existing maintenance contracts with third parties, the risk of the Customer’s existing maintenance staff being superfluous if the ESCO takes on maintenance, and the lack of incentives (in many cases) for the Customer’s existing maintenance staff to implement new procedures and undertake training.

The first issue is normally the easiest to resolve and is more of a perceived issue


than a real one for Customers. Most existing maintenance contracts contain adjustment provisions based on changed operations and addition or deletion of equipment. In the same way that you would prepare a specification to modify an existing maintenance contract for any other change, you could negotiate a change to the existing contract due to an ESCO project. In practice, changes due to an ESCO project are easier than changes not related to ESCO projects, because the ESCO prepares a detailed maintenance schedule, which you can use to negotiate with your third party maintenance contractor.

The second and third issues are industrial relations matters that can be difficult to resolve depending on the situation, the proposed measures (i.e. maintenance workloads), and the Customer (i.e. whether staff are organised or not). Regardless of the existence of organised unions, internal labour issues must be considered carefully in the context of any successful ESCO project. If the project is implemented without this sensitivity, staff may undermine potential savings – this may result in disputes between the Customer and the ESCO and perhaps even result in a failed project.

Despite most ESCOs being eager to take on maintenance responsibilities, they should nevertheless be sensitive to the Customer’s issues and concerns and design a program that meets everyone’s objectives.

An ESCO project can potentially be a significant boost to employee morale and skills development. ESCO projects involve new and, frequently, state-of-the-art equipment. This allows staff to enhance their experience and skills and be trained to use and operate this equipment. Often the attention provided by an ESCO to the project and to staff is more than they would have received under normal circumstances. This added attention can be a tremendous boost to morale and job satisfaction and can translate into higher productivity.

Maintenance specification

The first step in resolving who will be responsible for maintenance is to clearly define the maintenance requirements for all equipment in the works specification.

Note that clauses 5.1-5.5 or 5.6-5-8 are applicable depending on whether the customer or the ESCO is maintaining the equipment.

Once complete, it becomes relatively simple to consider alternatives and select an approach. In many cases, maintenance will be defined as a shared responsibility, where the Customer continues with practices it is already performing and the ESCO undertakes specialised and less frequent maintenance practices. The result of these discussions should be a detailed maintenance schedule with a note defining who is responsible for each maintenance item.

The ESCO’s maintenance objectives are to maintain energy savings for the life of the EPC, while not violating the manufacturer warranty requirements. From a


Customer perspective, the economics of maintenance are best evaluated on a life-cycle cost basis – additional preventive measures are included in the maintenance program, when it can be shown that this is cost- effective over the life of the equipment (e.g. extending equipment life, reducing energy consumption, health and safety improvements and reduced noise). Each maintenance item should be justified and agreed to by both parties.

Where the ESCO takes responsibility for maintenance, this will normally be done for an additional ongoing cost. This cost is over and above the measure purchase price and should be identified in the EPC as a ‘maintenance services fee’ (clause 6.10).

Customers evaluating the impact of maintenance costs on EPCs should consider only the incremental maintenance costs in their financial evaluation. Maintenance being performed on existing equipment will be still required following the implementation of the new measures and should not be added to the cost of the project. Where maintenance performed by the ESCO reduces Customer costs, these benefits should also be included in the financial evaluation of the project.

Maintenance versus warranty

There is an important relationship between maintenance and equipment warranties. The equipment warranty, or more specifically, manufacturer’s warranty, is an instrument provided by the manufacturer, which indemnifies against loss of the equipment due to defects in materials and workmanship for a specified period. This indemnification will normally cover repair or replacement of the equipment at the discretion of the manufacturer, provided the equipment has mechanically or electrically failed while used for its intended purpose, and had been ‘maintained according to manufacturer specifications’. This is why the ESCO and Customer must take care with maintenance. If the manufacturer finds that due diligence in the case of maintenance had not been followed, then the warranty may be voided and whoever was responsible for maintenance may be held partially or wholly liable for repairing or replacing the failed equipment.

Maintenance defined in the works specification should comply with the manufacturer’s minimum specification requirements for warranties to remain in effect and to achieve the life expectancy of the equipment. The Customer should verify this, or obtain a statement of compliance from the ESCO. It is then the responsibility of the party specified in the EPC, to conduct maintenance as specified.

Enhanced maintenance

Enhanced maintenance (i.e. maintenance specified beyond the minimum required and suggested by manufacturers) may be specified by the ESCO to ensure energy savings performance is maintained or enhanced. Compensation for this may be included in the maintenance services fee, an enhanced


maintenance fee, an ongoing guaranteed energy savings fee, part of the measurement and verification fees, or included up-front in the measures purchase price. It is important for the Customer and the ESCO to discuss and agree on the rationale and needs for enhanced maintenance and specifically how it will be paid for under the EPC.

Extended warranties

In some instances, the ESCO may have purchased extended warranties to the equipment, extending the period and/or conditions of warranty for further protection against equipment loss. This is normally done when the Customer or ESCO is interested in increased protection, particularly when the ESCO is responsible for maintenance, and up to a period (if available by the manufacturer) equal to the term of the EPC. If this is unavailable or too costly, the ESCO may provide an extended warranty for equipment through an insurance policy. Regardless of how extended warranties are provided, it is done at additional cost to the project and consequently, at the Customer’s cost. This added cost should be weighed against the risk reduction and additional benefits.

Maintenance compliance

Where the Customer is responsible for all or a portion of the maintenance, it may be critical for the ESCO to know that maintenance procedures have taken place and what special actions (work performed by the Customer not normally prescribed in the maintenance specification which may affect equipment performance, operation, or energy consumption) have taken place. For this reason, the ESCO will establish a reporting procedure and forms for the Customer to use. The ESCO will regularly seek copies of the forms and verify actions undertaken by the Customer. This is done as a risk protection measure for the ESCO against premature equipment failure due to a lack of regular maintenance and to ensure that a lack of maintenance does not contribute to reduced energy savings.

The Customer must notify the ESCO of actions that may impact energy savings

The intent of this clause is twofold:

1. to determine whether any action on the premises, either by the Customer or an outside entity, will impact on energy savings from the installed measures; and

2. to give the ESCO adequate time, if possible, to take corrective action to ensure savings are maintained, given any such occurrences.

The notification period is intended to be short enough to manage lost energy savings potential which could significantly impact the total guaranteed energy -savings, yet long enough to give the Customer reasonable time to respond.


Changes should be noted to the ESCO regardless of whether that change would have a detrimental or beneficial impact on the energy savings. In this way, the Customer can avoid future disputes over why energy savings are higher or lower than expected.

Areas that the ESCO knows may impact on energy savings should be fully defined in the MVP. As part of the MVP, the Customer may be required to regularly collect and provide data to the ESCO, and this should also be fully defined. In other instances, there may be implied areas that, if changed, could have an impact on energy savings, but where regular data collection is not taken. This clause is written primarily for those implied areas.

Equipment maintenance by ESCO

Where maintenance is provided by the ESCO, the EPC will need to define the maintenance specification in detail, including:

! the maintenance procedure specification over the term of the EPC; ! periods or frequency of procedures; ! access requirements, and notice of access, to the Customer; ! consumables; and ! the maintenance fee and any additional costs. This should be part of the

works specification appended to the EPC.

Example: notifying the ESCO about actions which impact on energy savings

The energy consumption, and hence savings, of a new energy efficient chiller is directly related to the amount of conditioned space the chiller is servicing. If the Customer were to construct an addition to its facility and air-condition it using the same systems serviced by the new chiller, it is reasonable to expect that the chiller will consume more energy. By understanding the relationship of conditioned space to cooling requirements, the baseline energy consumption can easily be adjusted and the building addition easily accommodated by modifying the baseline and guaranteed energy savings. Without knowledge of this addition, it may have been assumed that energy consumption had risen for no apparent reason. Under this clause, the Customer is required to report the additional conditioned space serviced by the chiller to the ESCO in a timely manner.

The clause is primarily aimed at protecting the guaranteed energy cost savings from unforeseeable circumstances. So, while a temporary blackout is an entirely foreseeable occurrence, a power failure that lasts days or even weeks should be viewed as a significant interruption or alteration of energy supply to the premises, that will effect energy savings. It should, therefore, be notified to the ESCO.!


Training, retraining, and ongoing training

Training is integral to most EPCs for the following reasons: ! most ESCOs will see training as an important part of the EPC. The

Customer’s staff will be responsible for day-to-day operations of the measures and, as a result, have direct control over the ESCO’s ability to achieve expected savings. Such staff therefore require adequate training to operate the equipment;

! an ESCO acts as a turnkey service provider, so the Customer will frequently not be involved in decisions and procedures that it would have had to perform under a traditional construction project. It may therefore require training to take over operations at the conclusion of the EPC; and

! all EPCs will eventually terminate, and the Customer will be expected to take operational responsibility for the measures at this point. It is therefore important for the ESCO to provide operations and maintenance training on the whole project.

Without knowing the impact of the Customer’s decisions, the ESCO is at risk. Although the Customer wouldn’t be at risk for these savings under a guaranteed savings scheme, it is in its best interests to help the ESCO achieve the maximum possible energy savings according to the operation specification of the EPC Solutions.

