ESPC Intro & ESPC/PPAs for RE (Presentation), NREL (National … · 2013. 10. 1. · ESPC Intro & ESPC/PPAs for RE (Presentation), NREL (National Renewable Energy Laboratory) Author:

NREL is a national laboratory of the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

ESPC Intro & ESPC/PPAs for RE

DHS Renewable Energy Roundtable

Doug Dahle

March 26, 2012 NREL/PR-7A40-54592

2

Overview

• Energy Savings Performance Contracting (ESPC) Principles o Understanding the money trail

• Energy Service Companies (ESCOs) • Risk Management • Tools for ESPC Customers • Consider Master ESPCs • Business Principles • ESPC/Power Purchase Agreements (PPAs) for

Renewables

3

Energy Savings Performance Contracts (ESPCs)

• Long-Term Partnerships (15-25 years) • Persistent Performance is Success Factor • Customer Champions & Commitment Critical • “Reallocating Excess Energy Expense into

Infrastructure”* • No Capital Cost – Contractor Revenues from $

Savings* • Determine Energy and $ Savings* • Risks & Responsibility – Key focus for both parties • Measurement & Verification – Verify Savings * Figures in following slides

4

ESPC Principles

• Reallocating Excess Energy Expense into Infrastructure

Pay a lower utility bill Pay the contractor Achieve cost savings for the government

5

Where the Money Comes From and Where it Goes

Agency Energy and O&M Bills

Cost Savings

Customer Funds for Energy and Related

O&M

6

The Project Cost Stack

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

28% Performance Period Services

69% Debt Service

42% Amount Financed (Principal)

3% Up-front payments Perc

ent o

f Age

ncy

Paym

ents

Ove

r Con

trac

t Ter

m

28% Interest

4% Financing Procurement Price (FPP)

*Data from Super ESPC projects awarded from 2005 to May 2008. Figures may not add to exactly 100% due to rounding.

31% Finance-related costs

41% Project investment

7

Energy Services Companies (ESCOs)

• A long term energy management partner • Customer focused service & communications • Listen to understand customer needs • Offer solutions to best address customer needs • Propose and document potential ESPC project • Good faith negotiations to meet mutual needs • Motivated – Financial return from long term

revenues

8

Energy Services Companies

• Expertise in Energy Efficiency & Supply Solutions • ESCO delivers in ESPC

o Audits and Baseline Energy Status & Data o Design & Installation of Energy Measures o Arrange Financing o Commissioning & Post-Installation measurement o Customer training on installed measures o Operations & Maintenance (O&M)

– Responsibility for O&M negotiable o Continuous verification of savings

9

Energy Conservation Measures

• Lighting • Heating, Ventilation, and Air Conditioning

(HVAC)/Variable Air Volume (VAV) • Energy Management Control Systems • High Efficiency Motors • Variable Frequency Drives • Boilers/Chillers • Renewables • All Other Energy Consumption Sources • Customer input:

o Energy/water use & cost, energy related O&M costs o Energy goals & wish list of projects

10

Facility Requirements

• Customer sets standards for building operations o Lighting levels, indoor comfort (HVAC) o Energy system controls

– Shut down HVAC during unoccupied hours

• Commissioning o Customer/ESCO develop design intent o ESCO prepares Commissioning Plan after project

design – Tests to ensure facility requirements are met

o Commissioning equipment tests & report

11

Energy/Water Savings

Measurement & Verification (M&V) Goal – Verify Annual Energy & $ Savings

• M&V Plan (set at contract award) o Develop pre-installation energy baseline o Measure post-installation performance o How energy savings is calculated:

– (pre-installation baseline) – (post-installation performance) – $ Savings = Energy Savings x Energy Rates

• Post Installation M&V Report o Demonstrates potential guaranteed savings/year

• Periodic M&V Report (typically annual) o Verifies annual guaranteed saving achieved

12

Determine Energy & $ Savings: Energy Efficiency

kW

Hours per Year

Post-Retrofit Energy Use Baseline Energy Use

Increased Performance

Reduced Operating Hours

13

Determine Energy & $ Savings: Renewables

Cost

$/kWh

Hours per Year

Reduced Utility Purchase Baseline Energy Requirements

Renewable Energy Supply

14

Risk Management

• Goal: Persistent savings over long term • Example: Building owner assumes O&M • Risk:

o Resources for building owner O&M to deliver savings o If performance degrades, ESCO expects full payment

• Benefit: o Building owner to consider and manage project risks o Increased infrastructure investment

• Risk & Responsibility Matrix (assess range of risks): o http://www1.eere.energy.gov/femp/financing/espc_resources.

html o See 2.3 (MS Word doc)

• Financial, operational, performance issues

15

Tools for ESPCs

M&V Document Templates: • M&V Plan • Post Installation M&V Report • Periodic M&V Report Renewable Energy Screening (no cost) • Pre-project analysis of cost effective RE opportunities:

o Solar (thermal & electric generation) o Wind o Biomass (biofuels, thermal, waste-to-energy) o Combined Heat & Power o Geothermal

16

Master ESPCs

• Includes common ESPC terms and conditions • Modify scope of work for specific sites • 16 ESCOs awarded Master contracts • Designed for federally owned facilities:

– Ameresco; Chevron Energy Solutions; Clark Energy Group; Consolidated Energy Solutions; Constellation Energy Projects & Services Group; FPL Energy Services; Honeywell Intl.; Johnson Controls Government Systems; Lockheed Martin Services; McKinstry Essention; NORESCO; Pepco Energy Services; Schneider Electric Systems; Siemens Government Systems; The Benham Companies; Trane

