Introduction to Energy Performance Contracting

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Target Audience-Biggest electricity users in government buildings
major reference for EPC process flow-North Carolina
Guide to Energy Performance Contracting

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Introduction to Energy Performance Contracting

  1. 1. Seminar on Energy Efficiency Initiatives for Government Buildings ENERGY PERFORMANCE CONTRACTING &FINANCING OPTIONS FOR IMPLEMENTATION By Zaini Abdul Wahab MAESCO 19th December 2012 Putra World Trade Centre Kuala Lumpur
  2. 2. Outline1. Introduction to MAESCO2. What is EPC?3. EE & EPC potentials4. EPC Process For Building Facilities Owner5. Options For EPC Project Financing6. What’s Next?7. The Conclusions
  3. 3. Introduction ToMalaysia Association Of Energy Service Companies
  4. 4. What is ESCO? An Energy Service Company(ESCO)  Develop and implement turn key, comprehensive energy efficiency projects.  ESCOs offer performance-based contracts (i.e., contracts that tie the compensation of the ESCO to the energy savings generated by the project) as a significant part of their business To gain accreditation, ESCOs must demonstrate the technical and managerial competence to design and implement projects involving multiple technologies such as:  Lighting  Motors and Drives  HVAC Systems  Control Systems  Building Envelope Improvements …at building facilities
  5. 5. What is Energy Services?
  6. 6. Scope of Energy Services ESCOs must also demonstrate the ability to provide the full range of services required for a comprehensive energy efficiency project covering:  Energy Audit  Consultancy  Design of energy efficient systems  Implementation Project Financing  Implementation and Project Management  Construction management  Energy performance monitoring and verification performance  Testing and commissioning  Operation and maintenance
  7. 7. Background of MAESCO  The Malaysian Industrial Energy Efficiency Improvement Project (MIEEIP) components includes ESCO Development Programs and ESCO participation in EE Technology Demonstration Projects  Industrial was chosen as the sector in which the greatest commercial and environmental impact could be achieved  MAESCO was registered with the Malaysian Registrar of Society in September 2000  Incorporated in conjunction with the launching of the MIEEIP by a Government’s implementation agency, PTM (Energy Centre of Malaysia) which is now known as Malaysia Green Technology Corporation(Green Tech Malaysia)
  8. 8. MAESCO’s Constitutional Objectives1. To develop recognized ESCO Business models in collaboration with Government and Private Sector2. To actively promote the activity of energy cost reduction and efficiency standards in the industrial, commercial and public sector3. To oversee the well being of its members4. To facilitate and do all things necessary towards developing successful energy related projects5. To introduce related products and services for the industry6. To foster healthy co-existence amongst members through ethical professional practices7. Ensure quality & reliable of services by members
  9. 9. Organizational Structure Honorary Advisor / Internal Auditor President Ir. Dr. KS Kannan Ar. Zulkifli Zahari General Admin Anuar b. Mat Saad Vice President, Policies & Int. Liaison Ir. Ong Ching Loon Admin / Secretariat Honorary Secretary / Afiza Mohd Sa’ad Webmaster & Historian Dharamarajah Treasurer & Finance Accountant Tuan Hj. Mohd Noor Harun Mohd Izzuddin Asst. Honorary Secretary & Salahudin Membership and Practice Koay Keong Tay Publicity & Training Government Business Green Promotions Iskandar Internal Auditor Liaison Development Technology Kevin Yap Ir. Kumarason S MajidiZaini Abdul Wahab Ahmad Zaky Dr. Dixon Chai Kandiah
  10. 10. Membership 60 Registered Members Categories Consist of  Energy Performance Energy Performance Contractors (EPC) Contracting (EPC)  Energy Auditors Non Energy Performance  Energy Management Trainers Contracting (EPC)  Energy Efficient Equipment Manufacturers/Suppliers Affiliate  Energy Consultants Associate  Energy Management Systems/Technologies International  Total Facilities Management
  11. 11. Key Activities & Involvement In EE Industry Development Energy Management Training Courses for Energy Managers Preparatory Workshop for Registered Electrical Energy Manager (REEM) Application Rental of Equipment for energy audit and M&V Awareness and promotional programs Visits And Dialogues With Government and Key Stakeholders Industrial Energy Efficiency For Malaysian Manufacturing Sector (IEEMMS) :UNIDO-SMECORP Green and Renewable Energy Institute(GREENi) with UTeM, Melaka
  12. 12. WHAT IS ENERGYPERFORMANCE CONTRACTING ( EPC)?
