Guaranteed Savings

Dec. 1, 2004
Performance contracting allows education institutions to improve facilities and immediately make use of new equipment.

Faced with shrinking budgets, expanding enrollment and pressure to improve academics, schools and universities often are forced to defer maintenance and equipment upgrades. However, schools do have an alternative. Performance contracting allows education institutions to improve facilities and immediately make use of new equipment.

Performance contracting is a funding method in which energy savings from utility expense reductions are used to pay for projects over several years. Utility savings are realized through various energy conservation measures (ECMs) that may include high-efficiency lighting retrofits; computer-controlled energy management; and the replacement and redesign of older, inefficient heating, ventilating and air-conditioning (HVAC) equipment and systems. A performance guarantee ensures annual savings. If a school does not achieve the guaranteed level of savings, the contractor will compensate for the difference.

In successful projects, a school or university saves money, and building occupants often benefit from improved comfort and productivity. To fully profit from these benefits, administrators and facility managers should carefully assess the impact of the contracting method they select and the reliability of the proposed savings projections.

The right approach

Three contracting methods are used by institutions seeking a performance contract: request for qualifications (RFQ), request for proposal (RFP) and negotiation. The selection method can affect the success of the project greatly.

Using the RFQ method, an institution issues a document that states its goals and objectives for the contract and describes the facilities involved, such as the number of buildings, location and square footage. Various energy services companies (ESCOs) respond with proposals detailing their capabilities. Administrators and facility staff evaluate the respondents and choose the best qualified ESCO to perform a detailed energy audit of the campus. Through the audit, the ESCO selects appropriate energy-conservation measures, determines the cost and the expected savings, and develops a proposal including the scope of work and all the financial details. Once the school is satisfied that the proposed ECMs will meet its infrastructure needs and financial objectives, the work begins.

The RFP method contains all the elements of the RFQ except that the competing ESCOs must complete a preliminary energy audit, including the scope of work, estimated project cost and the preliminary savings figures, before a company is selected. The institution evaluates the proposals and selects an ESCO based on the quality of the audit performed and the suitability of the proposed ECMs.

The negotiated approach to performance contracting can take many forms, but usually is very similar to the RFQ method. Typically, this approach applies only to private business or institutions that have no legal requirements for competitive bidding.

Each method offers its own advantages and disadvantages, but there are important points to consider. The cost of a preliminary energy analysis is substantial and increases the accuracy of the audit. When a project is bid as an RFQ, the ESCO is selected before the audit and is, therefore, more willing to dedicate resources to this costly analysis. On the other hand, if a project is bid as an RFP, each interested ESCO is required to commit its resources to performing an energy audit on a speculative basis. This forces ESCOs to either decrease the cost, and thus the accuracy of the audit, or bid on fewer projects, reducing the competition for a particular project. Using the negotiated method, there is no competition at all.

Therefore, the disadvantage of the RFP method vs. the RFQ method is that fewer companies may respond to a bid because of the cost involved. In addition, there is a strong inclination to select a company on the preliminary savings and project cost instead of focusing on the best project expertise. It also is important to take into account that some companies may adjust the preliminary numbers before the contract is finalized.

In contrast, with the RFQ method, the company is selected on expertise, credibility, quality of references and proven ability. This allows for greater competition and a more accurate audit, which can help assure the institution of the project's quality. After selection, the ESCO can work closely with the school to ensure the best possible selection of building improvements.

Potential savings

The energy audit will determine the type and amount of savings to be expected from a performance contract. These savings can take many forms; a well-designed and installed energy-conservation project typically will generate lower utility bills and repair costs, and reduced staffing needs. A variety of methods can be used to calculate these savings — computer modeling, individual ECM savings, targets, averages and load factor analysis.

Several computer-modeling programs are available for calculating a building's utility usage; each requires detailed information about a building's energy consumption. With modeling, the effects of an ECM alone or in concert with other ECMs may be tested for utility savings and compared with the existing systems and operations. The positive side of computer modeling is its relative accuracy. The downside is its cost, especially when multiple buildings are involved.

Energy savings also can be determined by calculating the results of individual ECMs, such as time scheduling savings or the savings derived from replacing older equipment with higher-efficiency models. The positive side of individual calculations is the moderate cost in terms of dollars and staff hours. The downside is accuracy when assumptions are made concerning equipment loading and building occupancy. Also, when various ECMs are applied to a project, the combined results may be different than if each measure were used independently.

Another popular method for determining the savings potential of a project is the use of targets, which are represented by energy units such as kilowatt-hours per square foot or British thermal units per square foot. The targets are either computer-model generated or gathered from actual projects. When using targets, the ESCO must modify them based on the geographic area of the job, the type of occupancy and the weather conditions. The positive side of using targets is the relatively low cost of analysis and the limited amount of time required. The negative side is the relative accuracy of the method when viewing all facilities of similar occupancy as identical.

A method sometimes seen, especially for budgetary work, is the use of average percentages. In this method, experience with various types of occupancies is used to assign a potential savings. For example, an energy-conservation project in a typical Texas public school may be expected to reduce utility bills from 17 to 25 percent. The positive side of this method is low cost. The downside is lack of accuracy and again a tendency to see all similar occupancies as identical.

Load factor also can be considered when determining energy savings. A building's electrical load factor is a calculation of the energy demand and usage represented by a single number. For example, a load factor of one would indicate that the building ran continuously and had a constant load. Typically, a high load factor indicates excessive equipment runtime. If the load factor of high-efficiency, similar occupancies in similar geographic areas is known, a load factor target can be established. To calculate savings, a utility model of the studied facility may then be modified until the target load factor is achieved. The positive side of load factor analysis is its low cost and general accuracy. The downside is that surprises can occur if those measuring the load factor do not understand a building's utility profile thoroughly and do not realize that the method applies only to time scheduling ECMs.

Although a number of techniques can be used to estimate savings, the important factors to consider are accuracy and verifiability. Because a school will rely on the savings produced to meet the annual payments for the project, it is recommended that the bulk of the savings guarantee is based on actual energy bill savings — these are verifiable. Furthermore, the institution should receive regular savings reports that compare the expected payment without the energy-conservation improvements with the actual invoice.

In addition, operational savings should be considered carefully and recognized if they can be substantiated. These savings fall into five general categories: equipment replacement savings based on life-cycle costs, repair cost savings, maintenance contract savings, in-house labor savings and productivity savings. It is important to note that operational savings rarely are guaranteed and may not be budgeted dollars. They can be real, but it is important to study the savings carefully to understand which will really save currently budgeted dollars.

Staying active

Finally, diligent monitoring is essential. In many cases, regardless of the ECMs applied, the energy efficiency of the facility may return to its original level over time. This may occur when technicians bypass problems rather than fix them or when changes are made in an effort to quickly resolve occupant complaints without keeping in mind the long-term schedule needed for the building.

For the energy-conservation project to remain successful for many years, remote monitoring and active user involvement is needed. The ESCO's ability to tune the system remotely also is helpful in training the facility staff and in troubleshooting problems. Costly maintenance contracts on computerized energy-management systems may be unnecessary if the staff receives quality training and can maintain it themselves.

McDaniel, CEM, CDSM, is vice president of Energy Solutions, TAC Americas, Carrollton, Texas.


  • $164.19

    National median K-12 cost of gas and electricity
    (per student)

  • $0.94

    National median K-12 cost of gas and electricity
    (per square foot).

  • $267.89

    National median college cost of gas and electricity
    (per FTE student).

  • $1.24

    National median college cost of gas and electricity
    (per square foot).

Source: American School & University, M&O Cost Studies for Schools and Universities, April 2004

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