Step 3 - Project Development

Step 3 - Project Development

Next, your selected ESP will conduct an IGA and deliver a project proposal. If you decide to proceed at that point, you’ll nail down the details and sign a contract with the ESP to perform the work.


Investment Grade Audit (IGA)/Project Proposal

The IGA is an interactive process between your organization and the ESP. The ESP gathers and analyzes information and presents its findings to you throughout the IGA process. In return, it is in the best interest of your organization to ensure that the ESP has access to the information and facilities needed to gather the required data.

The IGA process serves as the foundation of EPC and is critical to the success of the project. The data collected during this process is essential to determining baseline consumption, cost-saving measure (CSM) savings, and actual savings.

Initial Analysis

The ESP conducts a preliminary analysis of your facility in which the ESP staff will collect data and background information related to facility operations and energy use for the past three years. This initial survey will involve a variety of activities including interviews with the facility manager(s), staff, and building occupants, as well as a review of all major energy-using equipment. If necessary, the ESP will also perform “late-night” surveys outside of normal use hours to confirm system and occupancy schedules. Your entity will need to accommodate all reasonable requests made by the ESP in pursuit of gathering quality usage data. From this survey, the ESP will develop and deliver an initial analysis, identifying potential cost-saving measures in your facility (regardless of cost-effectiveness), a project baseline, and cost and savings estimates. Furthermore, this report should detail the potential for the successful development of an EPC and provide a brief list of recommended CSMs for further analysis.

At this point you will want to determine whether these preliminary findings fulfill your organization’s requirements. If not, you may want to terminate the process according to the terms in the IGA contract. Keep in mind, however, that if you terminate you may remain responsible for the cost of the IGA as it has been performed to this point.

Further Analysis and Audit Report / Project Proposal

Assuming the initial findings do fulfill your needs, the ESP will then continue with the IGA, analyzing the agreed-upon measures, developing cost estimates, and identifying utility savings. The results of this analysis will then be compiled into a final report. The report will provide an engineering and economic basis for the negotiation of a potential EPC between you and the ESP. The report will include:

  • A detailed description of your facility (i.e., existing equipment, systems, and conditions)
  • Baseline consumption and rates for energy, water, and other utilities
  • Detailed information regarding proposed cost-saving measures including estimated costs and guaranteed savings
  • Preliminary commissioning and measurement and verification (M&V) plans
  • Project cash flow analysis including guaranteed savings, O&M savings, M&V costs, and other economic factors regardless of guarantee status

It is recommended that you submit a copy of this report to DEQ for an independent review of the findings. Doing so will help ensure that the processes set down in the contract were fulfilled and that all energy and cost calculations, proposed improvements, and M&V plans are reasonable. Note that submission is mandatory if state funds are being used to finance the project.

Upon receiving the final report, you will need to sign and submit a copy of the Certificate of Acceptance for the IGA report to the ESP and DEQ.

Decision Point #2 – Continue?

Once the IGA report has been accepted, you will need to decide whether to proceed with an EPC or explore alternative means to complete the project or portions thereof. In most cases, you will move to the next step to begin implementation of measures identified in the IGA report. You have the option to:

  • Proceed with the EPC as recommended in the IGA report
  • Proceed with the EPC with modifications (possibly reduced scope) to keep the project within the financial ability of your entity or requirements of Montana’s EPC program
  • Terminate the EPC process and proceed with implementation of measures through design-bid-build or other construction process. At this point the savings guarantee is terminated. An alternative procurement method may also be required as the EPC procurement method is only permitted for EPC projects.
  • Terminate the EPC and do nothing.

The IGA contract specifies a timeframe for your decision of whether to proceed to the EPC. Typically this period is 90-120 days. If you decide to terminate the EPC process at this point, your entity will be responsible for paying the ESP for the IGA under the terms specified in the IGA Contract.

Decide on Scope of Project

Assuming you’ve decided to proceed, you will work with the ESP and your owner’s representative to scope the project. Factors to consider in this process include:

  • How big a project is your entity interested in taking on?
  • Are there any funding/financing limitations on amount or term?
  • Are there any non-energy upgrades that you want to include?
  • Do you want the ESP to take responsibility for operation and maintenance?

One of the more complex questions involves the varied payback periods of different cost-saving measures (CSMs). CSMs with shorter paybacks, like lighting, are easy to justify and will be feasible with 5-10 year financing. Longer paybacks may require up to the maximum of 20-year financing. CSMs with even longer paybacks can often be justified by looking at the combined payback period for all the CSMs. For instance, if one CSM has a payback period of five years, and another CSM of equal cost has a payback period of 25 years, the combined payback is less than mine years. Your finance people, ESP, and owner’s representative will be familiar with the interplay of payback periods, loan terms, and other factors that may have a bearing on which measures to include.

Decide on Funding and/or Financing

You’ll want to work closely with your finance department to make the final decision of how to pay for the project. Your ESP may also be able to offer helpful information on how financing is generally managed. Alternatively, you may decide to issue a financing solicitation in order to introduce competition. US DOE’s Solution Center includes a Model Documents for an Energy Savings Performance Contract Project page that includes a Financing Solicitation section with templates at the bottom of the page.

Decide on Measurement and Verification (M&V) Plan

M&V is crucial to all EPC projects, so the plan for M&V should be set as early as possible in the project for the greatest success. The purpose is to accurately measure whether the improvements are delivering the guaranteed energy savings. The cost for M&V is included in the overall project cost and is paid for by the entity during the initial monitoring period (minimum of three years in Montana). M&V needs to follow the guidelines established in the International Performance Measurement and Verification Protocol (IPMVP). See Measurement and Verification (M&V) Guidelines for more information.

A strong M&V plan should define precisely what “energy savings” means, and specifically how savings will be measured. Furthermore, the M&V plan should address how unforeseen events (weather variations, building use changes, etc.) are to be handled. Typically, a preliminary M&V plan will have been developed during the IGA process with a finalized version developed as a part of the EPC contract process. In general, a good M&V plan should:

  • Identify and establish utility baselines for the project
  • Identify appropriate M&V options for different cost-saving measures that are in line with your project goals
  • Specify quality control procedures for data collection and timely performance monitoring
  • Provide cost-effective M&V methods to verify project performance.

Negotiate Contract with ESP

You will want to use the Energy Performance Contract and EPC Contract Attachment: Schedules & Exhibits as templates. It’s important you understand each part of the contract and the services to be provided. The contract should be reviewed by your legal staff. Be sure open-book pricing is included to ensure you receive good value.

The guarantee is the cornerstone of an EPC contract. It covers the annual debt service and requires the ESP to pay any remaining balance if expected annual savings are not achieved.

In addition, be sure to review maintenance requirements and services. In order to guarantee performance or savings, an ESP often requires maintenance on new equipment. Additional services can include reviewing operational strategies, reporting on equipment operating problems, and repairing and replacing equipment.

Prior to signing, you will need to submit the EPC to DEQ for review. For state-owned facilities, DEQ may forward the contract to the Architecture and Engineering Division. The ESP is responsible for sending an electronic copy of the executed contract to DEQ. The ESP will also work with you to develop a marketing overview of the project for sharing as part of DEQ marketing efforts.