Most ESCOs will establish a training schedule for operation and maintenance (O&M) coinciding with the commissioning of the EPC Solutions. If possible, the ESCO should involve the Customer in the commissioning process and use that as a valuable part of training. If the Customer will be using third parties for maintenance, then discussion should centre on how those parties could participate in training. In addition to initial training, the ESCO will likely suggest periodic training updates. This is particularly important if staff turnover creates gaps in knowledge. In such cases, the Customer can usually request training, or the ESCO may offer training to new staff – but this would be a separate cost due to the unforeseen nature of this type of training. It is strongly recommended that the ESCO be given this latitude to charge for training, as it has no control over the human resources management practices of the Customer, which can directly impact on O&M and therefore on the ESCO’s guaranteed energy cost savings obligation.

ESCOs will normally offer a regular training program as part of a continuous improvement processes. This is particularly evident when the ESCO is compensated for enhanced or over-performance (i.e. paid a bonus for exceeding the annual guaranteed energy cost savings amount). Through training, the ESCO can keep staff focused on energy savings and can also use their day-to-day experience to fine tune systems for even more savings. This ‘win-win’ strategy is one of the biggest benefits of a well-run EPC and it helps to ensure the sustainability of the savings well after the EPC has terminated. The additional


benefit of training during ESCO projects is staff exposure to new equipment, standards of practice and general improvement in skills that otherwise would not have occurred. This training usually improves morale and job satisfaction because:

! it shows interest by management in the O&M responsibilities and systems that may not have been evident before, demonstrating to staff that all areas are important to the success of the business;

! it shows that staff’s ability to contribute is valued; ! it enhances staff’s skills and experience with new and state-of-the-art

equipment; and ! it demonstrates how changes can significantly impact on savings, which

may lead to a more proactive approach to identifying operational changes in the future.

3.7 Additional Customer obligations (clause 7) Up to this point, the contract has been principally concerned with documenting the rights and obligations of the Customer and the ESCO in relation to installing and maintaining the EPC Solutions and the equipment. This section deals with additional obligations of the Customer that were not explicitly dealt with in the preceding sections, but which are important to the installation and maintenance sections, as well as to the M&V provisions.

It is important for the implementation of each phase of the project that the ESCO is afforded full and complete access to the premises. However, the ESCO must accommodate the normal operations of the Customer’s business, so the obligation to provide access is qualified by specifying that it be provided only at reasonable times. What constitutes reasonable access will depend on the nature of the premises and the business conducted on the premises.

For example, it would not be reasonable for an ESCO to insist on monitoring the EPC Solutions in school classrooms during school hours or in a hospital operating theatre during surgery, unless this monitoring can be accomplished in a non-intrusive way.

It is recommended that the Customer and the ESCO establish what kind of access is required and decide how it can be accommodated to the satisfaction of both parties. The level and type of cooperation and information that the ESCO requires, or is likely to require, should be established early to avoid conflict later in the project.


3.8 Performance guarantee (clause 8) Note that this clause should be reviewed depending on the chosen funding arrangements.

Security

Clauses 8 A.3 and 8 A.5 stipulate a reduction in works security over time. The reason for this is that the security should reduce over time as the risk of non-compliant works reduces. This will ensure that the ESCO does not have to give a disproportionate amount of security over the full contract period. Monitoring and verification

The requirements and interactions between the Customer and the ESCO should be fully stipulated within the MVP as part of the works specification. The MVP establishes the procedures to determine the energy savings and is generally based on the following simplified formula:

energy savings = baseline energy consumption x ¶(adjustment factors) – post-EPC Solutions energy consumption

In this formula ¶(adjustment factors) represents a function of dependent and independent variables, applied in some function with correlated coefficients used to modify or determine the baseline energy consumption.

Although this formula represents the general process for establishing the energy savings, it is important that the parties work together to agree on the final MVP and calculation procedures for energy savings.

The MVP should stipulate the following in detail: ! baseline energy consumption of the existing systems (prior to introduction

of EPC Solutions); ! formulas and procedures for determining baseline energy consumption; ! adjustment factors to be applied to the baseline energy consumption.

These are factors that could reasonably be expected to increase or decrease energy usage and outside the control of the ESCO, such as changes in outdoor temperature for air-conditioning, increases in production or changes in occupancy;

! formulas and procedures for determining the post installation energy use; ! procedures for performing the statistical validation and level of anticipated

accuracy of results; ! specification of equipment and procedures used to collect, measure or

obtain results;


! method and format of reporting results to the Customer; and ! schedule of reporting to the Customer.

Depending on the M&V methodology used, the above MVP may identify procedures for each piece of equipment, or the facility as a whole. It is the joint responsibility of the ESCO and Customer to agree on the approach used in each case. However, in practice, the ESCO should propose MVPs for the project as a whole and work with the Customer to agree the approach. Because this is a relatively new area for most Customers, the ESCO may need to conduct some basic training to assist the Customer to appreciate the full scope of the issue.

The overall objective in finalising the MVP is to arrive at a balance between M&V cost and M&V accuracy. Because the Customer pays the cost for M&V, it must consider carefully the level of accuracy of the determined energy savings it will accept from the ESCO.

Another factor to consider is the simplicity of the process on which M&V and energy cost savings calculations will be based. If the Customer cannot understand the process and calculations then it is unlikely to trust the results of the annual audit produced by the ESCO. It would be useful to work closely with the ESCO to ensure full comfort with the procedures and calculations. Because not all MVPs can be straightforward and simple, it may take extra time and effort on both sides to arrive at an agreement.

The Customer must assist data collection

Although not directly stipulated in the EPC, one approach to collection of data is for the ESCO to prepare detailed forms and procedures for data collection required for it to complete its energy savings audit report. This will ensure that the Customer can plan properly for its involvement and avoid surprises when it is time for the ESCO to prepare the energy savings audit and report. This information should be stipulated in the MVP attached to the EPC.

Because the ESCO has designed the MVP, it will be relatively simple to set out the information requirements for the Customer. In most cases, this will include data that the Customer normally receives or collect in the course of its business; in some cases, new data that was not previously measured may need to be collected. Examples of data an ESCO might require include:

! monthly energy bills (either copies of bills or specific data from each bill); ! occupancy (weekly or monthly and could be in many forms such as:

average daily admittance or occupied beds (hospitals), occupied days (schools), occupied area or conditioned area (rented space);

! monthly or weekly production data (for industrial facilities this may include: number of widgets produced; kilograms of raw material used; number of occurrences of firing an oven; number of shifts etc.; for commercial facilities it may include: number of meals served/prepared; kilograms of


laundry cleaned etc.); ! changes in use (normally on a monthly basis, but usually as an exception

to use prior to implementation of EPC. Therefore, the Customer only provides a notice when a change occurs and provides basic details of the change, such as: description of area affected, description of new use, area (m2) affected, energy services that may be affected (air-conditioning, heating and hot water use etc.); and

! reading from meters, gauges, thermostats etc. While the Customer must assist in the preparation of the reports, by providing the information specified in the information requirements, the Customer may make ‘reasonable’ requests for explanation or clarification by the ESCO to assist the Customer in its interpretation of the audit reports prepared by the ESCO. The purpose of the ‘reasonable’ requests limitation is to avoid the potential for substantial costs to be incurred by the ESCO for teaching the Customer to analyse the audit reports. In this regard, Customers may consider retaining the services of independent energy audit consultants to assist in the analysis of audit reports.

Baseline adjustments

Typically, the most difficult aspect of M&V for Customers is understanding the need for changes, modifications or updates to baseline energy consumption to reflect changes to the environment of the EPC Solutions. The following example illustrates this.

Example: baseline adjustment

An ESCO implements a variable speed drive (VSD) on a material handling system in an electronics manufacturer’s plant. The energy savings have been estimated at 50% due to the variable nature of the loads on the motor. The ESCO arrived at this estimate by using the past 18 months of production data and monitoring the last six weeks of process data. The monitoring showed that there is a direct relation between the weekly production values (number of widgets produced per week) and the energy consumption of the motor. In discussions with the Customer, and through demonstration of the collected data, the ESCO and Customer agree on a formula, which will adjust the baseline energy consumption based on changes in production. In this way, the ESCO is not penalised for increased production (a benefit to the Customer) and the Customer is not penalised for reductions in production, which might show up as bigger energy savings.

In this case, it is agreed there will be no other ‘direct’ adjustment factors. However, if the Customer modifies the production line, or changes the production process, this may constitute the need to redefine the baseline, the energy savings calculations and possibly redefine the adjustment factors in the future.

!


Savings guarantee

As discussed above regarding adjustment factors, baseline energy consumption may need to be modified based on the impact those factors have on energy consumption. Because the baseline is being adjusted, the net result is also a change in expected energy savings and therefore guaranteed energy cost savings. Therefore, if there is a requirement to modify the baseline due to some adjustment factor (e.g. outdoor temperature, occupancy or production levels), there will almost certainly be a change in the guaranteed energy savings level.

Energy tariffs

Normally guaranteed energy cost savings are used in an EPC rather than simply energy savings. This is because energy savings can only be monetized if a value for the energy, such as a tariff, is included. And tariffs add further variability.

As tariffs change over time, the EPC must set out how tariff changes will affect the calculation of savings, i.e. will cost savings be based on the tariff(s) as it changes over time, or the the tariff(s) as at the time the EPC was negotiated.

As ESCOs normally have little or no control over future energy tariffs (some may act as tariff agent for the client, but this is not common), they will not typically accept the risk of a varying tariff(s). By fixing the tariff(s) in the EPC, the ESCO is in essence guaranteeing energy consumption savings, not energy cost savings (though the nominated tariff is used to monetize the energy savings). For example, if maintenance savings are a feature of the guarantee, then the energy consumption savings would be converted based on the agreed tariff(s) and this cost savings added to the calculated maintenance cost savings to arrive at the total cost savings. This total cost saving is then compared to the guaranteed amount to determine if the guarantee has been met, exceeded or if a shortfall must be paid to the Customer.