  13. 13. EPC Definition “A single procurement contract for engineering, construction, installation, start-up, measurement, verification, operation and maintenance that specifies performance energy saving improvements in buildings/facilities that will result in sufficient avoidance energy cost and enhanced recovery from utility systems to pay for the cost of equipment, materials, labour, subcontracts, fees, insurance, bonds, permits, debt service, and all cost associated with the implementation of the contract scope over the life of the contract.” In simple terms,EPC is a project approach that utilizes the energy savings andrevenue gains to pay for the project cost. - Land-of-Sky Regional Council, USA
  14. 14. Why EPC? : Building Owner Energy cost savings & improvementswith NO UPFRONT CAPITAL - investsavings achieved into other projects  ESCO supplies, install, maintain and retain on-going operational roles in energy performance ESCO to identify Energy Saving measurement for each ESM overMeasures (ESMs) to replace / modify the financing/contractual terms.existing inefficient systems or/andequipment  Use future energy ,cut operating cost, be more competitive and The remuneration of ESCOs is improved comfort/productivitydirectly tied to the energy savingsachieved  Positive environmental impacts & Energy cost saving is shared between reduced environmental footprintESCO and the building owner withpayment schedule with a single-sourceresponsibility
  15. 15. EE & EPC POTENTIALS
  16. 16. Overall Rankings in Asean EE Market 16
  17. 17. Biggest Electricity Users For Government Buildings (Sep 2009-Oct 2010) Others Hospitals (States, 20% Agencies) 32% 10% saving ± RM270 millions /year Ministries Universities 19% 29% Total Consumption Building Nos Total Bill (RM/year) (kWh/year)Hospitals 22 367,587,657 130,640,653Universities 25 543,961,738 193,324,002Ministries 25 360,592,831 128,154,692Others States & 56 603,464,085 214,471,136Agencies 128 1,875,606,311 666,590,483 Estimated Total TNB Bill for Total Consumption Total Bill government buildings (kWh/year) (RM/year) (Sep 2010-Aug 2011) 7,896,508,329 2,726,767,394
  18. 18. Potential Areas for EPC Projects Energy Conservation at buildings facilities Renewable & Alternative Air Conditioning, Refrigeration & Energy Sources Ventilation Systems  Chillers, AHUs, fans, pumps  Operational, & equipment controls  Utilization of Feed-in  System optimization Tariff(FiT) for RE sources Lighting Systems  Solar Photo Voltaic(PV)  Buildings(interior & exterior),public lighting  Building Integrated PV System  Operational controls  PV Power Plant  Types of lamp technologies Demand Controls  Biomass & Biogas Power Plant Internal electricity distribution system  Waste-to-energy systems
  19. 19. Successful EPC Project(1): Private Commercial Shopping ComplexAreas of Implementation:1) Transformers2) Cooling System – Chillers, Cooling Towers, AHUs, CHW & CDW Pumps3) Lighting System – Internal, External & Parking4) Demand Controls Total Actual Saving Achieved = RM 1,495,000/year
  20. 20. Successful EPC Project(2): Private Industrial Warehouse Application Areas: - Fluorescent Lamps - High bay Lighting - HID Total Annual Actual Saving Achieved = 42.2% = 3,283,200 kWh, = RM 920,000
  21. 21. EPC Potential: Pilot Project for Public Lighting -Comparison Before & AfterImplementation (Before) Conventional HID 250W (After) LED 150W
  22. 22. Options To Implement Energy Saving Measures MEASURES • Management With LOW/ Directives NO COST • Implementation of In-house EnMS- to ensure initiativesMinimal Cost sustainability of energy cost reduction Savings initiativesMEASURES Expert • Priorities of budget -WITH HIGH core business/operations assistance & COST • Investment risks investment from • Limited human resources ESCOs throughSignificant Cost & expertise EPC model Savings
  23. 23. EPC PROCESS FORBUILDING FACILITIES OWNER
  24. 24. EPC Process Flow & Key Elements Appoint ESCO Sign EPC Contract
  25. 25. 1.DEVELOP NEED BASIS
  26. 26. 2. DEFINE PROJECT
  27. 27. 3. ESCO PREQUALIFICATIONS
  28. 28. 4. REQUEST FOR PROPOSAL
  29. 29. RFP Steps1. PREPARATION OF PROPOSAL BASIS ANDPROCEDURESReview ESCO Prequalification DocumentFormal Communications of IntentRFP Document 2. ISSUANCE OF RFP 3. SITE VISIT AND SHARING BASIC INFORMATION 4. PREPARATION OF SELECTION CRITERIA
