Step 7: Consider a Guaranteed Energy Savings Performance Contract

Our previous Actions Cities Can Take to Support Energy Efficiency in Texas focused on strategies to develop energy management programs and assess energy efficiency opportunities. Yet actually procuring the efficiency improvements can be a bigger challenge for tight city budgets. Guaranteed Energy Savings Performance Contracting (GESPC) is a means to implement energy saving facility improvements while maintaining current utility budgets. The Texas Chapter of the Energy Services Coalition defines GESPCs as “a procurement method for energy, water, renewables, and resilient capital improvements that uses guaranteed utility and maintenance savings to pay for the cost of the improvements.”

GESPCs can be used by a number of markets but they are predominately used to procure facility improvements in cities, public schools and universities, and other public entities. Under the GESPC model, facility owners partner with an energy services company (ESCO). The ESCO performs a detailed audit of facilities, identifies energy and water saving measures, and creates a proposal from those audit findings. If the project moves forward to the implementation stage, the ESCO guarantees savings from installed measures.

GESPCs are attractive to public entities because calculated energy and operations savings are guaranteed by the Energy Services Company (ESCO) completing the work. In fact, a Texas Legislative Budget Board’s (LBB) 2019 Staff Report encourages state agencies to use Guaranteed Energy Savings Performance Contracting to reduce energy consumption. The report cites the success of a recent Texas Facilities Commission ESPC, which is expected to save the agency $9.6 million over its useful life. Furthermore, GESPCs are regulated by Texas statute, further bolstering the credibility of the process for public entities. Statute language details energy or water conservation or usage measures that may be included in a GESPC, methods of financing, procurement procedures, and terms of guarantees as well as other aspects of GESPCs. Statute governing state agency and public higher education GESPCs also stipulates a guideline and review process for GESPCs.[i]

GESPC’s are intended to be budget-neutral, meaning the savings from energy efficiency upgrades are equal to at least the cost of the upgrades, ESCO payment, and financing costs. In some cases savings may exceed project costs immediately, and often savings is enjoyed beyond the repayment period of the financing.[ii]

Figure 1: GESPCs are designed to be budget neutral where savings cover ESCO services, upgrades, and financing costs.

There are a variety of ways for a local government to procure energy efficiency upgrades. However, one city manager with experience on numerous ESPCs sees the two-fold value of performance contracting:

While a [performance contract] is beneficial as a funding mechanism by leveraging the savings from the improvements to cover project costs, an ESCO is also an expert and project manager in design/building projects with exposure to the product market for energy-efficiency measures and water meters. They are also able to customize a project’s scope based on the city’s needs and built environment.

The GESPC Process

The Texas State Energy Conservation Office (SECO) developed a set of guidelines to serve state agencies through the procurement and implementation of a Guaranteed Energy Service Performance Contract. By statute, the guidelines govern state agency contracts, and by extension serve as an essential reference for other public sector entities considering a GESPC. The guidelines offer recommendations and tools for the 9-step ESPC process.

Figure 2: The typical lifecycle of a GESPC

The Lifecycle of a Guaranteed Energy Savings Contract:

1. Build Internal Team: It is crucial to establish a strong, cross-functional, and multi-level team of city officials and staff to guide the city through the performance contracting process. In addition to the City Manager, finance executives, legal resources, and public works managers, additional stakeholders may be engaged throughout or at key points in contract development and implementation phases. These may include sustainability staff, the city’s purchasing office, building official, financial advisor, and any department heads of specific facilities to be upgraded.
2. Preliminary Audit: A preliminary audit gives you an idea of possible savings opportunities and if a GESPC is viable. They are generally provided at no cost to client and only take a few hours on site. The result of a preliminary audit is a project profile with estimated costs and savings.
3. Request for Qualifications: Statute dictates that procurement of an ESCO is a qualifications-based (rather than cost-based) process in Texas. The intent of the RFQ is to select a partner ESCO to develop the final scope of the contract based on the client’s needs and goals. GESPCs may also be procured through interlocal or cooperative purchasing agreements.
4. Select Partner ESCO: In selecting an ESCO it is important to consider their prior project experience and talk to references from numerous previous projects. Interviews are important to gauge personality fit with the ESCO. Include day-to-day ESCO project managers in interviews as they will work with city staff most closely.
5. Investment Grade Audit and Scoping: The final scope of guaranteed savings and pricing of the GESPC are determined through an investment grade audit (IGA). An IGA is an in depth assessment of facilities that can take 2-6 months. The IGA is done at the expense of the client and may be rolled into the financing of the overall GESPC.
6. Submissions: The ESCO submits the results of the investment grade audit and draft contract language and attachments including a Measurement and Verification plan and guarantee language. At this point careful negotiation of contract terms, specifics of M&V, and expectations of each party is essential.
7. Third Party Review: By statute, a qualified third party engineer must review the investment grade audit to confirm savings calculations meet engineering standards and are based in reasonable assumptions.
8. Project Construction: Energy and water savings retrofits are installed in client facilities. It is important to appoint an in-house project manager to oversee construction including review of submittals and respond to any ESCO questions. The client’s operations and maintenance staff should be trained on how to appropriately operate new equipment.
9. Post Construction: After installation of upgrades the GESPC enters into the post-construction measurement and verification (M&V) phase. Measurement and verification serves two key roles. It verifies that savings estimated in the investment grade audit are achieved and it is necessary to maintain the ESCO’s guarantee of savings. During M&V if actual savings are less than guaranteed savings the ESCO reimburses the client for unmet savings.