In some instances more than one tariff may be nominated in the EPC, such as where the Customer faces Time-Of-Use or TOU tariffs. For example, if savings from a particular EPC Solution occurs at night, it may be appropriate to apply a lower ‘night’ tariff, while for a winter energy saving measure, a higher tariff may be appropriate. It is important to ensure the ESCO has incentives to find all opportunities to reduce costs from variable tariff arrangements e.g. shifting energy use to off peak times where this is appropriate.

Calculation of guaranteed energy savings

It is important to establish a clear MVP describing the methods, data collection, data use, calculations, etc. when establishing the baseline energy consumption, post-retrofit energy consumption, and agreed adjustment factors. Without these clear procedures the savings audit submitted by the ESCO will be in doubt. Through a clear understanding of the documented adjustment factors, the


methods of achieving energy savings will be equally clearly defined. This means the ESCO cannot claim additional energy savings achieved through events or operations unrelated to the EPC Solutions. Savings shortfalls

The nature of the guarantee the ESCO provides should be carefully considered. This standard contract provides a bare contractual guarantee. If the ESCO establishes that savings are not achieved as projected at any stage during the performance guarantee period, it has a contractual obligation to pay the Customer the amount of the shortfall identified in the audit report for the year or years in which the shortfall occurs. There are no other legal remedies for the failure to meet the targets, for instance, it is not a breach of the EPC, which would entitle the Customer to cancel the contract, or to receive damages from the ESCO.

The contract provides an option for requiring security for the guarantee. The parties will need to negotiate whether this is appropriate in the circumstances of the particular contract. The ESCO will also need to consider whether it has the ability to give such security, and the cost of providing such security.

The ESCO does not obtain a guarantee from the Customer that payment for design and installation of EPC Solutions will occur. However, in practice, the contract is unlikely to be executed if the Customer cannot confirm beforehand that it has either secured funding for the capital works program, or will use a third party financing package developed by the ESCO. Accordingly, if it has reservations about the capacity of the ESCO to meet its contractual guarantee obligations, it should consider negotiating security for that obligation in some form (for example, insurance and bank guarantees). The type of guarantee the Customer should seek from the ESCO is for an amount equivalent to some percentage (from say 50 to 100% depending on circumstances) of the amount of savings to be achieved in any one year during the performance guarantee period. The guarantee should then be rolled over on each anniversary of the performance guarantee commencement date until the performance guarantee period expires or until your ESCO has earned the confidence of the Customer and demonstrated its ability to pay and/or manage the project effectively. If the Customer requires security of more than one year’s worth of energy savings, this amount should reduce proportionately, according to the remainder of the term. It will not be appropriate, for instance, for the ESCO to be required to guarantee two years worth of Energy Cost Saving if there is less than two years remaining in the term of the EPC.

If a shortfall payment is required and is then not made, the Customer can call on the guarantee and should ensure that it remains in place against the possibility that it may be called on again during the remainder of the performance guarantee period. Customers should be aware that in seeking this type of security for the performance guarantee it is likely to incur an additional cost.


Saving shortfalls and excesses in practice

On the anniversary of the performance guarantee commencement date, the ESCO will undertake to complete its M&V audit and savings report, which must be submitted to the Customer within the period nominated in the EPC. The objective of this report is to determine the energy cost savings obtained from the cumulative effect of the EPC Solutions and compare that to the guaranteed energy cost savings.

In practice, the ESCO periodically reviews energy cost savings to determine its position with regard to the guarantee. This process is usually described in the MVPs attached to the EPC. If the ESCO finds that the EPC Solutions are under-performing according to the guaranteed energy savings, it will normally take corrective action. In most cases, this action will focus on operational issues (such as control set points, other control functions, schedules) and corrective action will involve fine-tuning the operation to achieve savings, but remain within the equipment performance requirements. In extreme situations, the ESCO may need to replace equipment that is not performing according to expectations, or modify or apply additional EPC Solutions. In these cases the conditions discussed earlier apply, i.e. there is no cost to the Customer. The following is an example of how an excess or shortfall of savings would be treated.

IF actual energy cost savings = guaranteed energy cost savings, THEN the ESCO has met its obligation and no payments are made

IF actual energy cost savings < guaranteed energy cost savings, THEN the ESCO has not met its obligation and is required to pay the customer the difference between the guaranteed energy cost savings and actual energy cost savings

IF actual energy cost savings > guaranteed energy cost savings, THEN the ESCO has met its obligation and is not required to make any payment to the Customer. As an incentive, the Customer may have agreed, during negotiation between the parties to the EPC, to pay the ESCO a form of performance bonus for over achieving the guaranteed amount (normally based on a percentage of over-achievement, but can take many forms). Excesses in savings can also be ‘credited’ against previous or (potential) future under-performing years.


There are a number of options for guaranteed or shared savings. Variations include:

! guaranteed energy cost savings are not accumulated and shortfalls are reconciled annually. In this case, the ESCO pays the Customer if the annual savings are less than the amount guaranteed in any year. Repayments in the event of excess savings later in the term do not occur;

! guaranteed energy cost savings are accumulated for the first two years only, providing flexibility to the ESCO during the first year to fine-tune equipment. Depending on the nature of the EPC Solutions, the first year’s energy savings may require extensive commissioning, so by allowing accumulation for the first two years, shortfalls can be offset by later gains, once equipment has established anticipated performance levels. This may be particularly important where large seasonal variations are expected; and

! excess savings are shared – any excess savings beyond the guaranteed savings level (whether on an annual or cumulative basis as agreed by the parties in the EPC) are shared according to an agreed split. This would

Example: Guaranteed savings shortfalls and excesses

The example in the table below shows a five-year term EPC, with a guaranteed savings amount of $50,000 per year fixed in the contract over the term. The actual energy savings row in the table is determined by the ESCO through the M&V process defined in the MVP (also included in the contract). The savings credit (debit) row represents the annual and cumulative results of the net savings over the contract term. The payment to Customer (payment to ESCO) row represents the amount (if any) owed to either Customer (negative values) or ESCO (positive values). As a rule, the Customer will have been paid (cumulative up to any point during the term of the contract) the cumulative net savings debit. If this amount is positive (a credit), then the ESCO has achieved the guarantees up to that point and there would not be any default payments owing to the Customer. Also, if the Customer had received any default payments in the past, the Customer would have repaid these to the ESCO if a cumulative credit were achieved. See the progression in the table below, where, by year 5 the cumulative savings credit is $12,000. However, as the surplus savings are not shared, no payments are due.

!!


require the Customer to agree to pay an agreed amount to the ESCO (in the event of excess savings) at the time of M&V reconciliation and on presentation of an invoice.

These options are based on the assumption that the ESCO is guaranteeing an energy cost saving to a Customer and that these savings are reconciled annually. It is possible that an ESCO may propose the guarantee be on a purely performance basis. In this case, the ESCO would demonstrate that the equipment installed meets all performance requirements, as when originally installed, and that it is still performing the services required, and to the conditions specified. Through inference, the ESCO can state that if all the performance requirements are still being met (i.e. the guarantee levels are achieved), then the resulting energy savings would also have been achieved. The benefit to this method is normally a greatly reduced cost in M&V15. This option would require alterations to the model EPC.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!15!This is similar to Option A in the IPMVP.!

Example: Performance is guaranteed Consider the installation of electronic ballasts in a lighting system (with this being the only equipment being installed). The ESCO measures the pre-retrofit lighting load using data loggers for two weeks normal operation, establishing the baseline lighting load. It then installs the energy efficient electronic ballasts and performs the same data logging to determine the post-retrofit lighting load. The difference is determined to be the guaranteed lighting load reduction. The energy savings can be determined from this value.

In some cases, the baseline hours of operation may be difficult to determine or agree to, and the ESCO may be uncomfortable with the risks associated with changes of use and operation by the Customer. In this example, the ESCO makes the case that by guaranteeing the maximum load of the new system and taking responsibility for maintaining the lighting system (ensuring lamps and faulty ballasts are replaced) the Customer will realise savings over the existing lighting system – this is a fact and can be guaranteed by the ESCO. The only question is the amount of energy savings. It is reasonable to assume the Customer will use its lights, but to establish consumption to within a 10% margin may not always be possible. So the Customer agrees to accept the operations risk as long as the post-retrofit load is guaranteed and lighting levels are maintained (according to a performance specification).!

Example: Shared excess savings

Refer to the Table in the previous example, and assume that the ESCO and Customer have agreed to share savings on a 60 (Customer): 40 (ESCO) basis. At the end of year five, the Customer would pay $4,800 to the ESCO as a performance bonus, being 40% of cumulative savings.


3.9 Baseline adjustments (clause 9) As has been described previously, the process of adjusting the baseline should be carefully and fully described within the MVP appended to the EPC. It is the ESCO’s responsibility to draft the MVP’s and get the Customer’s full agreement to the adjustment factors.

As a guide, the IPMVP provides a starting point for the methodologies and options for M&V. However, this document does not provide specific requirements for MVPs relevant to the EPC Solutions being implemented by a specific contract.

While it is beyond the scope of this guide to provide a comprehensive description of MVPs and the specific issues related to adjustment factors, a brief discussion of the main issues is set out below.

Measurement and verification

An MVP must be fully described because energy savings cannot (generally) be directly measured, but are determined through an indirect process, by comparing pre-retrofit (or baseline) energy consumption with post-retrofit (or actual) energy consumption.