  30. 30. RFP Document To gain important  RFP Outline evaluation information  Introduction about the proposers  Overview covering:  Scope of Work  Owner’s Preliminary  Administrative Information Scope of Work and Project • General Contract Terms Definition and Conditions  Communicating owner • Insurance and Licensing Requirements and Agreements Expectations in the RFP • ESCO Response Format  Sharing Energy Service • Evaluation Criteria Agreement Format in RFP • Technical Profile of the facilities  Proposal Response
  31. 31. 5. EVALUATE PROPOSALAppointment of ESCO
  32. 32. Proposal Evaluation Method Steps Criteria1. Initial screening  Prequalification rating/minimum requirements2. Scoring  Project team qualification  Experiences in relevant project  Technical approach3. Reference interviews  Management plan  Credit worthiness4. Oral presentation with  Full range of capabilities given outline and Q&A  Financial benefits  Cost competetiveness
  33. 33. Example: Evaluation of ESCO
  34. 34. 6. ENERGY AUDIT & ENERGY SERVICES AGREEMENTAppointment of ESCO
  35. 35. 7. NEGOTIATE PERFORMANCE CONTRACT TERMS • Sharing amount (%) • Duration of contract • Baseline, M&V method • Detailed terms & conditionsSign EPC Contract &Implement Project
  36. 36. 8. MONITOR, MEASURE & VERIFY PERFORMANCE To calculate the ACTUAL savings achieved! Factors should be considered to reduce dispute in EPC Contract  Commitment from the client  Factors affecting savings performance  Valuating savings uncertainty  Minimum operating conditions  Energy prices/tariff rates  Verification by A third party  Baseline modification/review(non-routine)  Balancing uncertainty and costs
  37. 37. Options For Energy Baseline & Savings Calculation Method Advantages DisadvantagesUtility billing history Low cost •Effects of weather , occupancy, other changes Data already available may mask savings Independent data Represent all effects of •May be unreliable unless ESMs savings are significant compared to normal bill Account for interactive variation effects Isolate effects of ESMsSystem/Equipment •Higher cost Very accurate for lightingsub-metering measures •Misses interactive effects Results are more predictable(low risk)
  38. 38. Baseline: Baseline year from electricity bill data (kWh)(kWh)
  39. 39. Example: Energy saving calculated by the difference between abaseline year and a subsequent year from electricity bill (kWh)
  40. 40. Baseline : Building Monthly Load Profile (kW) from sub-metering 40
  41. 41. Baseline : Building monthly electricity consumption profile(kWh) from sub-metering 41
  42. 42. Baseline : Building monthly load profile(kW) for AHU from sub-metering 42
  43. 43. Baseline : Monthly electricity consumption profile(kWh) for AHU from sub-metering 43
  44. 44. Example: Savings calculated based on actualmeasurement from sub-meters
  45. 45. Modifying/Reviewing Baseline To establish standards for “Materials” changes which may reasonable expected to change energy consumption trend in the facility  Occupied square footage, operating hours Trust , good relationship  Facility’s energy equipment/operating parameters other than the ESCO equipment & effective communication between  Energy equipment, other than ESCO equipment, ESCO & building owner that malfunctions, or is repaired, or replaced in a is crucial to identify the manner that increases or decreases energy needs to modify/review consumption; baseline!  Other actions taken by the facility owner that may reduce or increase energy use; and,  Discovery of an error in the original baseline, in which case the change would be retroactive
  46. 46. OPTIONS FOREPC PROJECT FINANCING
  47. 47. Key imperative for financingCertainty: • Revenue certainty and ring fencing • Precedence Clarity: • Project size and feasibility study • Procurement framework Commitment: • Counter party • Institutional arrangementSource: KPMG
  48. 48. Financing Options for EPC 1. GUARANTEED 2. SHARED SAVINGS Model SAVINGS Model • The loan goes on the client’s • The loan goes on ESCO’s balance sheet balance sheet 3. Through a Special Purpose Vehicle(SPV) created specially for the purpose In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client
  49. 49. Guaranteed Savings Model Loan Project Fees FACILITIES ESCOBANK OWNER Repayment Project Design& Implementation
  50. 50. Shared-Savings Model EE PROJECT Energy saving Energy saving share share (90%-70%) (10%-30%) Financing Loan FACILITIESBANK ESCO OWNER Project Design& Repayment Implementation
  51. 51. How the Model Works? Guaranteed Savings Shared Savings Facilities owner takes out  Facilities owner does not take “normal” loan loan (will not appear on balance (will appear on balance sheet) sheet) ESCO guarantees loan can be  ESCO finances project: takes repaid with savings performance & credit risk ESCO pays difference if  Facilities owner pays higher % minimum savings not met to ESCOMain advantage: Main advantage:ESCO can undertake more Independent of Facilities owner ’sprojects borrowing capacity
