Project Development | Better Buildings Initiative

Step 1: Investment Grade Audit (IGA) / project proposal

The IGA is an interactive process between your organization and the ESCO. The ESCO gathers and analyzes information and presents its findings to you throughout the IGA process. In return, it is in the best interest of your organization to ensure that the ESCO has access to the information and facilities needed to gather the required data.

The IGA process serves as the foundation of ESPC and is critical to the success of the project. The data collected during this process is essential to determining baseline consumption, energy conservation measure (ECM) savings, and actual savings.

Initial Analysis

The ESCO conducts a preliminary analysis of your facility in which the ESCO staff will collect data and background information related to facility operations and energy use for the past three years. This initial survey will involve a variety of activities including interviews with the facility manager(s), staff, and building occupants, as well as a review of all major energy-using equipment. If necessary, the ESCO will also perform “late-night” surveys outside of normal use hours to confirm system and occupancy schedules. Your entity will need to accommodate all reasonable requests made by the ESCO in pursuit of gathering quality usage data.

From this survey, the ESCO will develop and deliver an initial analysis, identifying potential cost-saving measures in your facility (regardless of cost-effectiveness), a project baseline, and cost and savings estimates. Furthermore, this report should detail the potential for the successful development of an ESPC and provide a brief list of recommended ECMs for further analysis.

At this point you will want to determine whether these preliminary findings meet your organization’s requirements. If not, you may want to terminate the process according to the terms in the IGA contract. Keep in mind, however, that if you terminate you will remain responsible for the cost of the IGA as it has been performed to this point.

Further Analysis and Audit Report / Project Proposal

Assuming the initial findings do meet your needs, the ESCO will then continue with the IGA, analyzing the agreed-upon measures, developing cost estimates, and identifying utility savings. The results of this analysis will then be compiled into a final report. The report will provide an engineering and economic basis for the negotiation of a potential ESPC between you and the ESCO.

The report will include:

A detailed description of your facility (i.e. existing equipment, systems, and conditions)
Baseline consumption and rates for energy, water, and additional utilities
Detailed information regarding proposed cost-savings measures including estimated costs and guaranteed savings
Preliminary commissioning and measurement and verification (M&V) plans
Project cash flow analysis including guaranteed savings, O&M savings, M&V costs, and other economic factors regardless of guarantee status

You might be able to submit a copy of this report to your state ESPC program for an independent review of the findings. Doing so will help ensure that the processes set down in the contract were completed and that all energy and cost calculations, proposed improvements, and M&V plans are reasonable. Upon receiving the final report, you will also sign a Certificate of Acceptance for the IGA report.

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Decision point

Once the IGA report has been accepted, you will need to decide whether to proceed with an ESPC or explore alternative means to complete the project or portions thereof. In most cases, you will move to the next step to begin implementation of measures identified in the IGA report.

If not, you have the option to:

Proceed with the ESPC with modifications (possibly reduced scope) to keep the project within the financial ability of your entity or requirements of your state’s ESPC program;
Terminate the ESPC and proceed with implementation of measures through design-bid-build or other construction process. At this point the savings guarantee is terminated. An alternative procurement method may also be required as the ESPC procurement method is only permitted for ESPC projects.
Terminate the ESPC and do nothing.

The IGA contract specifies a timeframe for your decision of whether to proceed to the ESPC. Typically this period is 90-120 days. If you decide to terminate the ESPC process at this point, your entity will be responsible for paying the ESCO for the IGA under the terms specified in the IGA Contract.

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Step 2: Decide on scope of project

Assuming you’ve decided to proceed, you’ll work with the ESCO and your owner’s representative to scope the project.

Factors to consider in this process include:

How big a project is your entity interested in taking on?
Are there any funding/financing limitations on amount or term?
Are there any non-energy upgrades that you want to include?
Do you want the ESCO to take responsibility for operation and maintenance?

One of the more complex questions involves the varied payback periods of different energy conservation measures (ECMs). ECMs with shorter paybacks, like lighting, are easy to justify and will be feasible with 5-10 year financing. Longer paybacks may require up to the maximum financing. ECMs with even longer paybacks can often be justified by looking at the combined payback period for all the ECMs. For instance, if one ECM has a payback period of five years, and another ECM of equal cost has a payback period of 25 years, the combined payback is less than 9 years. Your finance people, ESCO, and owner’s representative will be familiar with the interplay of payback periods, loan terms, and other factors that may have a bearing on which measures to include.

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Step 3: Decide on funding and/or financing

You’ll want to work closely with your finance department to make the final decision of how to pay for the project.

Your ESCO may also be able to offer helpful information on how financing is generally managed. Alternatively, you may decide to issue a financing solicitation in order to introduce competition. US DOE’s Model ESPC Contract Documents include a Financing Solicitation section with templates.

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Step 4: Decide on measurement and verification (M&V) plan

M&V is crucial to all ESPC projects, so the plan for M&V should be set as early as possible in the project for the greatest success. The purpose is to accurately measure whether the improvements are delivering the guaranteed energy savings. The cost for M&V is included in the overall project cost and is paid for by the entity during the initial monitoring period. Check the minimum monitoring period in your state.

M&V needs to follow the guidelines established in the International Performance Measurement and Verification Protocol (IPMVP). Check with [state ESPC program office] if your state has a required M&V protocol. The US DOE also offers a user-friendly set of guidelines for following the IPMVP protocol that states often use when they don’t have their own specific requirements in place.

A strong M&V plan should define precisely what “energy savings” means, and specifically how savings will be measured. Furthermore, the M&V plan should address how unforeseen events (weather variations, building use changes, etc.) are to be handled. Typically, a preliminary M&V plan will have been developed during the IGA process with a finalized version developed as a part of the ESPC contract process.

In general, a good M&V plan should:

Identify and establish utility baselines for the project
Identify appropriate M&V options for different cost-saving measures that are in line with your project goals
Specify quality control procedures for data collection and timely performance monitoring
Provide cost-effective M&V methods to verify project performance

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Step 5: Negotiate contract with the ESCO

Negotiating for open-book pricing can ensure that you receive good value, and the contract should be reviewed by your legal staff.

The guarantee is the cornerstone of an ESPC contract. It covers the annual debt service and requires the ESCO to pay any remaining balance if expected annual savings are not reached. Check the details of the guarantee in your state/city/county, i.e. duration, negotiation for variation.

In addition, be sure to review maintenance requirements and services. In order to guarantee performance or savings, an ESCO often requires maintenance on new equipment. Additional services can include reviewing operational strategies, reporting on equipment operating problems, and repairing and replacing equipment.

Prior to signing, you may be able to submit the ESPC to your state ESPC program for review. Check for details of how to put the final contract in place with the state ESPC program office if required.

You can use the U.S. Department of Energy's model ESPC contract as a template.

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If you have negotiated a contract with the ESCO, please continue on to Project Implementation.