Frequently Asked Questions

Step 1 - Project Planning

1. What can the state do to help individual entities with the EPC process?

The state has developed standardized procurement, evaluation, and contracting procedures and documents (e.g., RFP, IGA contract, EPC contract, etc.). The state also offers free technical assistance and training to entity staff throughout the EPC process. For assistance, please contact DEQ staff.

2. What do entities need to know as they initially plan EPC project scope, energy-savings objectives, and financing terms?

Any project should be consistent with the site’s long-term master plan. Obviously a building slated for demolition during the likely term of an EPC should not be included in a project. A building scheduled for a major change in operation – such as converting a barracks building into office space – could necessitate a change in the way savings are calculated (baseline adjustment) at some point down the road. So it’s important to anticipate these changes and plan for them in the contract.

As for energy savings objectives, we encourage entities to be open to a wide variety of Cost-saving Measures (CSMs). They may have a desire to investigate certain technologies, and it’s important to include those in the RFP, but an ESP should be encouraged to develop a comprehensive project. That’s where their expertise lies – in their ability to perform assessments, find opportunities to save energy and water, and to develop comprehensive projects. The entity should also have a defined economic benefit or requirement for cost-effectiveness, such as the savings for the project must be able to pay for the project cost within 10 or 15 years.

Financing rates are generally not under the control of the ESP; they are subject to the same market forces that drive interest rates on other types of loans. These finance rates do affect the length of the performance period of an EPC, however. In general, the agency will maximize project investment and the savings delivered when the length of the performance period is maximized, subject to the statutory limit of 20 years (which includes the construction period).

3. How is an ESP different from a standard architectural/engineering firm?

An ESP provides a turnkey approach to design and implementation of an energy improvement project. This includes design (which may be in-house or contracted out) and construction management where the ESP serves as the General Contractor. An ESP must financially guarantee energy and operating cost savings by measuring project performance results over time. The ESP assumes a financial risk that the project will produce the promised savings performance. Also, the ESP typically provides a broader range of customer services, like measurement and verification of cost savings and commissioning of project equipment and systems. It provides more comprehensive engineering analyses of energy, water, and maintenance cost savings opportunities. It also assists in providing financing for projects.

4. How is an Energy Performance Contract (EPC) different from a standard equipment specification and bid project?

An EPC relies on the technical expertise of an Energy Service Provider (ESP) to design and build a comprehensive and creative technical energy project. The ESP provides a guaranteed maximum price, rather than lowest bid, which allows it to negotiate prices with subcontractors to achieve the savings objectives without compromising quality. Also, with an EPC you buy a guaranteed performance result, not just new equipment. These contracts contain a guarantee of avoided utility and operating costs, along with guarantees of environmental comfort parameters, such as temperature, humidity, and carbon dioxide levels. Specifically, they provide compliance with applicable American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) and Illuminating Engineering Society (IES) standards.

5. Why is a comprehensive EPC project preferable to several single measure projects?

A comprehensive approach maximizes the capture of savings opportunities available from a specific building or set of buildings. It also provides financial leverage to do more expensive individual measures that might otherwise not be economical to do on a stand-alone basis. A comprehensive project allows the measures with shorter payback periods to subsidize those with longer paybacks. A common error is for a facility to do only the shorter payback measures first and postpone more expensive upgrades. The agency has then lost the opportunity to bundle measures to maximize both energy and cost savings.

6. Why not just implement these comprehensive efficiency projects with our own technical staff and capital funds?

This is an option that you need to consider. Do you have the resources – time, finances and expertise – to complete the project? Are there competing demands for these resources? Is the savings guarantee important to your project? Many entities do not have adequate capital funds appropriated to address many of their capital equipment replacement needs. They also may not have enough staff or the appropriate technical expertise to manage these complex projects in-house. There may be little incentive for in-house staff to accept the risk of project non-performance or financially guarantee the results of the project’s performance. Agency staff may not have the expertise to measure and verify savings or commission the equipment. Also, the traditional procurement process for capital projects may require the acceptance of low-bid equipment instead of a best-value project design that minimizes life-cycle costs. The traditional capital budget process may require as long as five years or more to do a project that an ESP could deliver in less than three years. The savings opportunities that are lost by waiting three extra years or more for capital funds to implement efficiency projects creates a huge cost of delay.

7. If our agency has been doing small efficiency projects for many years, haven’t we already picked the “low-hanging fruit” of these savings and eliminated the opportunity for a comprehensive energy efficiency project?

