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Getting Energy Projects Done Through Efficiency Services Agreements
Author: Scott Henderson, Metrus Energy

While much attention has been paid to power purchase agreements (PPAs) that finance solar PV systems on commercial and industrial facilities, many building owners will be surprised to know that there is a similar contract for energy efficiency retrofit projects. The contract is called an efficiency services agreement, and it was designed to address the challenges, or "pain points", that building owners commonly face when contemplating such projects.

Like a PPA, an efficiency services agreement (or "ESA") enables third-party ownership of a project, in which a developer designs, finances, implements and owns a package of efficiency measures at a customer facility. In return for implementing the project, the ESA provider charges the customer for any realized savings, at a rate that is less than their current cost of electricity, gas or water. This continues until the end of the contract period, typically 10 years, at which time a buyout option exists.

The ESA is a pay-for-performance contract, similar to a solar PPA. If the project does not produce measurable and verifiable savings, the customer owes nothing. More fundamentally, ESAs allow energy efficiency to be valued and sold as a resource, much like wind or solar power.

Although building owners recognize the benefits of implementing multi-measure energy efficiency retrofits, their implementation in the commercial and industrial (C&I) market has been historically low. Most C&I building owners grapple with a common set of "pain points" as they attempt to plan, fund and execute capital improvement projects. However, these pain points are often most acute when it comes to energy efficiency retrofits, and can conspire to scuttle even the most well designed project.

The list below includes eight pain points that C&I owners frequently cite when evaluating energy retrofit projects, as well as the specific ways in which ESAs address these issues:
  1. Customer's capital budget for facility improvements is constrained, due to competing needs for cash within the organization.

    ESAs involve zero up-front capital from the customer. ESA providers fully finance the project using their own sources of capital and cover all ongoing operations and maintenance (O&M) costs.

  2. Customer is unable to assume the performance and/or financial risk associated with a large, integrated energy project.

    ESA providers mitigate these risks for the customer by taking ownership of the assets and charging the customer only for realized energy savings.

  3. Customer must establish that energy savings have truly been realized.

    ESA providers, with their contractor partners, use only the most sophisticated and widely accepted protocols for measurement and verification (M&V) of energy savings.

  4. Customer lacks the time and resources necessary to undertake an integrated energy efficiency project.

    ESA providers typically handle all project development activities including overseeing engineering and construction, project financing, and providing O&M services during the contract period.

  5. The building energy efficiency market is heavily fragmented with a wide array of technologies and service models to choose from, often leading to confusion and/or inaction on the customer side.

    ESA providers manage project development, giving customers more time to focus on their core business. ESA providers partner with leading contractors to ensure reliable and efficient engineering and construction of projects, including equipment selection.

  6. Customer is worried about the impact of financing an energy efficiency project on their balance sheet.

    ESA payments often qualify as an operating expense for GAAP purposes, avoiding any negative impact on the customer's balance sheet. Since ESA providers fund projects using their own capital, the customer can reserve their credit capacity for core business needs.

  7. Customer is sensitive to rising energy prices.

    ESAs provide customer with a partial hedge against rising energy prices, by allowing them to lock in a known rate for a significant portion of their baseline energy consumption. Further, the rate is lower than the rate they currently pay.

  8. Customers of multiple facilities are hesitant to invest the time and energy to undertake a "one-off" project in a single building.

    ESAs are structured to accommodate funding of multiple projects with different scopes across a portfolio of buildings.

To date, most of the initial customers utilizing ESAs have been large industrial or institutional customers. Organizations such as these tend to own and occupy a large campus or portfolio of facilities, allowing them to replicate their first ESA project across other buildings. Don Hill, Facilities Director for BAE System's Electronic Systems Sector notes, "ESAs enable us to implement a range of efficiency measures at different sites in different states under the same program." That said, smaller companies can also benefit from ESAs, provided their credit and project size meet certain minimums.

By directly addressing the known pain points of customers, ESA providers such as Metrus Energy turn energy efficiency into a resource much like PPAs did for solar and wind energy. However, ESAs have the added benefit of helping customers upgrade their facilities from the inside out with new equipment and other improvements that are critical to their operations.

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About Our Sponsor: Metrus Energy develops and finances large-scale energy efficiency and combined heat and power (CHP) projects. We offer end-to-end services that cover everything from project development and operations and maintenance, to no-first-cost financing solutions. We identify opportunities for more efficient use and production of energy and put our own capital to work to get your project done.

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