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Performance Contracting: Paying for ImprovementsWith Energy Savings
LEONARD E. RIPLEY, PH.D., P.E.FREESE AND NICHOLS, INC.
Example Scenario
• You’re currently paying $3 million/yr in electrical costs
• Potential energy & operating improvements could yield
$1-1.5 million/yr in savings
• Improvements would cost $10 million
• Simple payback = 7-10 years … looks good!
• But, what if you don’t have $10 million?
A Simple Proposition …
• An outside entity signs a contract to design and make the
improvements, with a guaranteed savings of $1 million/yr
(conservative).
• You take out a loan for $15 million to cover the project’s capital
cost, interest, profit, and contingency and pay it to the outside
entity.
• You repay the loan at $1 million/yr for 15 years.
• If the annual savings fall below the guarantee, the outside entity
makes up the difference.
Performance Contracting
• The outside entity is an Energy Service Company, or “ESCO” and
the finance method is referred to as Performance Contracting,
where the ESCO guarantees the performance of the
improvements.
• Performance Contracting is regulated by federal and by state law:
– In Texas - Local Government Code 302
– Amended by SB 831 ...
• several specific requirements added.
• Maximum allowable payback period is 15-20 years
Key Advantages
• The loan does not count against the City’s indebtedness.
• With the annual savings guaranteed, the City has “zero cost” for
the project.
FNI Funding Seminar: Performance Contracting Slide 6
• If savings are greater than guaranteed,
the City keeps the additional savings.
• Non-energy projects can be added to
the overall project as long as the
overall payback is OK.
But remember Charlie Brown’s Christmas tree ...
Historical Background• Background helps explain current approach of many ESCOs.
• Started in late 1970’s in response to the energy crisis … companies installed equipment for “free” and contracted for a percentage of the savings.
• In the 1990’s energy companies entered the ESCO market in response to deregulation. Smaller players exited or were absorbed by larger ESCOs.
• Major emphasis is still on:
– Lighting & controls
– Electrical motors – efficiency & VFDs
– HVAC upgrades and optimization
– Central plants for city facilities, campuses, etc.
Move into Water/Wastewater
• Major incentives:
– WW treatment consumes 3% of US electrical energy; major energy demand for most cities.
– Many W/WW plants were designed when electrical costs were 3-4¢/kW-hr and they have not been upgraded since then.
– Regulatory pressure … SB5 & SB12.
– Public desire for sustainability & green policy.
• Typical low-hanging fruit:
– Lights, motors, HVAC controls – the “regulars”.
– W/WW pumping.
– WW aeration – blowers, diffusers, DO control; co-generation with digester biogas.
Key Players• Many mergers between historical ESCOS
• Overall categories: equipment-affiliated, utility-affiliated,
construction-affiliated, pure-play
• Major current ESCOs:
AMARESCO Johnson Controls
Siemens Bldg Honeywell
Carrier ConEdison
FPL Services Chevron Energy
• Some ESCOs are more interested than others in expanding beyond
lighting, HVAC, motors, etc.
Project Structure: Typical
FNI Funding Seminar: Performance Contracting Slide 10
OWNER
CONTRACTORENGINEER
Project Structure: PC / ESCO
FNI Funding Seminar: Performance Contracting Slide 11
OWNER
CONTRACTORENGINEER
ESCO
Measurement & Verification
Project Implementation
FNI Funding Seminar: Performance Contracting -- Slide 12
Letter of Intent
Feasibility Study
Preliminary Design
Contract w/ Costs
Design / Construct
Challenges in PC Projects
• Engineer is working for the ESCO, not the owner
• Owner must commit to project before seeing construction documents -- owner may not have as much control over the project design
• Financing for performance contracts is not compatible with SRF financing
• Owner has to honor terms for guarantee to be valid (flow, BOD, mixed liquor DO, etc.)
• Probably need to upgrade instrumentation (add SCADA?) for measurement & verification.
Additional Resources
• National Association of Energy Service Companies (NAESCO) –
www.naesco.org
• Energy Services Coalition (EPC) –www.energyservicescoaltion.org
FNI Funding Seminar: Performance Contracting Slide 14
Case Study: Fort Worth Village Creek WWTP
• ESCO: Johnson Controls, Inc.
• Engineers: Freese and Nichols, AECOM, Vic Weir, CDM
• Project elements:
– Aeration improvements
• Replace old ceramic diffusers with membranes
• Add anoxic zones to reduce O2 demand 15-20%
• Automate DO controls to minimize air flow
– Digestion / heat recovery
• Replace lance gas mixers in 6 of 14 digesters
• Co-digest high-strength wastes to boost biogas
• Install HRSG to double turbine energy recovery
– SCADA replacement
Digestion / Heat Recovery
FNI Funding Seminar: Performance Contracting -- Slide 16
DIGESTERS
Biogas
Landfill Gas, Natural Gas
TURBINE
Electricity for Blowers
Heat
Digestion / Heat Recovery
FNI Funding Seminar: Performance Contracting -- Slide 17
DIGESTERS
High-Strength Wastes
Biogas
Landfill Gas, Natural Gas
New Mixers
TURBINE
Electricity for Blowers
Heat
HEAT RECOVERY
STEAM GENERATOR (HRSG) & BURNER
Exhaust
Steam
2 Steam-Driven Blowers (Retrofits)
Air to AB’s
JCI Project Status
• Currently in pre-design phase, developing guaranteed max pricing
from contractors
• Expect to start final design late summer
• Expect to start construction late 2009 / early 2010
• Construction duration ~ 18 months
• Current cost estimate: $20-30 million