While this may be true in some cases, many owners are finding that even though they have spent thousands or even millions of dollars over the last 10-15 years on energy efficiency projects, allowing an ESP to evaluate their facilities comprehensively often results in their finding large untapped savings opportunities. One reason for this is the continual evolution of energy efficiency technologies. Lighting technologies have improved dramatically in the last five years. Also, the technology of direct digital control systems has improved and the opportunities to save energy, especially in larger buildings with larger equipment loads, may allow these new controls to provide economically feasible savings. It is recommended that all facilities be evaluated against an Energy Use Index (EUI) of British Thermal Units BTUs per square foot in order to determine their relative efficiency compared to similar types of buildings. Projects that may not have been economically attractive five years ago may be feasible today due to the higher utility costs.

8. In Step 1, how do I evaluate whether my facility is a good candidate for an energy savings performance contract?

The guideline document “Is EPC Right for Me?” is a good start to determine if your facility is a good candidate for an EPC. This document provides guidance on determining if the savings potential exists that would support an EPC project. The second document, “IGA Price Guidelines” provides a general overview of costs associated with an Investment Grade Audit. Most ESPs prefer a minimum project size of at least $1 million, but some will often work with projects as low as $200,000. Also, equipment near the end of its useful life, which has very high maintenance and repair costs, indicates the potential for significant operating cost savings. If there are significant problems with the operational control of building comfort, this provides another opportunity to create value by dramatically improving indoor environmental quality. Due to the long-term nature of financing EPC projects, it is important that the agency have a long-term plan to use the building in the future.

9. What are the main obstacles to ESPs delivering EPC projects to state agencies?

Lengthy government procurement processes extend the implementation cycle that increases ESP project delivery costs and the cost of delay for agencies. Multiple agency decision-makers who need to approve projects can delay the process of finalizing the energy services agreement and project financing. The entity needs to establish an in-house team that is focused on selecting a project based on the best value rather than low bid. The entity's team should include the facility manager, budget and finance staff, legal advisor, procurement officer, engineering staff and outside technical consultants if applicable. The entity facility and financial managers receive little or no recognition or incentives for championing EPCs. Rather than combining several agency facilities into a single procurement, many building managers focus projects on either one or just a few buildings, which makes the project’s economics less attractive. Financing energy performance contracts over periods of less than 15 years erodes the opportunity to leverage financing for capital projects.

10. What are the main benefits of EPC projects?

The most obvious economic benefits are utility and maintenance cost savings. The modernization and replacement of aging capital equipment, however, is probably an even more important project driver. Significant improvement in the indoor environmental quality resulting from better control of temperature, humidity, and ventilation is another benefit. Preserving scarce capital funds for priority projects that do not produce significant operating cost savings is an additional and important financial benefit.

11. What can I do to improve the EPC process and outcome for my project?

Identify a leader within your organization to carry the project and assign a support team including administration, finance, legal and operations. Determine a general understanding fof your facility needs, project goals, financial ability and economic requirements for the project. Include DEQ in the process through communication and the use of program documents. Develop a partnership ethic that emphasizes cooperation and clear understanding of each party’s roles and responsibilities. Full and timely communication between all relevant entities and ESP staff is crucial to project success. Keep good records of revisions to the project scope as the project evolves so no one is surprised at the final project scope. It is important to budget realistically for project commissioning, training, maintenance, and measurement and verification services. Making quality decisions at every step of the process will produce high quality project results. Review and approve a detailed plan for measuring project performance, including the role of agency staff in providing notice of building changes and utility data to the ESP. Consistently apply realistic standards and fairness as you negotiate the allocation of project responsibilities between the entity and the ESP.

12. When does EPC make the most sense?

EPC makes the most sense when facilities contain aging equipment that is nearing the end of its useful life, or when the buildings and central plant equipment have not received an Investment Grade Audit within the past five years. Newer equipment generally has higher efficiency, and it will also have many years of service left, so there is less economic benefit to replacing it.

13. What are the most common challenges for agencies pursuing an EPC for the first time?

General construction: EPCs are generally major construction projects and, as in other construction projects, you never really know what is behind the walls. There can be surprises at any stage of construction. Beyond that, the entity must have the expertise and manpower to manage a construction project occurring on their installation: approving schedules, providing building access, reviewing construction drawings and commissioning reports, and inspecting equipment installation prior to final acceptance.

