Step 1 - Project Planning

Step 1 - Project Planning

The purpose of this step is to help you determine if energy performance contracting (EPC) is an appropriate procurement path for your needs. In this step you will compile data to assess cost-saving opportunities for a project, review available resources, and identify stakeholders for your project team. If you’re already communicating with an Energy Service Provider (ESP), they will likely be willing and able to help with some of these activities.

Learn about EPC Resources Available from DEQ

Contact our Energy Bureau to let us know of your plans for energy performance contracting. We can help you follow the state statutes and provide free technical review to help you get your project set up and avoid potential project pitfalls.

Communication is a key element throughout the EPC process. The process relies on you, the ESP, and our team for planning and reporting project activities. It is important to keep us informed early and throughout the process to ensure a successful EPC project. We are capable of providing assistance and technical review for all aspects of the EPC process.

You’ll discover DEQ and other EPC resources referenced throughout this Virtual Assistant. A full list of EPC program documents is available here.

Identify Potential Projects

Next you will determine if your facilities are a good fit for EPC based on potential project size, annual utility bills, comfort or maintenance problems, equipment age, funding options, and future plans for renovation or retention. An ESP may be helpful in assisting with this process.

Some guidelines related to cost savings and project size may be helpful in the pre-screening process. Here is an example:

  • Determine utility consumption and costs on an annual basis. You’ll need at least the last 12 months of utility bill data, and three years is preferable. As an example, let’s assume your utility costs are averaging $100,000 per year.
  • Utility cost savings for most EPC projects typically do not reduce your annual utility bills by more than 30 percent. A bill reduction range of 15-25 percent is common. In our example, assume the potential savings are 25 percent, or utility cost reduction from $100,000 to $75,000 per year.
  • Depending on the financing source, the finance term is typically 15 or 20 years. 20 years is the maximum set by Montana law. If we assume 20 years, this means your annual cost savings of $25,000 per year could cover financing payments totaling $500,000 ($25,000/year * 20 years).
  • The $500,000 in available financing includes financing costs such as interest, so the project itself will need to cost less than $500,000. A rule of thumb is the principal portion of the payments (the portion that pays back the cost of the project) will amount to 80 percent of the financing payments. So in this case, the principal payments would equal $400,000 ($500,000 * 80%).
  • Based on these assumptions, a facility with $100,000 in annual utility costs could potentially support a $500,000 financing package with a total EPC construction cost of $400,000.

For another guideline, our two-page Is EPC Right for Me? document will help you compare your facilities’ energy use to others and consider other important factors. The US Department of Energy (DOE) also offers a series of benchmarking sheets that show the average project statistics in several public market sectors.

Our Preliminary Assessment Workbook will help you through the process of identifying potential projects. This Excel-based tool helps you compile and organize general building information and utility data to assess energy savings potential. The workbook also provides baseline information your ESP will request from you as the project progresses.

Begin Outreach to Key Stakeholders

Support from multiple stakeholders is critical to a successful EPC project. Key staff may not be familiar with EPC, so gaining their support may take some time. Meet with them now to introduce EPC and its benefits, let them know what you’re doing, and lay the groundwork for their support. The following two US Department of Energy (DOE) one-page handouts may be helpful in these meetings:

It is important to identify and get your key stakeholders involved early in every EPC project. We recommend developing both an internal and external stakeholder team. Key internal stakeholders listed below are described by function, since the names of the departments with these functions often vary:

  • Authorizing Power (Mayor, City Council, School Board, etc.) – These are the people who will ultimately need to approve the project. They share many of the same interests as the stakeholders below.
  • Finance Function – A financial officer will sign off on the project; get this person involved early. This is a good time to discuss all possible financing options and get a feel for what might work. Finance people will tend to focus on the cash flows and risks, so the performance guarantee and the financial strength of the ESP will be of particular interest.
  • Budget Function – Your budget officer will be responsible for managing the budget and payments to the ESP. Although the EPC project will reduce your utility cost, a new account is needed to transfer these cost savings toward repayment of the project financing. Budget staff will ensure that the combination of your post-project utility costs plus project financing payments will be less than or equal to your pre-project utility costs.
  • Legal Function – The project will be governed by two contracts: the Investment Grade Audit (IGA) and project proposal contract followed by the Energy Performance Contract. The legal function will need to approve both contracts while also ensuring you follow EPC program statute and rules.
  • Contracting/Purchasing Function – This party will typically need to be involved in the "Request for Proposal" process when selecting an ESP.
  • Facilities Function – Staff responsible for operating and maintaining the buildings to be improved know the most about the facilities and will take lead roles working with the ESP.

Key external stakeholders should include your utility provider, the State Energy Office, and your selected ESP:

  • Utility – Your gas, electric, and water utilities representatives frequently provide rebates, grants, or other incentives for installing energy-saving equipment. It’s important to discover what incentives are available early in the process, since this revenue can augment project financing and can have an impact on the potential size of the project.