  52. 52. Through a Special Purpose Vehicle(SPV)
  53. 53. Case Study: Financing building retrofit projects through EPC Different Steps in Energy Performance Contracting Initial Owner Preliminary Assessment Selection of 1 ESCO Investment Grade Audit Final Contract Signed Commitment by ESCOs • Harmonization • Scope of Work • Conformance • Detailed Energy Engineering • Project Implementation • Project • Qualitative & Quantitative • Savings/price Guarantee • Loan Underwriting Savings/Pricing/Technologies evaluation • Service Proposal Performance • Qualified Measures Contract • Performance Guarantee • Walk-away Compensation Energy Savings Financials: Savings used to pay for The ESCO scheme project and remaining to customer Additional cost avoidance due to Guaranteed Savings (GS) Structure energy price increase Performance Contracting Agreement Customer (energy savings guarantee) Savings used to pay for project savings Business Risk Performance Risk Energy & Operational costs Payment Baseline Client (building owner) ESCO Reduced costs due to service performance based solutions Financing Payment Financing Agreement (fixed- repayment schedule) Time (Years) Bank (lender / investor) Duration of Start of Customer to Program Program retain all savings Credit Risk Source: KPMG research
  54. 54. Example :ESCO Fund in Thailand
  55. 55. WHAT’S NEXT?
  56. 56. Proposed Support Programs by thegovernment for EPC Implementation  To create a special revolving fund for EPC Projects with lower interest rates – to kick-off and develop the EPC market  Development of in-house capacity in technical & financial evaluation of EE&EC Projects for  Authorized agency  financial institutions  Development and acceptance of standard technical evaluation, monitoring and performance verification criteria for EE&EC Projects  With by technical experts from recognized professional/industry bodies/ associations  Development of and acceptance of standard evaluation for funding and risk assessment criteria for EE&EC Projects  Sharing of experiences in successful investments in EPC projects through seminars/dialogues • (results, payback period) from people in business community who have experienced it • Criteria of viable EE projects • Competency of ESCOs
  57. 57. Proposed Actions Required for Financial Institutions  To specialize in green technologies such as EE  EE has wide range of technologies & applications with different levels of difficulties in technology(implementation, reliability, ease of operation and durability Due to…  Insufficient proven domestic case studies by banks  EE project require time and specific expertise to be assessed  EE funds started in other countries such as Thailand & USA has developed in-house expertise for banks in evaluating EE projectsSource: Green Prospects Asia, June 2012
  58. 58. Expected Impacts From EPC Implementation IMPROVED •Energy Efficiency •Competitiveness /profits PERFORMANCE •Environmental IMPLEMENTATIONINTRODUCTION & & SUPPORT MONITORING, quality AWARENESS MEASURES MEASUREMENT & VERIFICATION REDUCED •Energy consumption & costs •CO2 emissions CREATED •Business & job opportunities •More experts/workers from EE industry •New source of economic growth & Direct Domestic Investments
  59. 59. THE CONCLUSIONS EPC The potentials in Malaysia is still relatively “UNTAPPED” Interested parties must have the same understanding & goals on how to make EPC works ESCOs must have/develop competency & capability to ensure successful EPC projects implementation More successful EPC projects are required to attract more attention of building owners & banks/investors
  60. 60. THE CONCLUSIONS FINANCING FOR EE PROJECTS  is more complex than rebate or grant programs  potential for leverage and for low/no energy subsidies  provide new opportunities for overcoming barriers to the adoption of EE measures  should be viewed as a complement to other strategies such as building energy codes, appliance EE standards, or utility rebate programs  successful financing program should support, and not be a barrier to, customer participation - financing should remain streamlined, easy- to-access, and quick
  61. 61. THANK YOU FOR YOUR ATTENTION! zaini@cnsgroup.com.my 019 2152700 www.maesco.org.my www.goingee.blogspot.com

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