Legal: Agency legal teams must review and approve contracts in a timely manner and procurement professionals perform the actual acquisition, and either of these can cause delays in awarding contracts if personnel are not familiar with the EPC process.

Technical: Technical oversight is often needed to make sure the project is right for the agency/building and that it is a good investment for the taxpayers. Entities may choose to hire an independent 3rd party to provide technical review of an ESP’s work.

14. How risky is Energy Performance Contracting for me?

Risks for EPC exist for both the ESP and the entity. Managing those risks includes being aware of the risks as well as mitigating the risks through contract negotiation. Using the documents provided by DEQ and modifying these through your legal staff will reduce your risk. Understand that the savings guarantee only applies to cost-saving measures specified in the contract. The main risk for the ESP is the performance of the project – that the guaranteed savings are realized. If energy savings don't materialize, the ESP pays the difference, not you.

15. What can I do to get started?

Act today and get those energy savings working for you by reviewing our 5-step process.

Step 2 - Energy Service Provider Selection Process

16. Why use a Request for Qualifications (RFQ) to create a qualified list of proposers?

Statute requires that the entity solicit proposals from at least three qualified ESPs. An RFQ lets you comprehensively survey and quickly evaluate ESP capabilities and experience. It is less risky and less costly for ESPs to respond to an RFQ because there is no requirement for them to spend time on-site. It is helpful to disclose in the RFQ the economic potential of projects for which the agency intends to issue an RFP so that ESPs have an incentive to respond to the RFQ.

19. What are allowable avoided costs in EPC?

Utility cost savings from reduced consumption of energy and are allowable avoided costs. In addition, avoided operations and maintenance costs and avoided equipment replacement costs, to the extent that these agreed upon by the entity, are also allowed. All guaranteed savings must be measureable.

Step 3 - Project Development

20. What are the entity's and ESP's roles in structuring the EPC project, such as scale and scope of work, setting the baselines, etc.?

An EPC is a partnership between an entity and an ESP. This allows for maximum flexibility during the process. The entity identified the facilities to be considered in Step 1and negotiated the scope with the ESP in Step 2. In Step 3 the entity reviews the progress of the IGA and their needs as they relate to the scope of the EPC project. The ESP responds to the needs of the entity, and puts together a project that meets those needs.

21. What is included in an energy performance contract?

An energy performance contract is the core agreement for the project. The Investment Grade Audit Report is the base for project scope as it identifies the cost-saving measures to be included in the project. The contract also includes the cost of the project (often a guaranteed maximum price), payment schedule, savings guarantee, baseline conditions and methodology for adjusting the baseline, methodology for measurement and verification of savings, and other components, each of which is subject to negotiation by the entity and the ESP. Certain components are required by statute and/or rules, but others are able to be customized for the specific project.

22. What are the disadvantages of using appropriated capital improvement funds for energy efficiency projects?

Capital funds are usually limited so energy efficiency projects face stiff competition from other budget priorities. The approval process for requesting new capital appropriations can be time consuming and expensive. Failure to obtain all the required capital funds for a comprehensive energy improvement project leads to piecemeal project implementation which can be more expensive. The crucial advantage of EPCs is that they use operating cost savings from existing budgets to pay for the financed cost of capital projects.

23. What are the most important factors to evaluate when reviewing the projected cash flow for an EPC project?

The accuracy, reasonableness, and documentation of utility and other operational savings amounts, are critical to a proper economic analysis. The interest rate and utility escalation rates have a significant effect on the project cash flow due to the length of these contracts (e.g. 20 years). It is important to be realistic, since choosing rates which are too high or low can skew the economic analysis of project feasibility. Also it is important to evaluate the difference between the level of savings being guaranteed and what is projected. For example, if the guaranteed savings are less than 90% of projected savings, it may raise concerns about the accuracy of savings calculations. If guaranteed savings are 100% of projected savings, there should be a significant amount of excess net savings in the cash flow to hedge project performance risk. These differences are also called project contingencies. Both the ESP and the entity may assign a contingency to the project finance package.

24. Can entities do multiple separate EPC projects on one facility?

Yes, they can. Of course, subsequent EPCs will have to address buildings and/or systems that were not addressed in the original EPC. For example, a large military base may phase its EPCs by area, addressing buildings in one area in the first phase, and another area in the second. Alternately, the entity may choose to lump multiple projects together; however, rules apply.

