The Top 5 Mistakes Made During Energy Performance Contracts
(and how to avoid them!)
By Kendra McQuilton
CEO, The ECG Group
The EPA reports that our nation’s school districts are spending $8 billion annually on energy, and that 30 percent of this energy is used inefficiently.
The good news is that there is a powerful tool school districts can use to “beat” this national statistic locally: Energy Performance Contracting (EPC). On average, EPC projects reduce total energy consumption by 30%. EPC projects are more complex than people think, however, and must be controlled properly to produce the desired results.
In my role of almost 20 years as a Technical Owner’s Representative specializing in EPC projects, here are the top 5 mistakes I see districts making when undertaking this type of initiative:
- Relying too much on the ESCO to sell or shepherd the project
The way you begin the EPC process is so important because who you rely on (or don’t) to assist you with this initiative will greatly impact the results and the integrity of the procurement process.It’s tempting to bring in an Energy Services Company (ESCO) when you are contemplating an EPC to educate yourself on the process and concept. It is important to keep in mind, however, that all ESCOs will ultimately need to respond to a competitive RFP. When one ESCO is relied upon too heavily, you may not have a clear perspective on the pros and cons of the proposals you receive, or worse — you may not get any other proposals, because one firm has already established a relationship. Further, if you bring an ESCO to the Board to explain the concept, skepticism and doubt often develop in the minds of stakeholders. They question how they can trust that they are getting a good deal if the district needs to bring in the “contractor” to explain the process.I have also seen projects stall out when school administrators rely solely on themselves to educate the Board and other stakeholders. There will inevitably be many questions – some anticipated and some not — that arise that are difficult to answer if you are not an expert. Failing to provide solid responses has killed many an EPC project. Examples are: how does the savings guarantee account for changes in weather? Should we get energy savings insurance? Does this proposal contain savings guarantees that are unrealistic? What is your basis for determining yes or no? What are the pros and cons of each company based on previous work experience? And the list goes on.How to Avoid: Engage an expert, independent consultant to handle all the questions for you, sell the concept, and allay any concerns.
- Using a Boilerplate/Generic RFP
Generic RFPs are viewed as a signal to ESCOs that the district does not have strong technical representation. Boilerplate RFPs do not contain the critical parameters that will result in competitive, comparable proposals. Examples of incomplete/generic RFPs are those that leave out the following, to name a few items: full data set for predetermined, realistic baseline year, requirement to physically audit the buildings and produce real, implementable scopes, your preferences for parameters such as interest rate and energy escalation percentage, and a predetermined realistic base price for oil and electric.If you do not specify your preferences for parameters such as these up front, a few things may happen. You’ll get proposals that are not comparable at all, because each company used a different variable that they chose, not necessarily the ones that make the most sense for you. You also may not get meaningful scopes that can be acted upon. You will not receive the critical financial information you need to properly evaluate the proposals and determine which ESCO is giving you the best value for your energy savings. This could cause problems when the Board of Education asks how they can be sure that they are not handing a multi-million-dollar opportunity to a company without a rigorous vetting process.How to Avoid: Use an RFP that has been customized for your district’s unique needs by a consultant that understands the many hidden complexities of this type of a project.
- Relying Solely on Legal Counsel to Negotiate the Energy Services Agreement
After you have selected a winning ESCO, you will enter into an Energy Services Agreement (ESA). It’s important to realize that the ESA is both a legal AND technical document. I knew of one district that, because of the technical nature of the savings guarantee language, essentially forfeited their guarantee by signing an ESA that was not in their favor. This is just one example of how a project can deliver disappointing results if the technical aspects of the ESA are not reviewed by those who understand how to mitigate your risk.How to Avoid: Involve technical experts to help your legal counsel properly assess the risk factors within the terms and conditions.
- Assuming Measurement and Verification will be done appropriately without your input
Measurement and verification (M&V) is an often-overlooked area of risk for districts in energy performance contracts. The term, method, and cost are all important factors that must be understood and customized for your district’s preferences and unique project scope. Your district could inadvertently forfeit the guarantee if measurement and verification terms and conditions are not appropriate.How to Avoid: Understand your options and preferences for measurement and verification going into the RFP phase. It will help set the tone and help you select the right ESCO.
- Over-Prioritizing general SED Experience vs. the Specialized Expertise Required for Success in your consultant
Although there is a design/SED component to Energy Performance Contracts, in my work, that is the smallest part of the overall effort that is required to shepherd them through the process successfully. Your Energy Performance Contract team MUST consist of professionals that understand the calculations, scope implications, M&V protocols, rebates, etc. inside and out in order to properly protect your interests, as well as achieve maximum value for the project. Just as you wouldn’t go to a general practitioner for heart surgery, you will be well served to engage a firm that specializes in the unique nature of EPC projects to guide you through the process.How to Avoid: Make sure your Owner’s Rep. is not simply an architect/engineer, but also a true expert that has managed multiple Energy Performance Contracts with different ESCOs and has achieved measurable and provable results.
In summary, Energy Performance Contracts are highly complex projects and often last for a term of 18 years. Ensure your project’s long-term success by being aware of the common mistakes that can compromise your project, and engaging technical experts with significant credentials in this specific industry to help avoid them.
Kendra McQuilton is the Chief Executive Officer for The ECG Group. ECG has served as a technical owner’s rep and engineer of record for more than 100 Energy Performance Contracts for School Districts. For more information about the above, contact Kendra at kendra@theECGgroup.com or their website at www.theECGgroup.com.