The difficulty with this is that it is rare for all conditions to remain constant over the term of an EPC. Consequently, adjustment factors are introduced into calculation procedures. These factors are applied to the baseline (pre-retrofit) energy consumption to estimate what the energy consumption of the EPC Solutions would have been had the same conditions been present throughout the full term of the EPC. This dynamic process is repeated (typically) on each anniversary of the M&V audit and report performed by the ESCO to demonstrate the savings.

In general terms, energy savings are determined through the following formula:

Energy savings = baseline consumption – post-retrofit consumption.

In this formula:

baseline consumption = ƒ(pre-retrofit consumption, adjustments)

post-retrofit consumption = actual energy consumption of EPC Solutions as determined using agreed process.

Cost savings = energy savings x agreed tariff rate

Under this approach, the baseline is rarely a static value (it would only be static if there were no adjustments, dependent or independent, defined). Therefore, it is represented as a function of those variables.


Note: If the EPC Solutions provide cost savings that do not reduce energy use, but rather offer demand savings, other network savings or load shifting benefits, then the ESCO is likely to propose that these benefits be included in the calculation of cost savings.

In practice, this example could be simplified by relying on the determination of the load savings to establish the guarantee. The calculations of energy consumption would then only be required to establish the energy cost savings for economic evaluation purposes by applying the appropriate energy tariff.

Where loads and consumption are not constant, an engineering or statistical model of consumption must be developed.

The following figure tries to show how an ESCO has taken two years of energy consumption data from a building and, by applying adjustment factors to this data, has developed a statistical model which closely resembles the past energy consumption.

!Figure 3

As the data required for this model is collected in the future, the model is used to estimate the baseline. The factors that constantly vary (weather is a prime example) are built directly into the baseline model. Other factors that may or may not change (such as use of facility or conditioned space) are dealt with as add-ons or multipliers to the model. The difference between the target line and the baseline represents the guaranteed energy savings, and is also modelled according to the same adjustment factors. This example uses a dynamic model

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13


that requires monthly data.

The benefit of this approach is that problems are quickly noted and identified early enough to take action so the guarantees can still be met. The disadvantage may be the complexity of the model, the number of dependent and independent variables, the uncertainty in correctly modelling unforeseen factors, or the cost to collect the required data.

The issues to be aware of here are: ! the baseline is rarely a static value and must be modified by agreed

adjustment factors; and ! whatever adjustment factors are applied to the baseline will normally be

applied to the target line, and affect the guaranteed energy cost savings. The comprehensive MVP attached to the contract will deal with these issues and should provide:

1. a statement of the plan’s methodology (e.g. IPMVP Option B with post-installation metering of operating hours). This is a recommended step, but not essential as it only provides a reference to the methods proposed by the ESCO, while the details required to verify the results will still be contained within the actual MVP as identified in steps 2 – 8 below;

2. an indication of who will be responsible for the components of the M&V process;

3. an explanation of how the following will be determined: ! baseline energy consumption; ! actual energy consumption; ! estimated energy savings; ! guaranteed energy savings; and ! adjustment factors and how they will be used;

4. specifications on data collection and (if required) metering procedures to be conducted, such as specification of the equipment, calibration, accuracy, location of measurements, periods of collection, sampling protocols etc. This should be provided for all data;

5. details of key assumptions to be made about significant variables and unknowns, including how these may be treated to adjust results if needed;

6. details of the level of accuracy to be achieved, if not for the entire analysis, at least for key components;

7. an indication of how quality assurance will be maintained and repeatability confirmed; and

8. specifications and contents for reports, and when they will be provided.


The last item to remember about M&V is that standard techniques can be used and applied by your ESCO (e.g. IPMVP or the American Society of Heating, Refrigeration and Air-conditioning Engineers (ASHRAE) Guideline 14P16). However, it is impractical to develop and require ESCOs to use standard M&V Plans (MVPs), as the requirements of each EPC Solution will be unique. Most ESCOs tend to standardise a series of EPC Solutions and consequently develop their own templates for MVPs for each measure. The more experienced the ESCO is in developing these plans, the easier it will be to reach final agreement on the methodology and specifics of each plan.

Provision of monthly report on changes affecting baseline

The specific provisions of this clause should be dealt with in detail in the MVP. A typical list is attached to Appendix 2, and described above. The items identified may seem onerous, but their specific requirements should be fully defined in the MVP. If a specific variable is not required, the MVP should not identify its need. Changes may occur that neither the Customer nor the ESCO anticipate. In this case both parties should employ their best endeavours to provide or develop the required data.

The main issue in this clause is the Customer identifying unforeseen events it becomes aware of, which may affect EPC Solution energy savings. By quickly identifying these, the ESCO is able to take the corrective action required to continue to achieve the guaranteed energy savings. Without this information, the ESCO may be exposed to unnecessary risks or the project may experience lower energy cost savings. The Customer has full responsibility for advising the ESCO as soon as it becomes aware of potential changes to these adjustment factors.

3.10 Intellectual property (clause 12) Intellectual property rights need to be considered carefully when negotiating an EPC. Generally speaking, the knowledge and experience the ESCO brings to the design of the EPC Solutions it proposes to install has substantial value that usually remains unquantified in the EPC. The manifestation of that value is found in the equipment, materials, systems and software the ESCO uses to implement the EPC.

The model contract provides for the Customer to use the ESCO’s intellectual property in connection with the contract. It also provides for the licensing of software associated with the EPC Solutions, which generally relates to M&V software and to building management control systems software.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!16!ASHRAE Guideline 14P—Measurement of Energy and Demand Savings: ASHRAE has developed comprehensive guidelines for M&V practices. The guide is intended to complement the IPMVP by providing more practical information for the development of MVPs. (See www.ashrae.org for more information.)!


A situation may arise where the Customer wants to re-use designs for EPC Solutions on sites other than those nominated in the EPC, without the ESCO being involved in implementation. This would give the Customer the benefit of the ESCO’s expertise but does not remunerate the ESCO for providing that benefit. The EPC includes a clause that provides the Customer with the opportunity to declare its intention and negotiate a suitable price for use of the ESCO’s intellectual property.

3.11 Insurance (clause 13) For the purposes of the EPC, the Customer is required to maintain public liability insurance – which should be in the joint names of the Customer and the ESCO. Typically approximately $10 million of insurance cover will be needed although this figure should be determined on the basis of the replacement value of the site and the circumstances of each EPC. As noted earlier, the Customer should insure equipment against loss or damage, once it has been installed.

The ESCO is required to carry substantially more insurance for the duration of the installation phase of the EPC. Customers should ensure that consequential loss cover is included, but note that the ESCO’s liability in all circumstances is limited to the level of that cover. Consult with professional advisers about the appropriate levels of insurance cover. Generally speaking, the ESCO’s level of cover will be determined by the size of the project. Appropriate levels of insurance cover will need to be negotiated on a case-by-case basis.

Example: intellectual property A chain of retail stores may recognise the intrinsic value of an EPC and commission an Energy Audit as a pilot project for one of its outlets. The ESCO designs a number of EPC Solutions, using high quality equipment that is relatively inexpensive. The Customer then implements these EPC Solutions in all of its outlets, receiving the costs savings associated with the implementation of the ESCO’s designs but foregoing the benefit of the guarantee that is provided under an EPC. It therefore avoids all ongoing costs associated with the provision of the guarantee. While this may make commercial sense, it is unethical and the ESCO is entitled to refuse to participate in such a scheme and to protect itself from the possibility of it occurring.

It is generally unlikely that the ESCO will obtain access to a Customer’s intellectual property in preparing the Energy Audit and implementing the EPC. However, the Customer may seek similar assurances from the ESCO if it determines such an occurrence is likely.


3.12 Liability or Indemnity (clause 15) Depending on the situation, it may be preferable to have only indemnities here. Indemnities will, however, not be possible if the customer is in the public sector, as there are restrictions on public sector entities giving indemnities. The inapplicable elements should be reviewed and deleted.

3.13 Suspension Clause 16.3 (c) implies all parties will need adequate insurance to cover the possibility of full destruction.

3.14 Dispute resolution (clause 18) Dispute resolution procedures are particularly important in an EPC. An EPC creates a relationship in which parties must work closely together over a number of years. The parties should view any dispute that may arise as an issue to be resolved within the framework of the contract, rather than as an irreparable breakdown of the relationship.

Seeing an EPC through to its conclusion is a partnering process, as discussed in Part 1. In a legal sense, the parties maintain absolute independence, but must work together towards a common goal over several years. For this reason, the dispute resolution provisions focus on expert determination of issues that arise, rather than the formal resort to the courts, or to alternative dispute resolution procedures such as arbitration.

Energy performance contracting is an industry in which most Customers will have little experience. It is therefore incumbent on ESCOs to educate Customers about what their expectations should be. Most disputes that arise will probably relate to interpretation of the rights and obligations of the parties, as discussed throughout this guide. The assistance of an independent expert to help interpret those rights and obligations, and the information produced under the contract, should also assist the parties to continue this partnering process through to completion of the EPC.

Note that the threshold amount stated in Clause 18.8 should be linked to the value of the contract.


APPENDIX 1: ENERGY AUDIT AGREEMENTS

Introduction This Appendix provides a discussion of the objective and key components of an Energy Audit Agreement (EAA).

The EAA is a contract between the Customer and its selected ESCO for the preparation and delivery of an Energy Audit. The Energy Audit, as discussed in Part 2, is undertaken by the selected ESCO to provide a basis for developing and agreeing on the detailed scope of the project. The EAA places conditions on the ESCO so the Customer can plan for and control the scope of the project. Regardless of whether the Customer proceeds with the EPC, it is likely to be obliged to pay for the Energy Audit.

