Guest Column

Energy contracting can offer big savings

February 8, 2013
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Energy performance contracts offer unique opportunities for building owners to significantly improve their energy efficiency at little to no long-term net cost due to the energy savings created by these improvements.

The practice, which has been around in some form for decades, allows industrial and commercial building owners, colleges and universities, municipal and state governments, schools, hospitals and other players to reap tremendous savings by reducing energy usage and utility consumption.

Energy performance contracting can involve more than saving on electrical usage. It may include improvements in lighting, heating, air conditioning, ventilation, insulation, roofing and windows, and more efficient responses to demands for energy, renewable energy usage, water and sewer systems and sustainable material usage.

To date, the industry has been largely dominated by public actors — although that is starting to change as private design, engineering and construction companies are beginning to better understand and embrace the cost-saving potential for their customers.

Energy vs. traditional

Energy performance contracting is similar to traditional construct projects in that an owner will hire a party to engineer and install or retrofit improvements to a building to increase the energy or other operational efficiencies of the building. The important difference, however, is that energy performance projects will typically include:

  • An audit or evaluation of the ways to improve the efficiency of the facility.
  • A guaranty of energy or other operational savings.
  • A post-project mechanism to measure whether the savings have been achieved.

In some cases, the contractor or other party assists in the financing and together there is a shared “profit” on the savings. In other cases, there may be a rebate on the project costs if the efficiencies have not been recognized within a certain period of time.

While many businesses might benefit, the best candidates have one or more of the following attributes:

  • Higher than average annual utility costs, such as a manufacturer.
  • Consistent facility use, such as large apartment complexes.
  • Stable occupancy, such as an office building with longer-term leases.
  • Access to utility records for the past several years.
  • A facility scheduled to undergo a significant capital improvement.

Larger — and older — buildings with complex systems often offer the most significant opportunities for energy savings from this comprehensive approach.

The process

Evaluation and benchmarking: The process should start with an energy audit to identify and estimate potential efficiency improvements, estimate their cost and then develop the specifications and timetable for making those improvements. The audit also should determine the method to use to measure the success of improved efficiencies between the pre-project and post-project performance of the building.

Enter into a contract: Next, the facility owner should enter into an installation or construction contract for services, usually with a guarantee that certain savings will be achieved or that the project will be paid by the energy savings from the improvements. In other cases, the contract will be more akin to a capital lease or “lease-to-own” arrangement where the energy service company retains ownership of the equipment installed. The equipment will be paid for through a rental payment that is based in part on a profit-sharing factor on the energy savings realized.

Post-project completion training and measurement: The engineer, contractor, utility or other provider may provide — or train a facility’s staff to provide — operation and maintenance services for the affected portions of the facility and will monitor and verify savings and later energy use. Accurately measuring energy use before and after the improvements are made is of paramount importance to everyone involved since these measurements will help determine whether the energy performance contract was successful and potentially what each party must pay the other.

With energy performance contracting growing in popularity, the range of services and contracting arrangements options are expanding. It is now possible for many different types of private actors to find an energy performance contracting arrangement that may be beneficial for them.

Melissa N. Collar is a licensed Realtor and a partner at Warner Norcross & Judd LLP, where she chairs the firm’s Real Estate Services Group. She can be reached at mcollar@wnj.com.

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