An important factor in winning project support is to tailor your outreach to the audience, speaking their language and highlighting the benefits most likely to be meaningful to them. For instance, in talking with finance people, you will want to lead with financing benefits (long-term reduction in operating expenses, financing options that are not treated as debt, etc.). US DOE’s EPC Opportunities and Advantages offers additional credibility.

Define Project Goals

Next define and outline your project goals. Common EPC goals focus on project components that have cost-savings measures targeting reduced energy or water consumption or reduced operating and maintenance costs. Common goals include:

  • Energy cost savings
  • Operating cost savings
  • Maintenance cost savings
  • Positive cash flow (cost savings exceed financing and other costs)
  • Attractive financing that avoids the need for capital or additional operating budget allocations
  • Inclusion of a critical non-energy capital improvement in the project, with cost savings from the energy improvements helping to pay for the non-energy improvements
  • Heightened awareness of occupants about energy waste
  • Resolution of deferred maintenance issues by replacing old equipment before it fails and disrupts operations

Keep in mind the interests of your stakeholders and supporters. While most project goals should be quantified, it may only be feasible to give rough estimates or ranges at this stage of project development.

If you’re not already talking with an ESP, it’s never too soon to begin identifying ESPs that might be interested in working with you, and to reach out to them for input. They may be able to help with identifying realistic goals. Keep in mind that Montana law requires you to solicit proposals from at least three qualified ESPs so this is a good time to begin finding a project partner.

Explore Financing Strategies

The goal at this point is not to nail down financing, but to simply explore what financing options might be available. You’ll want to talk with your finance and budget departments to learn the possibilities. US DOE’s guide on How to Finance an EPC may also be helpful.

The options fall into two categories: funding and financing. Funding involves a source of money that does not need to be repaid, such as a capital budget allocation. Financed revenue will be repaid from the project cost savings improvements. ESP’s can offer information on how financing is generally managed for EPC projects, and your finance people will likely have preferences for how to finance the work.

It’s important to note that you will need to be ready to pay for the IGA if the project does not go beyond the IGA phase (e.g., the IGA determines that a project is not viable or you decide not to proceed for some other reason). In most cases, the cost of the IGA is folded into the overall project cost and financed or funded accordingly.

Choosing a payment option is not an either/or question. It may make sense to use funding sources to pay for a portion of the project and to finance the rest. You can even choose to break your project into deferred maintenance and energy savings categories and procure construction through a bid and EPC separately. Funding sources for deferred maintenance or break-out projects can be especially useful for funding measures that might not be well-suited to financing, such as those with longer paybacks. Even a relatively small capital budget appropriation will help, and once your finance people get some experience with EPC, they may be more comfortable with a larger project the next time.

Although funding through a capital budget allocation may be preferable to long term project financing, financing is required for at least a portion of the project to qualify as an EPC in Montana. Work with your finance people to get a feel for which options might be suitable for your circumstances. To view potential financing options please visit the EPC Funding and Financing Information page.

Develop Scope of Potential Work

Next, collect more detailed information about your facility to include in the Request for Proposal (RFP) you will issue to select an ESP from the pool of pre-qualified ESPs. The goal here is to attract ESPs by providing them with an idea of what your project might involve. You may have already collected much of this information using the EPC Preliminary Assessment Workbook. If not, now is the time to do so.

Start with the buildings that are most likely to have savings opportunities that justify an EPC project. The information to collect includes details such as:

  • Buildings: age, size, as-built construction drawings and specifications, and drawings from any renovation projects.
  • Equipment: age, make, model numbers, efficiency ratings, and service records for major equipment, including HVAC, lighting, hot water heaters, and plug loads (computers, copiers, desk lamps, etc.), giving special attention to older and less-efficient equipment.
  • Utility information: list utility service providers, account numbers, meter locations, and energy use for at least 12 continuous months, and preferably for the last three years.
  • Potential improvements: identify and list potential improvements based on equipment age, efficiency ratings, maintenance problems, etc.

Decision Point #1 - Continue?

You should now have enough information to decide whether to move forward with selecting an ESP to perform an IGA. Important questions to answer at this point include:

  • Will the likely energy cost savings support repayment?
  • Are you confident that funding or financing can be arranged?
  • Can your entity pay for an IGA if the project does not move beyond that point, (e.g., the IGA determines that a project is not viable or you decide not to proceed for some other reason)?
  • Does the project have the support of the necessary stakeholders?
  • Do you have the resources required for the RFP process?
  • Have any ESPs expressed an interest in the project?

If the answer to all of the above questions is "yes," congratulations! The next step involves selecting an ESP and negotiating the project contract terms. Proceed to Step 2 ESP Selection Process.