Signing an EAA represents a commitment by the Customer to negotiate in good faith with the ESCO to enter into an EPC provided the proposed Energy Audit identifies EPC Solutions that meet the technical and financial conditions established in the EAA.

The Energy Audit and the EPC The Energy Audit is a precursor to the EPC and will deliver the specific outcomes that are required to negotiate an EPC:

! identifies potential saving measures for implementation; ! defines the scope of work (and proposed EPC Solutions) required to

achieve the savings; ! establishes the costs (investment grade level) for implementation and

maintenance of delivering and maintaining the scope (i.e. itemised EPC Solutions costs) including any relevant assumptions;

! establishes baseline energy usage at the site; ! identifies performance levels (including savings and cost savings levels)

and guarantees to be provided by the ESCO (e.g. 100% of estimated cost savings guaranteed, or a lesser level, and any relevant assumptions);

! defines the M&V procedures that will be used to calculate savings over the life of the EPC; and

! provides a schedule outline for the proposed EPC project. The Audit provides a diagnostic comparison between current energy consumption related to equipment and services in use at the premises and forecast energy consumption, using the recommended EPC Solutions to achieve guaranteed savings – ultimately qualifying the savings and costs that will become a point for negotiating an EPC.


The completed Energy Audit becomes the tool used by the Customer and the ESCO to negotiate an EPC and ultimately a works specification to implement the project. As such, setting the scope for the Energy Audit is important: it should be detailed enough to achieve the outcomes, but at the same time allow sufficient flexibility that the ESCO can modify the final Energy Audit to achieve the Customer’s overall technical, operational and financial expectations. The Audit scope of work is usually based on the RFP and the selected ESCO’s proposal, as modified during the EAA negotiation.

Independent advice

In some cases, it may be advisable to consider professional independent assistance (before it is finalized) to ensure that it Audit has delivered everything required to properly negotiate the EPC, particularly where:

! the Audit encompasses a large number of measures or sub-projects; ! the measures are technically complex and the Customer has limited

experience in the area; ! the proposed Measurement and Verification Plan (MVP) is based on

several different methods and/or based on utility bill analysis, regression or energy model simulation; and / or

! there are special options that modify the basic conditions of the standard EPC documents.

Key components of a standard EAA 1. Financial and Technical Requirements

A comprehensive Energy Audit can have high upfront costs. The normal approach taken to payment for an Energy Audit is that the Customer agrees to pay the fees and endeavor to enter into an EPC with the ESCO provided the outputs of the Energy Audit meet financial and technical conditions set out in the EAA. Fees may be paid upfront, or rolled into the project cost to become part of the EPC cost. If the conditions are not met, the Customer would probably still be obliged to pay the fees, but would not be obliged to endeavor to enter into an EPC.

The level of fees is agreed during negotiation of the EAA, and should reasonably compensate the ESCO for the expected level of time, effort and materials required to complete the Energy Audit.

This approach potentially addresses the major barriers to negotiating an EPC: high up-front costs to undertake an Audit which will deliver uncertain outcomes (risk to the Customer); and identifying acceptable potential savings in the Audit, but the Customer not proceeding to the EPC stage (risk to the ESCO).


In addition to the financial criteria, the EAA should include a general description of the services to be provided by the ESCO, and the specific requirements that must be met for the Energy Audit to be technically compliant, i.e. the technical conditions.17

The following table sets out the nature of technical and financial conditions usually included in an EAA.

Financial conditions The most important aspect of the EAA is establishing the necessary conditions to ensure flexibility for the ESCO to define the scope of the project and allow for variations and yet control the scope. This is achieved by defining three parameters within the EAA: 1 The maximum project

cost for the proposed EPC Solutions.

This is calculated for the entire project over the proposed term of the EPC, discounted at an agreed factor.18 The reason for defining this upfront is to facilitate budgeting and approvals and to speed up the EPC negotiation process.19

2 The minimum total identified projected energy savings expected to be achieved each year over the term of the proposed EPC.

This value is typically established through preliminary discussions or proposals from ESCOs. It is specified primarily to ensure the ESCO delivers on the expectations established during the proposal phase – which are likely a reason the ESCO was selected.

3 The minimum Internal Rate of Return (IRR) in respect of all the bundle of services provided over a defined period.

Typically this is the minimum ‘hurdle rate’ for the Customer for any new project, and approval should be straightforward if this condition (and others) is met. Note that the IRR should be set independently of the previous two items.

Technical conditions The technical conditions are usually stated in general terms to allow for flexibility in the final scope of works proposed by the ESCO. For example, a fairly standard set of technical conditions would require that the ESCO document the following: 1 Background information including:

a) a detailed description of the equipment and energy systems

This information is used to establish a clear understanding of the current situation and a baseline for comparison with the proposed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!17!The scope of work (including the facilities, area, end-uses, and equipment to be studied) is typically in accordance with the Customer’s specifications and/or the ESCO’s preliminary proposal.!18!The maximum cost should include all project costs, including any additional costs the Customer is expected to bear independent of the EPC (such as maintenance required for new equipment which is carried out by the Customer), and any ongoing costs that will be paid to the ESCO (such as the MVP, ESCO maintenance and guarantees).!19!Generally the Customer would obtain at least ‘in principle’ approval to proceed with the works to this cost level if the conditions are met, the investment appears favourable and an EPC can be negotiated between the parties.!


in place at the premises, their condition at the time of the Audit, and methods of operation; and

b) The energy consumption and demand profile and the space conditions of the facilities on the premises.

EPC Solutions. Information is only included and data only collected and analysed if relevant to the EPC Solutions being proposed. The level of detail and format of the data is a direct function of the proposed M&V process.

2 EPC Solutions: a) A description of the EPC

Solutions and improvements proposed by the ESCO, cost of implementing them, projected IRR for each site on the premises and impact of the proposed EPC Solutions and improvements on the energy consumption and demand profile of each site and on the space conditions of the facilities on the premises.

The ESCO’s proposal should state clearly all costs, savings, guarantees, performance, etc. The data should also be broken down by EPC Solution to enable assessment of individual EPC Solutions, but the project should be assessed as a total package when considering whether the financial conditions have been achieved;

b) A brief description of the intended purpose of each of the modifications proposed by the ESCO to the equipment or systems and/or to the operating methods of the equipment or systems.

This section should provide a brief, easily understood narrative of each of the proposed EPC Solutions, drawing a comparison between the current (baseline) practice and the proposed new practice. It should focus on items other than costs and savings such as improved comfort, air quality, tighter temperature control, peak demand control, reduced emissions, heat transfer, reduced operating hours, improved load factor, equipment rejuvenation, and enhanced operating life;

c) A projection as to any changes in capacity of the existing equipment due to implementation of the proposed measures

For example, a measure may affect future equipment capacity requirements, such where the ESCO proposes that an existing oversized motor be replaced with an appropriately sized, high efficiency motor to achieve significant energy savings. If current production rates were expected to increase in future, and the proposed change was not acceptable to the Customer the measure would either be deleted or replaced with an alternative (e.g. a Variable Speed Drive to match motor speed with production output requirements, in the case of the example).

3 Impacts and ongoing requirements: a) An outline of training programs

Training should be detailed in line with the


or instruction required for the Customer’s facilities managers and operators, and a summary of the involvement of facilities managers and operators likely to be necessary to effect the improvements.

b) A summary of the intended schedule for implementing the modifications and improvements, including the timing and estimated duration of on-site work for each location or facility.

c) A description of any altered or

new operating or maintenance requirements that will apply due to implementation of the improvements, and an estimate of the cost of any upgrading or maintenance work that the ESCO recommends be undertaken prior to, or during, the implementation of the modifications/improvements to maximise their effect.

Customer’s staff responsibilities and performance expectations, e.g. if the objective of training is to enable the organisation to manage the day-to-day operations of the newly implemented measures, the training must be sufficiently comprehensive to ensure that staff can achieve the required performance level. Due to the length of EPCs, there may be an ongoing need for training.

This is the proposed construction schedule, including all preparatory, final design, and equipment procurement work. Based on final EPC negotiations, this schedule will almost always require revision. For planning purposes, the schedule should be sufficiently detailed to show the impact of installing each of the EPC Solutions on the Customer’s premises, and to highlight any special requirements identified by the Customer. The schedule proposed in the EAA will then provide a clear basis for establishing the final implementation schedule.

The ESCO should produce a detailed maintenance schedule to ensure that equipment is maintained according to manufacturer specifications and requirements established by the ESCO to ensure sustain-ability of energy savings and guarantees. This schedule highlights all maintenance tasks required for each EPC Solution, defines which party is responsible for each, and identifies parts or materials required as part of this service and how they are to be paid for. Where the Customer takes responsibility for maintenance, the ESCO should provide a reporting format and audit procedure with sufficient detail to enable the ESCO to verify that compliance with maintenance requirements. This reporting allows the ESCO to determine whether any shortfall in savings has been caused by lack of maintenance.20

4 Projections of annual energy savings expected to result from the measures or improvements,

Performance criteria for the systems are defined in terms of lumen, litres/sec of air temp, etc. For example, a new lighting system

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!20!For major equipment such as boilers or chillers, and where the ESCO has maintenance responsibility, it may be prudent for the Customer to request similar maintenance reporting to ensure duty of care by the ESCO.!


together with a description of how these figures are determined, and how minimum performance is maintained.

aiming to reduce energy use should only be proposed where lighting levels can be maintained at or above minimum requirements for the current application. Calculations should be provided to demonstrate how these requirements are achieved, and how they will be maintained and verified.

