Questions from grantees occasionally surface regarding what protections they may enjoy within an Energy Savings Performance Contract* (ESPC). Answers to questions this week focus on some of these guarantee-related inquiries.

* An ESPC is an agreement between a customer and an Energy Services Company (ESCO). Based on a comprehensive energy audit, the ESCO arranges to finance and implement an energy savings project for an existing building determined to need an upgrade. Customers repay the cost of the improvements per the terms of a contract – payments that are balanced by the energy savings they enjoy once the work is completed. *

Question:  How is a facility owner protected if the Energy Services Company* (ESCO) refuses to pay an energy savings shortfall?

Answer:  The ESCO should be required to provide a guarantee instrument that will guarantee determined savings. This can be an irrevocable letter of credit, an insurance policy, or a guarantee bond. Regardless of which kind of guarantee instrument is used, the document must name the building owner as the allowable claimant. In addition, the guarantee instrument should be written so that the financing institution will pay immediately upon demand, e.g., as soon as a claim is filed. If there is a potential for energy savings disputes, make sure the ESCO cannot delay payment. The facility owner has a loan to pay and any disputes can be settled later.

Question:  To determine savings resulting from a specific project, the ESCO provides Measurement and Verification (M&V) services as part of their contract. How can one be assured that their numbers are accurate?

Answer:  In the contract, the M&V methodology must be clearly established and defined for each Energy Conservation Measure (ECM) undertaken. For each ECM, the contract shall specify which International Performance M&V Protocol (IPMVP) method will be used, depending on whether the ECM is an isolated retrofit or involves the whole facility. Based on the type of approach selected, the calculation procedure for determining savings must be detailed, and include all applicable equations. In addition, the contract must clearly specify the method for adjusting baseline energy use.

If there is no one in-house who can verify the ESCO’s baseline adjustment or savings calculations, and compare them to the guarantee, it may be worth hiring a third-party consultant to help review and approve the annual savings reconciliation the ESCO performs. In that circumstance, it is best to include funds for hiring this third party in the prospective project cost, so that the project can pay for the third-party consultant.

If you have further questions regarding ESPCs, please provide a comment to this post or contact a Technical Assistance Provider.

Content for this Blog post courtesy of Sentech-SRA/ICF International