Office Midwest

Look beyond equipment makers in considering energy service companies

Government officials who need to make energy-efficient upgrades to buildings—but have no budget to make building improvements--often turn to energy services companies that will do the work and finance the cost from the energy savings over time.

by Jack Sanders

Government officials who need to make energy-efficient upgrades to buildings—but have no budget to make building improvements--often turn to energy services companies (ESCOs) that will do the work and finance the cost from the energy savings over time.

Most active ESCOs are affiliates of HVAC equipment manufacturers who built the business as an avenue to sell their big-ticket products.  But government decision-makers may be better off working with general contractors who understand energy saving opportunities, in order to tap their expertise in specifying best-in-class products, negotiating with equipment makers and delivering projects on a tight schedule.

Energy savings performance contracting (ESPC) enables schools, entire municipalities and other traditionally public-sector buildings to be upgraded to energy-efficient standards.   Increasingly, managers of public buildings are under pressure to improve energy efficiency to reduce greenhouse gas emissions and, often, to make them eligible for green-building certification such as LEED.

But an ESPC is more than just a way to meet energy mandates. The key benefit to municipalities and government agencies is the ability to fund replacement of aging HVAC systems, windows, fixtures and other building elements.  Cities don’t have to float bonds or levy taxes to make much-needed improvement to buildings—they can leverage the inefficiencies in their utility costs.

The first step is to bring in an energy service company to conduct and pay for the improvements, as well as guarantee the performance.  The ESCO analyzes the building for performance improvement opportunities, specifies the equipment to be used, orchestrates the installation, arranges the funding and payback mechanisms, and maintains energy systems after installation to ensure continued peak performance throughout the contract period.  In return, the ESCO keeps most or all of the energy savings accrued during the contract period to cover the cost of their services and products.

In the worst-case scenario, the public-sector client gets improvements without having any out-of-pocket costs. In many cases, the savings on energy, water and facility costs are greater than the cost of renovation, resulting in a positive cash flow for the municipality or agency, which also keeps the residual cost savings after the contract period is done.  An agency may get a substantial renovation at no cost and make money in the deal!

The terms of the ESPC are different for each situation, but for these plans to make sense there generally needs to be an opportunity to reduce energy use by 25 to 40 percent and a contract period of 10 years or longer.  The owner uses the savings from reduced energy cost to finance the project and reimburse the ESCO for its work and equipment. Once the contract period is over, the owner collects 100 percent of the energy savings. Another benefit to the owner is the ability to enhance the building’s sustainability, paving the way for LEED certification or other third-party recognition of environmental responsibility.

ESPCs can be a great way for government agencies and schools to reduce energy usage without using taxpayer funds for improvements.   The strategy of working with ESCOs has been in existence around the country since 1985, but really started to take off in the mid-1990s. By 2006, more than $3.5 billion in contracts were in place, and the industry was growing by more than 20 percent per year, according to a report from the Environmental Protection Agency’s Energy Star program. Since 2011, the U.S. government has earmarked an additional $4 billion for ESPCs in federal buildings across the country, and all 50 states have programs as well.

The State of Illinois’ ESPC pilot program financed $33.4 million in improvements to seven facilities using private capital, resulting in $4.7 million in annual savings over 10 years.  Since 2006, the state has helped municipalities, schools and colleges with projects totaling an additional $144.6 million, achieving annual savings in excess of $17.2 million.  Current projects seek to reduce not just energy, but also water and maintenance costs, as well as enhancing the comfort of occupants.

What makes a good ESCO?

Government entities start the ESPC process by issuing a request for proposal (RFP) or a request for qualification (RFQ) detailing the desired scope of the project and the projected contract length.  Proposals are made by eligible ESCOs, which act as project developers backed by teams that include contractors, equipment providers and third-party financiers.

Historically, the development partner has been the equipment maker, so as much of the equipment as possible will come from that company.  The idea behind this arrangement was that, with one company serving as both contractor and supplier, there will less finger-pointing if work is delayed or savings fail to materialize.  But in truth, the financier is the one taking the financial risk, and the contractor is ultimately responsible for performance.  Participants in ESCOs choose their partners wisely, because they would all lose money if one of their partners failed to perform.

It’s also worth noting that energy strategies produce reliable results; if the upfront analysis indicates that a set of improvements will reduce energy use by 30 percent, then a competent implementation will yield at least that result. There’s not much guesswork involved.

However, it’s simply not the case that any one equipment maker has the ideal products for every building.  If the ESCO is motivated by the desire to sell its own equipment, then they miss out on one of the main ways the energy specialist adds value—specifying the right equipment for each unique situation.  By contrast, an ESCO led by a general contractor can tap into a wealth of experience at identifying the best possible set of products from a range of manufacturers.  A general contractor can also use its relationships with multiple suppliers to get the best price on the right equipment for the job at hand.

General contractors possess unmatched skill at managing complex projects to a successful outcome.  Many have experience with new integrated design techniques that combine design, construction and facility management expertise from the outset, often resulting in overall cost savings when high-performance features are specified.  In addition, some contractors employ purchasing specialists who know when and how to order equipment to get the best price and ensure on-time project delivery.

It’s also important for Illinois-based projects to retain ESCOs with knowledge of state and municipal energy guidelines.  Illinois is one of just eight states that have adopted the 2015 version of the International Energy Conservation Code, which sets increasingly stringent requirements for renovation and new construction projects in energy efficiency areas beyond HVAC equipment--such as the building envelope, roof reflectance, window-to-wall ratio and daylighting. The city of Chicago also offers incentives for energy-efficient building projects and sustainable construction techniques. Illinois-based contractors with day-to-day experience in these areas are positioned to do a better job than out-of-state ESCOs led by equipment makers.

Whatever path a government decision-maker chooses, an ESPC is a good way to improve aging buildings and meet energy efficiency goals without spending money to do it. The difference between an ESCO led by an equipment maker and one led by a general contractor is the difference between good and great.