5 Detailed equipment procurement and supply list.

This is a full description of all new equipment to be installed to effect the improvements together with an estimate of the expected lifetime of that new equipment, including engineering summaries, detailed equipment data sheets, the effect the installation may have on the expected lifetime of the existing equipment, and a full description of the warranty and servicing arrangements that will apply to the existing equipment and to the new equipment installed.21

6 A Measurement and Verification Plan (MVP) that is acceptable to both parties for monitoring, verifying and guaranteeing savings from the implementation of the EPC Solutions.

This is a comprehensive action plan of how the ESCO will demonstrate the savings and performance guarantees over the term of the EPC. It should show the means of determining the baseline, the ongoing consumption for each EPC Solution, and the resulting energy savings. It should detail what, if any, adjustment factors may or will be applied and specifically how they will be applied. It should identify what monitoring equipment will be used and the frequency of data collection. It should also provide a ‘confidence interval’ for the accuracy of the result. A data collection procedure should be fully described if the Customer is required to collect the data.22 Further discussion on M&V is provided in Appendix 2.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!21!To save Audit costs, some ESCOs may not complete the final design of all EPC Solutions until the EPC has been negotiated and signed. It may not be possible, therefore, to provide final equipment lists until the EPC has been finalised, in which case a draft list can be provided and full details supplied when available. The full details and their effects on existing and new equipment are provided for the Customer’s asset planning purposes, and it is the Customer’s responsibility to review these details to ensure that impacts on the continued operations of the facilities are acceptable.!22!The reference to the IPMVP is intended to provide an independent source and reference of measurement and verification, and provide assurance to Customers that the ESCO is following recognised international practice with respect to M&V.!


2. Other ESCO Obligations

As well as setting out the financial and technical conditions to be met in undertaking an Energy Audit, a standard EAA will also set out provisions that govern how the ESCO must perform the services, including that:

! the services must be performed diligently, and in accordance with agreed time limits and relevant legislative requirements;

! the ESCO must observe certain requirements in relation to the subcontracting of any part of its performance of the services and in relation to the existence of any conflict of interest that may affect its ability to provide the services; and

! the ESCO must provide the Customer with reasonable access to ensure it is able to keep abreast of the ESCO’s performance of the services.

Example: establishing the right conditions to control the scope and guarantee flexibility

The Customer has selected an ESCO to undertake an Energy Audit and negotiate an EPC based on the ESCO’s (preliminary) proposal that it can save approximately $110,000 per annum, with a project investment of $420,000 (based on a brief prepared by the customer and a walk-through audit of the facilities), and an error of up to 20% barring unforeseen events. The calculated IRR of the project is 25.3% (over a 15-year life analysis, assuming that all costs are in year 0 and that projected savings are not escalated).

The Customer and ESCO agree to proceed on the following conditions for the EAA:

! maximum project costs for implementation of the proposed measures: $500,000. This reflects uncertainty in early stage initial cost estimates, and also allows for identification by the ESCO of additional measures that were overlooked during the walk-through audit. The Customer has acknowledged that provided the other financial criteria are met, this level of cost increase would be acceptable, and has obtained internal ‘in principle’ approval for the expenditure;

! minimum total identified projected energy savings: $100,000. This is slightly lower than estimated, to reflect the uncertainty of the ESCO’s projection at this early stage. It provides a clear benchmark for the ESCO and identifies the minimum savings required for the Customer to proceed with the project; and

! minimum IRR: 20%. This reflects the Customer’s internal hurdle rate for project investment. It is lower than the ESCO’s projection (but higher than the IRR of 18.4% that would be achieved if the ESCO delivered an Energy Audit that exactly met the other two conditions above). Establishing an IRR of 20% (and obtaining internal ‘in principle’ approval with this condition) enables, both Customer and ESCO to proceed more quickly to establish the final EPC.


It will also include provisions dealing with the nature of the information to be set out in the Energy Audit, the minimum standards that must be met by the changes to the premises that the ESCO proposes, and security of documentation provided to the ESCO by the Customer.

3. Other Customer obligations

While the ESCO can control its own input into the project and attempt to obtain necessary information from the Customer, the ultimate success of the EPC will rely on development of a ‘partnership’ approach. To ensure the ESCO has every opportunity to deliver on its commitment and achieve the successful outcome expected by both parties, it is essential that the Customer meet certain obligations under the EAA, including:

! the Customer must fully cooperate with the ESCO in connection with the conduct and completion of the Energy Audit;

! the premises and equipment under study must be owned or leased by the Customer, and the Customer must demonstrate evidence of this if required by the ESCO conducting the Audit; and

! the Customer must provide any and all reasonable information requested by the ESCO for the purposes of conducting and completing the Audit, and the information must be accurate and free of errors or misleading information – the ESCO cannot be held accountable for errors in the Energy Audit attributable to errors, omissions, or inaccuracies in information provided by the Customer. The type of information the ESCO may require from the Customer includes: contracts the Customer has with third parties relating to facilities management and maintenance, energy supply or other facets of the business that may impact on the provision of the services; energy bills, tariff sheets and rate schedules, or other documentation that may assist the ESCO in calculating the costs of current levels of energy consumption on the premises; and details of the operation of the premises, including hours of operation, floor areas, number of occupants and usage patterns.

4. Variations to the EAA

The most important aspect of the Energy Audit is establishing control of the scope of the project while retaining flexibility. A standard EAA will provide a mechanism through which the Customer can request a variation to the scope of the Energy Audit, provided that it does not substantially affect the objectives originally agreed to by the parties.23

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!23!The reason for this is that if the Customer requests a variation to the scope of the Energy Audit that will make it impossible (or substantially less likely) to achieve the IRR, the ESCO may advise that, in its opinion, the variation will substantially affect the original objectives agreed to by the parties and should not be incorporated into the Energy Audit. In this case, if the variation was agreed to without further consideration, it could jeopardise the viability of the whole project.!


The EAA will also deal with fees related to variations, by providing for renegotiation of the Energy Audit fee if a requested variation will extend or markedly reduce the objectives, or substantially broaden or narrow the scope of services to be performed by the ESCO. Because a variation may significantly compromise the efficacy of the Energy Audit, the EAA will usually provide that the Customer may not terminate the agreement simply because the ESCO does not agree to the value of such a variation, but rather the parties must refer the matter to arbitration under the dispute resolution procedures in the agreement.

5. Entitlement to use data contained in the Energy Audit

Clauses are normally included in a standard EAA to prevent the Customer from using information contained in the Energy Audit without the ESCO’s permission if for any reason the parties do not progress from the Energy Audit to the EPC. If the Customer does not wish to proceed to an EPC, depending on the agreement on paying for the Audit, the information contained in the Energy Audit may be subject to the intellectual property rights of the ESCO. For example, the information contained in the Energy Audit may be used by the organisation but it may not implement the recommended systems without the prior consent of the ESCO. It may be the case that the ESCO has some intellectual property contained in the Audit that it does not wish its competitors to benefit from. 6. Confidentiality

Confidentiality is an issue of vital importance to developing industries, so clauses are included in a standard EAA to protect both the ESCO and the Customer.

The ESCO may need to gather confidential information from the Customer to enable it to provide a baseline estimate of the forecast savings. Conversely, information provided by the ESCO regarding proposed measures or the methods of modification to the existing systems and equipment on the premises may be commercially sensitive to the ESCO.

Both the Customer and ESCO should consider the sanctions they would take in the event of a breach of confidentiality, and ensure this is covered off in the EAA.

Confidential information could include all or any of the following: all documents, communications, data, computer software, intellectual and industrial property created, together with each and every other agreement, deed, guarantee, instrument, arrangement or understanding, and any amendment, from time to time, existing now, or in the future, made between the Customer and the ESCO (either alone or jointly with another person) or between the Customer and any other person, which information is disclosed to the Customer pursuant to this Agreement.


7. Indemnity

Under a standard EAA, the ESCO will promise to protect the Customer from harm (being damage, liability, loss, claim or expense) resulting from anything done (or not done but which should have been done) by the ESCO.

This indemnity is subject to two provisos. The first is that the indemnity will be diminished or extinguished to the extent that any action of the Customer (or its employees, agents, subcontractors or invitees) causes or contributes to the harm suffered by the Customer. The second proviso relates to any errors or misleading descriptions in the information provided to the ESCO by the Customer: if any harm is suffered by the Customer as a result of some action or omission of the ESCO’s, which was in turn caused or contributed to by an error or misleading description in the documentation provided by the Customer, the ESCO’s indemnity of the Customer will be diminished or extinguished to the extent that the error or misleading description has contributed to or caused the harm suffered by the Customer.

8. Insurance

A standard EAA will require the ESCO to provide proof that it maintains two types of insurance: professional indemnity, and public liability. Subject to the indemnity provisions in the EAA, professional indemnity insurance protects the Customer against expenses related to a fault in implementing any EPC Solution recommended by the ESCO.

9. Termination

Either party may terminate the EAA without affecting their other rights under the agreement, though the Customer will remain liable, to some degree, to pay the Energy Audit fee, unless there has been some default or breach by the ESCO. The ESCO will remain obliged to rectify any breach or non- performance of any obligation even if the Customer has terminated the EAA as a result of such a breach.24

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!24 Termination clauses would apply in the event of financial failure of either party to the EPC.


APPENDIX 2: MEASUREMENT AND VERIFICATION Measurement and Verification is an essential component of any EPC. Having a rigorous method for calculating energy savings gives confidence to all parties that have a stake in the contract and the outcome, i.e. financiers, customers, service companies, and any other affected parties such as building tenants or government programmes.