Step 4 - Project Implementation

25. How is project commissioning relevant to EPC projects?

Formal building commissioning is a systematic, interactive, and documented quality control process. Commissioning functionally tests and verifies the performance of a building system’s design, installation, operation, and maintenance procedures against the entities cost savings requirements. In the initial commissioning report, the ESP should certify that all newly installed equipment is operating and performing in accordance with the design parameters contained in the commissioning plan. Proper training of building operators and adequate documentation of the building’s systems are also essential components of an effective commissioning plan. The goal, which formal building commissioning shares with energy cost savings performance contracting, is to deliver verifiable building performance results. The commissioning plan should also address a continuous commissioning process to assure the performance of the energy conservation measures (ECMs) over the life of the project.

26. What are the main benefits of commissioning EPC projects?

Project commissioning provides the knowledge to optimize building equipment system operation for best efficiency. During project construction, commissioning provides more complete communication between the ESP and the entity. This results in shorter punch lists and fewer callbacks, as well as a faster and smoother equipment startup process. Commissioning extends the life of the equipment due to the verification of proper design, installation, and operation. Another valuable benefit from commissioning comes from better building control, which improves thermal comfort and indoor air quality. Again, training of facility staff is an important benefit of commissioning as it ensures that the operational savings will continue over time.

Step 5 - Project Performance

27. What are the benefits of measuring and verifying project operating cost savings?

Ongoing measurement of cost savings gives ESPs real feedback on the performance of their design, installation, and operation strategies. Monitoring savings over the contract term improves both the persistence and reliability of savings achieved. Savings measurement and verification helps agencies document the economic benefits of their projects to confirm that cost savings to pay for project financing is being realized.

28. What is the difference in Measurement & Verification (M&V) options? Where do we find information on them?

The International Performance Measurement and Verification Protocol (IPMVP) offers four options for measuring and verifying performance and energy and water savings. These options, titled A, B, C, and D, are the cornerstones of the standardized set of procedures contained in the IPMVP. In brief, Options A and B focus on the performance of specific measures and require measurement of key factors before and after the project. Option C assesses the energy savings at the whole-facility level by metering and analyzing utility use and costs before and after the implementation of ECMs. Option D is based on computer models of the energy performance of equipment or the whole facility, calibrated against historical utility consumption data to verify the accuracy of the simulation model.

State Guidance Document & IPMVP Public Library of Documents

29. How can Direct Digital Control (DDC) systems be used to manage EPC project performance?

The following are recommended strategies for using DDC systems to effectively manage project performance:

  • Select a system that has energy information data management capabilities.
  • Use trend log data to verify equipment operating compliance with energy saving schedules and operating parameters.
  • Store trend log data in a data warehouse so that it can be analyzed to refine equipment control strategies.
  • Design the trend log data to provide actionable information to building operators and maintenance contractors to optimize equipment performance.
  • Use the DDC system effectively for remote equipment operation fault detection and diagnostics.
  • Design equipment control alarms so that they are prioritized to provide valuable information.
  • Be sure that ESP staff or building maintenance staff is trained to properly use the information provided by the DDC system.
  • Establish clear lines of responsibility for who is accountable for taking corrective action based on the data provided by the DDC system.

30. What kind of equipment warranties should be expected in EPC?

Typically the ESP will provide a comprehensive equipment and labor warranty for one year from the date of beneficial use of major equipment systems installed as part of an EPC. Due to the fact that construction on large projects can range between 18 and 24 months, it is possible that some warranties could expire prior to completed project construction. It is often possible to negotiate to arrange for the ESP warranty period to run for one year from the date of project completion and acceptance. Specific equipment manufacturer’s warranties do vary significantly based on the type of equipment selected. The ESP should transfer all vendor equipment warranties to the entity. Entities need to do a careful evaluation of the expected value gained from purchasing extended warranties.

31. What happens if my project is not meeting the savings guarantee?

Although the ESP works diligently to ensure that the guaranteed savings are met, there are instances in which the savings fall short of the guarantee. The EPC contains language on measurement and verification and how adjustments are made to the baseline conditions (e.g. weather, occupancy, schedules). State law requires that the ESP pay the entity:

  • The costs of measurement and verification until guaranteed cost savings are achieved for all years in a term of consecutive years equal to the initial monitoring period (minimum of three years); and
  • The amount of any verified cost savings shortfall using the baseline rates, plus any escalation rates as allowed by rule.

The entity and ESP may also negotiate terms of measurement and verification reports and shortfall payments for the remainder of the EPC finance term.