Financing a GESPC

Guaranteed Energy Savings Performance Contracts are not a financing mechanism and the ESCO does not provide financing for the upgrades. In Texas, GESPCs can be financed through a number of methods and therefore may be more accurately considered a contracting or procurement mechanism. A GESPC can also be self-funded by the city, avoiding financing entirely. The State Energy Conservation Office’s LoanSTAR Revolving Loan program, tax-exempt lease purchase agreements, bonds, and certificates of obligation may be used to finance the projects. Assessing and securing financing should happen in parallel to the ESCO selection and contract negotiation process.

There is no one best way to finance an ESPC. Experts advise to keep it simple and use trusted advisors. Rely on the advice of the city’s financial advisor, bond counsel, and Chief Financial Officer. As one city manager suggested, “there are enough nuances to explain with a [Performance Contract], so keeping the financing straightforward is best to not add additional complexity into the project.”

GESPC Resources

Procuring and managing a GESPC can be a complex and long-term process. Fortunately, many resources exist to assist in every step of a GESPC.

• National Energy Services Coalition: A public private partnership promoting the benefits of, providing education on, and serving as advocates for the widespread use of Guaranteed Energy Savings Performance Contracting (GESPC) by state and local governments. Resources include case studies, sample contract documents and other local government guidance.

• Texas Chapter of the Energy Services Coalition: Looking for one-on-one guidance on GESPCs? The local chapter of the Energy Services Coalition provides vendor neutral expert assistance to answer your questions about GESPCs. Contact the Chapter at txesc@energyservicescoalition.org.

• State Energy Conservation Office (SECO): SECO offers no-charge Preliminary Energy Assessments to evaluate energy savings opportunities. Their Energy Savings Performance Guidelines for State Agencies is step-by-step guidance for GESPCs in Texas. They also host linked to the statutes governing GESPCs.

• Department of Energy: The U.S. Department of Energy developed the Energy Savings Performance Contracting Toolkit as a comprehensive resource for establishment, implementation, and evaluation of ESPC projects. Resources include customizable Sample Documents and Contracts for every stage of an ESPC project, including RFQs, RFPs, Base Contracts, a full Energy Savings Performance Contract, and Financing Solicitations.

• Other SPEER Resources: The City Efficiency Leadership Council has developed a case study documenting Fort Worth’s successful GESPC. “Energy Savings Performance Contracting – From the Experts” is a compilation of “best practices” for each phase of a GESPC from industry experts. The City Efficiency Toolkit compiles tools and resources for various energy and water initiatives including GESPC resources features in the City Project Financing module.

[i] Statutes governing GESPCs: State Agencies (Title 10, Texas Government Code §2166.406), Public Higher Education (Title 3, Education Code §51.927), Cities and Counties (Title 9, Local Government Code §302), Public Schools (K-12) (Title 2, Education Code §44.901)

[ii] Title 9, Texas Local Government Code §302.004(b): “An energy savings performance contract shall contain provisions requiring the provider of the energy or water conservation or usage measures to provide a guarantee. If the term of the contract exceeds one year, the local government’s contractual obligations in any one year during the term of the contract beginning after the final date of installation may not exceed the total energy and water savings, the net operating cost savings, and the stipulated or agreed upon increase in billable revenues resulting from the estimated increase in meter accuracy, divided by the number of years in the contract term.”