For that reason EMANZ has introduced an accreditation programme for professionals who have demonstrated competence in M&V called Certified Measurement and Verification Professionals or CMVP. For businesses who want to know what standard of reporting they should expect from their M&V, a set of Standard M&V reports for a range of projects of different scale and complexity is available on the EMANZ website (www.emanz.org.nz).

Important aspects to consider when designing and implementing an M&V Plan (MVP) include the following IPMVP Adherence Any report should be developed in line with the principals of the International Performance Measurement and Verification Protocol, to assist ESCOs in New Zealand in aligning M&V activities with international best practices. It must be understood that IPMVP is a complete framework of definitions and methods. Accordingly, adherence with IPMVP must include all of the following activities (as described in IPMVP Volume 1 EVO 10000 – 1:2012):

1. Identify the person responsible for approving the site specific M&V Plan, and for ensure that the M&V Plan is followed for the duration of the reporting period;

2. Develop a complete M&V Plan which: ! Clearly states the date of publication of the version number of the

IPMVP edition and Volume being followed; ! Uses terminology consistent with the definitions in the version of

IPMVP cited; ! Includes all information mentioned in the M&V Plan chapter (IPMVP

Chapter 5); ! Is approved by all parties interested in adherence with IPMVP; and ! Is consistent with the Principles of M&V (IPMVP Chapter 3);

3. Follow the approved IPMVP adherent M&V Plan; and 4. Prepare M&V Reports containing the information mentioned in the M&V

Reporting chapter (IPMVP Chapter 3).


IPMVP References All M&V reports should be developed under the assumption that the author is familiar with the concepts and terminology of the IPMVP. The protocol is available for viewing on the website of the Efficiency Valuation Organisation (www.evo-world.org) Multiple-EPC Solution Projects Any M&V report should be developed with a focus on reporting project-wide savings. However, if it is necessary to report on the performance of multiple EPC Solutions individually, Section 3 of EMANZ model M&V reports may be duplicated as many times as necessary to cover the required scope of M&V reporting. Baseline Measurement and Analysis It must be noted that, according to IPMVP guidance, the presentation and subsequent analysis of Baseline data (collected prior to EPC Solution implementation) is documented in an M&V Plan rather than an M&V Report, and therefore it has been excluded from the EMANZ model reports. Template Instructions The EMANZ model reports set out the general structure and content expected from an IPMVP aligned M&V Report, but it is intended that they should be adjusted to suit each specific project or situation. Sections shown in red italics are instructions for using the template or content that needs to be written from scratch, while sections that are highlighted in yellow are generally pre-written but require consideration and/or adjustment to suit the specific project.


APPENDIX 3: CHECKLIST – IS EPC RIGHT FOR YOUR FACILITY? Is energy performance contracting a possible solution for you? This checklist may help you to decide. Answer the following questions for the facilities you want to upgrade, circle the numbers below your answers, add them up and compare them with the notes at the end.

1. Are all the facilities in one location? No = 1 point Yes = 4 points

2. How many facilities are included?

60 or more = 1 point 25-59 = 2 points 8-24 = 3 points 1-7 = 4 points

3. What is the average per kWh electricity price you pay? < $0.05 = 1 point $0.05-$0.07 = 2 points $0.08-$0.10 = 3 points > $0.10 = 4 points

4. What is the area of the facilities? <5,000 m2 = 1 point 5,000-10,000 m2 = 2 points 10,001- 50,000 m2 = 3 points >50,000 m2 = 4 points

5. What is the total energy bill (all fuels)? <$100,000 = 1 point

$100,000-$500,000 = 2 points $500,000-$1 million = 3 points >$1 million = 4 points

6. What is the average age of the facilities? <5 years = 1 point 5-10 years = 2 points 11-20 years = 3 points >20 years = 4 points

7. How many years since you undertook any significant upgrade?

<5 years = 1 point 5-10 years = 2 points 11-15 years = 3 points >15 years = 4 points.

!


Your score:

7 – 10: Your savings potential is low and your facility is probably not a good candidate for an EPC. However, there may be opportunities for savings which can be cost effectively implemented by more traditional methods, for example using an energy consultant to do an energy audit.

11 – 15: Your facilities may benefit from an EPC if you are strongly committed to energy efficiency.

16 – 22: Your facility is a good candidate for an EPC. The more commitment to energy efficiency, the more money can be saved.

23 – 28: Your facility is an excellent candidate for an EPC.


APPENDIX 4: TYPICAL EOI DOCUMENT

EXPRESSION OF INTEREST (EOI) FOR THE SUPPLY OF ENERGY PERFORMANCE CONTRACT SERVICES Preamble

As part of a commitment to saving energy, [company] is seeking expressions of interest from parties to supply energy performance contract services. Interested organisations are to provide the information requested in this document. Expressions of must be lodged by 10 a.m. on the closing date of [date/month/year].

Background

[The company] is planning to negotiate an energy performance contract (EPC) to [aim of the contract]. The purpose of this EOI is to find out who is capable of, and interested in, carrying out an EPC for this work. It is anticipated that a maximum of three registrants will be short-listed from this EOI to develop a proposal for an EPC for [company] (see Request for Proposal below).

Interested organisations should be capable of supplying the following as a ‘turnkey’ project across the facilities:

! carrying out detailed auditing; ! identifying energy saving opportunities; ! designing procuring and installing proposed changes; ! guaranteeing energy savings; ! monitoring and reporting results; and ! providing ongoing technical service and support, including staff training at

all levels on energy efficient practices. The work includes [details of work]. The major objective is to maintain or improve the existing functionality of the facility while reducing energy and other operating costs.

Request for Proposal (RFP)

Following the evaluation of EOIs, [company] intends to prepare an RFP document reflecting its requirements. Once the RFP is completed, [company] will invite proposals to be submitted for the services in accordance with the RFP. Organisations that respond to this EOI will be evaluated and the short listed organisations will be invited to submit an offer under the RFP.


Enquiries

All enquiries in relation to this Expression of Interest must be directed to [name and contact details].

Absence of legal obligation and confidentiality

In inviting or receiving EOIs, [company] makes no representations, nor does it intend to create any legal relationship with potential parties that choose to respond to the invitation. No part of the EOI shall be deemed to be confidential unless [company] and the potential registrant agree in writing. [Company] has no obligation of liability to selected registrants if it decides not to proceed with the proposal.

Evaluation criteria

All EOIs will be evaluated in accordance with the criteria set out below. The criteria are not listed in any special order and may not be accorded equal weight. Some criteria may be regarded as mandatory for the purpose of registration (as suggested below). Evaluation and/or non-compliance with a mandatory requirement may result in the registration not being further evaluated.

Criteria for ESCO's should incorporate the following requirements:

! Financial Standing. The ESCO must have sufficient financial standing to offer guarantees.

! Insurance. The ESCO must hold public liability to a minimum value of $2,000,000 and professional indemnity to a value of $500,000.

! Guaranteed savings. Provider must guarantee the savings it predicts will arise as measured using IPMVP.

! Fixed Price: The ESCO must offer a fixed price for all work (exceptions can be negotiated for any areas of uncertainty).

! Expertise. The ESCO must have energy expert accreditations such as EnergyMasters. If an equivalent alternative, state what these are. If not, how is competence demonstrated?

Registrant’s details

[insert]


Experience and capabilities

Previous projects

! Registrants are invited to provide details of experience in similar projects within the past five (5) years. Details should include:

! description and value of projects; ! name of client and contact person for enquiries, including telephone

number; ! corporate occupational health and safety management system; ! quality management system; ! staffing details, including support services and training; ! ability to identify running costs, savings and efficiencies; ! proposed methodology for the monitoring of energy savings; and ! demonstrated ability to implement comprehensive energy saving

opportunities across a range of services, if required.

Other relevant experience

Registrants are invited to provide details of any area in which they have particular experience and expertise that may be of special relevance to this EOI.


APPENDIX 5: EOI EVALUATION SHEET Evaluation will be based on the following criteria. Please mark each row with a tick if you can provide the service. Only tenderers that can satisfy all criteria will be considered. Items marked * can have up to one page of supporting documentation to demonstrate your ability/experience in these key areas.

In addition, registrants should include:

• if applicable, a one-page description of their approach to carrying out a performance contract when faced with implementation at distributed sites; and

• up to three pages outlining their specialities, particularly experience in energy management in sensitive environments and energy performance contracting.

These criteria are not necessarily in order of weight. The emphasis of the evaluation will be the firms that meet the needs of [company] and which have the background and experience to provide long-term service.

1. Member of EMANZ. 2. Able to carry out the Energy Audit of all sites in times nominated. 3. Ability to identify and implement comprehensive energy saving

opportunities across both mechanical and electrical services. 4. Able to design, supply, install and project manage all energy efficiency

projects. 5. Will monitor energy savings from energy efficiency projects. 6. Will guarantee performance of all installed systems. 7. Can provide third-party financing if required. 8. Provide full commissioning and documentation of equipment. 9. Able to provide ongoing support, service and training. !


Evaluation methodology for an EOI The purpose of this document is to set out an evaluation method to pre-select three (or more) energy performance contractors for [company]. It is expected that a Request for Proposal for an energy performance contract (EPC) will be sent to each successful registrant. (This method is a subjective evaluation; each selection criteria should be identical to those described in the EOI document distributed to contractors.)