17

Public/Private Partnerships

• Agency ESCO selection: o Qualifications/interviews > down select o Short list & submit preliminary assessment

• Conducts at risk, facility survey to identify energy projects: o If not economically viable, no cost to customer o If economically viable, develops ESPC project o If customer rejects, customer reimburses ESCO costs o If customer accepts, ESCO effort part of project cost

• ESPC project developed and negotiated • Customer acquires infrastructure improvements and

facility energy efficiency at no capital cost

18

Business Principles

• ESCO Project Investment Thresholds: o Transaction Costs vs. Rate of Return

– Markup (15-20%), Profit (6-10%) o Common target ≥ $1 Million investment o Economy of Scale o ESPC Scope Considerations

1. Bundling energy efficiency (EE) & renewable projects 2. EE & private owned RE projects

A. Capture tax incentives & state incentives 3. Non-infinite delivery, infinite quantity (IDIQ) ESPC

request for proposal (RFP) for RE Only

19

ESPCs/Power Purchase Agreements (PPAs) for Renewable Projects

• Key: 25-year contract authority less construction time • RE Project developers seek minimum 20-year PPA • Office of Management and Budget (OMB)/Council on

Environmental Quality (CEQ) 8/16/11 endorses ESPC/PPAs • FEMP Support to Agency & ESCO • Private Ownership & Operation of RE Energy Conservation

Measures (ECMs) works o IDIQ allows ESCO to grant ECM private ownership (H.2) o Private party - Federal Tax Incentives (ITC & MACRS) o ESPC/PPA terms & conditions

– Guaranteed Production Requirements – Termination schedule – Agency License/Easement – Key to financing

20

ESPCs/PPAs for Renewable Projects

• ESPC/PPA Terms & Condition (cont’d) o Owner Warranties

– PV (25 years), Inverters (10 years) o RE Asset Title Issues

– Government Purchase Option Asset Appraised Value required by IRS Recommend not before 7 years (vest tax incentives)

– Remove at ESPC expiration (wear &tear accepted) – Cannot acquire Asset at $0 cost

o Consider owner retention > follow on PPA (10 years)

21

Cash Flow & Parties for Renewable Energy ECMs in ESPC

7 Agency

ESCO

Financier

Utility

Payments

RE Incentives

Debt Service

Utility Savings

Financing

Energy Services

22

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

7 7 Agency

ESCO Lessee

Financier Lessor

Utility

Payments

RE Incentives

Debt Service & RE Lease Payments

Utility Savings

Financing & RE Asset Lease

Energy Services

Private Sector Lease

23

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

7 7 Agency

ESCO Lessee

Financier Lessor

Utility

Payments

RE Incentives

Debt Service & RE Lease Payments

Utility Savings

Financing & RE Asset Lease

Energy Services

IRS RE Investment

Power Production

Tax Credits MACRS

IRS Tax Tests: • Lease Term < 80% useful life • At lease end asset value >= 20% initial value • Lessee purchase option – protect Lessor ROI • Lessor must have 3% cash on cash return

Meeting IRS Regulations

24

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

7 7 Agency

ESCO Lessee

Financier Lessor

Utility

Payments

RE Incentives

Debt Service & RE Lease Payments

Utility Savings

Financing & RE Asset Lease

PPA

Energy Services

IRS RE Investment

Power Production

Tax Credits MACRS

PPA – Deliver RE Power at

25

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

7 7 Agency

ESCO Lessee

Financier Lessor

Utility

Payments

RE Incentives

Debt Service & RE Lease Payments

Utility Savings

Financing & RE Asset Lease

PPA

Energy Services

Utility or REC Market

IRS RE Investment

Power Production

Tax Credits MACRS

Private Party Owns RECs

26

Panel Discussion- PPAs within EPSCs

• How to Replicate DHS Success – Day 2 1:30 pm • USCG – Puerto Rico, Awarded 12/16/10 (3 MW PV) • FLETC – Cheltenham, MD, Awarded 12/29/11 (2MW

PV)

• Panel o James Richardson – DHS o Bill Bresnick – DHS o Wilson Reynolds – Energy Management Engineering, Inc. o Doug Dahle – NREL

ESPC Intro & ESPC/PPAs for REOverviewEnergy Savings Performance Contracts (ESPCs)ESPC PrinciplesWhere the Money Comes From and Where it GoesThe Project Cost StackEnergy Services Companies (ESCOs)Energy Services CompaniesEnergy Conservation MeasuresFacility RequirementsEnergy/Water SavingsDetermine Energy & $ Savings: Energy EfficiencyDetermine Energy & $ Savings: RenewablesRisk ManagementTools for ESPCsMaster ESPCsPublic/Private PartnershipsBusiness PrinciplesESPCs/Power Purchase Agreements (PPAs) for Renewable ProjectsESPCs/PPAs for Renewable ProjectsCash Flow & Parties for Renewable Energy ECMs in ESPCCash Flow & Parties for Leveraging Tax Incentives for RE in ESPCCash Flow & Parties for Leveraging Tax Incentives for RE in ESPCCash Flow & Parties for Leveraging Tax Incentives for RE in ESPCCash Flow & Parties for Leveraging Tax Incentives for RE in ESPCPanel Discussion- PPAs within EPSCs

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