Criteria Max points

Actual points

Complied with all items on checklist Yes/No 1 Performance Contracting experience:

! stated ability to carry out an EPC ! part of the team has implemented an EPC in

Australasia or overseas ! carried out an EPC in New Zealand; ! carried out an EPC in a group of facilities with similar

issues to [company]

5 10 5 5

2 Ability to carry out an EPC in: ! mechanical ! electrical; and ! controls

8 10 7

3 Describes and shows ability to: ! identify projects; ! design solutions; ! procure required equipment; ! install energy efficiency projects; and ! project manage the whole job

5 5 5 5 5

4 Ability to provide: ! ongoing support; ! service; and ! training

5 5 5

5 Describes approach to carrying out an EPC in these facilities and shows an understanding of issues inherent with working on similar sites

10

Total 100

A minimum of three companies with the highest scores will have the opportunity to prepare a response to an RFP.


APPENDIX 6: DEFINITIONS EXTRACTED FROM MODEL CONTRACT In this agreement, unless the context requires otherwise:

Acceptance certificate means the certificate to be issued by the ESCO to the Customer for its execution upon completion of the installation of the EPC Solutions which certificate shall itemise the completion of each task specified in a works specification. Agreement means the provisions of this contract, including all schedules. Base energy rate(s) means the energy rate(s) set out in the EAA and in Schedule 4 for each energy source used at the premises during the base year energy period. Base year energy means the twelve (12) month period of consumption (expressed in units such as kilowatt hours of electricity, megajoules of natural gas, pounds of steam and litres of oil) of each energy source used at the premises as set out in the EAA, and as modified from time to time in accordance with Clause 9. Business day means any day other than a Saturday, Sunday or statutory public holiday in [insert relevant city, New Zealand]. Commencement date means the date this Agreement is signed unless otherwise specified. Completion means the issue date of the acceptance certificate (unless the Customer gives notice under Clause 5.1(b)(ii) in which case the date shall be the issue date of any acceptance certificate which the Customer signs and returns). Consequential loss means loss of profit, loss of revenue, loss of business opportunity, loss of reputation, economic loss, loss of contract, business interruption, loss of production, production stoppage, loss of data or indirect or other forms of consequential loss or damage. Contractual completion date means the date specified in Schedule 1 on or before which completion must occur. Core business means the [insert description] undertaken by the Customer at the premises. Defects liability period means the period which:

a) commences on the date of completion; and b) continues for a period of 12 months, subject to Clause 5.7.

Deficiencies means defects or omissions, or any other non compliance with this Agreement.


Delivery period means the period during which the EPC Solutions are delivered by the ESCO at the premises. Document means all drawings, designs, specifications or other documents prepared by the ESCO EAA means the Energy Audit Agreement document prepared by the ESCO dated [ ] and attached at Annexure 2. EAA fee means any fee payable by the Customer to the ESCO as set out in Schedule 1. EPC Solutions means the energy conservation measures (including energy, water and other associated utility cost savings) specified in a works specification the subject of an instruction under Clause 3.2 or approval under Clause4, consisting of the installation of equipment and the development and delivery of procedures. EPC Solutions works means the work undertaken by the ESCO to deliver the EPC Solutions. EPC Solutions works contract sum means the total cost of performing the EPC Solutions works as agreed by the Customer as part of the works specification and specified in Schedule 1 (including the works specification fee, if not separately invoiced). If there are changes to the works specification subsequent to the execution of this Agreement, the price specified in the agreed works specification shall supersede the price specified in Schedule 1, to the extent that they are different. EPC Solutions works security means security in the amount calculated as set out in Schedule 1. Energy consumption means the consumption of an energy source. Energy cost savings means the reduction in costs associated with the EPC Solutions at a premises in a guarantee year determined on the basis of the base energy rates. Energy savings means the reduction in energy consumption of each energy source used at the premises during the performance guarantee period which result from the work undertaken by the ESCO to install the EPC Solutions. The reduction in energy consumption for each energy source during each guarantee year must be calculated as follows:

Total energy consumption of that energy source during the base year energy period less actual energy consumption of each energy source during that guarantee year.

Energy source means [electricity, natural gas propane, fuel oil, coal or water]. [note- insert or delete additions as necessary] Equipment means all items of equipment specified in a works specification. Foreseeable changes means a change of which the ESCO was aware before the date of this Agreement, or which an ESCO exercising good industry practice should


reasonably have been aware of or catered or allowed for having regard to the nature of the premises, the Customer, the core business and the future developments. Future developments means possible changes to or impacting the premises after the date of this Agreement, as identified by the Customer as part of the Request for Proposals. Good industry practice means standard of skill and care to be expected from an experienced, professional service provider regularly undertaking work and services of the same or similar scope and complexity as this Agreement in New Zealand. Guaranteed energy savings means the sum of the reduction in consumption of each energy source used at the premises during each guarantee year as specified in Schedule 1, or such sum as amended by the ESCO in accordance with Clause 9 for each of the EPC Solutions. Guaranteed energy cost savings means agreed upon guaranteed energy savings multiplied by the base energy rates as specified in Schedule 4. Guarantee year means any period of one year beginning on the performance guarantee commencement date or on any anniversary of that date during the performance guarantee period. Latent conditions are physical conditions on the premises or its near surroundings, including artificial things but excluding weather conditions or physical conditions which are a consequence of weather conditions, which differ materially from the physical conditions which the ESCO anticipated or which should reasonably have been anticipated by a competent ESCO exercising good industry practice at the time of the ESCO’s tender and which would affect the completion of the installation if the ESCO had inspected:

c) all information made available in writing by the Customer to the ESCO for the purpose of tendering;

d) all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by the making of reasonable enquiries; and

e) the premises and its surroundings. Liability exceptions means claims in respect of death or personal injury. Liquidated damages rate means the rate specified in Schedule 1. Maintenance services means, where Clause 6.6 applies, those services to be provided by the ESCO (including provisions for emergency repairs) as set out in Schedule 3. Maintenance services fee means:

a) the amount set out in Schedule 1; or b) an amount specified by the ESCO relating to the provision of maintenance

services for additional EPC Solutions.


MVP means the Measurement and Verification of Energy Savings Plan as set out in the International Performance Measurement and Verification Protocol (IPMVP) as described in the EMANZ Guide to Energy Performance Contracting Measurement and verification fee means the ESCO’s fee for performing measurement and verification activities under the Agreement and is the amount set out in Schedule 1. Performance guarantee means the guaranteed energy cost savings specified in clause 8.2. Performance guarantee commencement date shall have the meaning given in Clause 5.3 of this Agreement. Performance guarantee period means the period of years set out in Schedule 1, commencing on the performance guarantee commencement date. Performance guarantee security means security in the amount set out in Schedule 1. Premises mean the property of the Customer inclusive of the existing equipment and systems on the property as set out in Schedule 1, and where more than one property is specified in Schedule 1, the terms and conditions of this Agreement shall apply to each property jointly and severally. Procedures means all systems and procedures to be implemented by the Customer at the premises, including energy efficient methods of operating equipment and other energy efficient operational procedures, as developed by the ESCO in conjunction with the Customer consistent with the works specification. Project means the design, delivery, implementation, operation and measurement and verification of the EPC Solutions by the ESCO in accordance with this Agreement. Security means, at the ESCO’s election, either:

a) an unconditional undertaking for the relevant period specified in Clause 8A issued by a New Zealand trading bank acceptable to the Customer’s Representative; or

b) a cash deposit held by the Customer’s bank or solicitor, on terms that access is permitted only when the Customer is entitled to the security under Clause 8A.

Site conditions means the physical and artificial conditions and characteristics of, under, over, near and adjacent to the premises, including:

a) disposal, handling and storage of material; b) matters affecting transportation and access; c) existing utilities and services, above or below ground level and the location of all

facilities with which such systems and services are connected; d) physical conditions above, upon and below the site including weather conditions; e) all known asbestos; f) known contamination of any kind; g) equipment and facilities needed preliminary to, and during the performance of the

works; and


h) any other site matters which may in any way affect the performance of the ESCO under the EPC, but does not include latent conditions.

Statutory requirements means the laws relating to the EPC Solutions, the equipment, the premises, or the work under the Agreement, or the lawful requirements of any authority having jurisdiction over the EPC Solutions, the equipment, the premises or the work under the Agreement. To specification means in accordance with the manufacturer's recommended maintenance procedures and the terms of any other operation or maintenance manuals or specifications provided to the Customer by the ESCO under Clause 5.2(a). Works specification means the scope of works submitted to the Customer by the ESCO for the design and delivery of EPC Solutions, which is consistent with the EAA (unless otherwise agreed by the Customer):

a) Sets out the tasks involved (and a timetable for completing them) in relation to the design and delivery of the EPC Solutions;

b) Specifies the EPC Solutions works contract sum, broken down into a schedule of progress claims corresponding to the tasks relating to the delivery of the EPC Solutions.

c) In the case of any additions or changes to the EPC Solutions, specifies the works specification fee for the amended EPC Solutions;

d) Specifies the guaranteed energy savings for the EPC Solutions, as identified in the EAA or pursuant to Clause 3.1(a);

e) Includes any other information the ESCO considers necessary, including plans, specifications, engineering designs and drawings relating to the proposed facility upgrade;

f) Includes a listing and description of the equipment that needs to be upgraded or replaced;

g) Includes a detailed listing of all maintenance programmes, training programmes, any other necessary procedures and schedules for the equipment; and

h) Includes a detailed list of criteria prepared by the Customer to control and define performance of the works by the ESCO, as specified in the Request for Proposals.

Works specification fee means the ESCO’s fee for the preparation of a works specification for delivery of the EPC Solutions pursuant to Clause 3 or additional EPC solutions pursuant to Clause4, provided that the fee charged for the preparation of a works specification for the installation of additional EPC Solutions shall be limited to ten percent (10%) [note - this could be negotiated] of the project cost of any such additional EPC Solutions.

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