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• Investigate district cooling/heating • Explore selling your central plant • Calculate square foot pricing • Buy comfort, Btus or GPMs; not kWhs • Outsource your Operations and Maintena

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GEORGE R OWENS, P.E C.E.M.

Energy and Engineering Solutions, Inc

24.0 INTRODUCTION

“ Utility Deregulation,” “Customer Choice,” “

Un-bundled Rates,” “Re-regulation,” “Universal Service

Charge,” “Off Tariff Gas,” “ Stranded Costs,”

“Competi-tive Transition Charge (CTC),” “Caps and Floors,” “ Load

Profi les” and on and on are the new energy buzzwords

They are all the jargon are being used as customers,

utilities and the new energy service suppliers become

profi cient in doing the business of utility deregulation

Add to that the California energy shortages and

rolling blackouts, the Northeast and Midwest outages of

2003, scandal, rising energy prices, loss of price

protec-tion in deregulated states and you can see why utility

deregulation is increasingly on the mind of utility

cus-tomers throughout the United States and abroad

With individual state actions on deregulating

natural gas in the late 80’s and then the passage of the

Energy Policy Act (EPACT) of 1992, the process of

de-regulating the gas and electric industry was begun

Be-cause of this historic change toward a competitive arena,

the utilities, their customers, and the new energy service

providers have begun to reexamine their relationships

How will utility customers, each with varying

degrees of sophistication, choose their suppliers of

these services? Who will supply them? What will it

cost? How will it impact comfort, production, tenants

and occupants? How will the successful new players

bring forward the right product to the marketplace to

stay profi table? And how will more and better energy

purchases improve the bottom line?

This chapter reviews the historic relationships

between utilities, their customers, and the new energy

service providers, and the tremendous possibilities for

doing business in new and different ways

The following fi gure portrays how power is

gen-erated and how it is ultimately delivered to the end

customer

1 Generator – Undergoing deregulation

2 Generator Substation – See 1

3 Transmission System – Continues to be regulated

by the Federal Energy Regulatory Commission (FERC) for interstate and by the individual states for in-state systems

4 Distribution Substation – Continues to be lated by individual states

regu-5 Distribution Lines – See 4

6 End Use Customer – As a result of deregulation, will be able to purchase power from a number

of generators Will still be served by the local

“wires” distribution utility which is regulated by the state

24.1 AN HISTORICAL PERSPECTIVE OF THE ELECTRIC POWER INDUSTRY

At the turn of the century, vertically integrated electric utilities produced approximately two-fi fths of the nation’s electricity At the time, many businesses (nonutilities) generated their own electricity When utili-ties began to install larger and more effi cient generators and more transmission lines, the associated increase in convenience and economical service prompted many industrial consumers to shift to the utilities for their electricity needs With the invention of the electric motor came the inevitable use of more and more home ap-pliances Consumption of electricity skyrocketed along with the utility share of the nation’s generation

The Power Flow Diagram

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The early structure of the electric utility industry

was predicated on the concept that a central source of

power supplied by effi cient, low-cost utility generation,

transmission, and distribution was a natural monopoly

In addition to its intrinsic design to protect consumers,

regulation generally provided reliability and a fair rate

of return to the utility The result was traditional rate

base regulation

For decades, utilities were able to meet increasing

demand at decreasing prices Economies of scale were

achieved through capacity additions, technological

ad-vances, and declining costs, even during periods when

the economy was suffering Of course, the monopolistic

environment in which they operated left them virtually

unhindered by the worries that would have been created

by competitors This overall trend continued until the

late 1960s, when the electric utility industry saw

decreas-ing unit costs and rapid growth give way to increasdecreas-ing

unit costs and slower growth

The passage of EPACT-1992 began the process of

drastically changing the way that utilities, their

custom-ers, and the energy services sector deal (or do not deal)

with each other Regulated monopolies are out and

cus-tomer choice is in The future will require knowledge,

fl exibility, and maybe even size to parlay this changing

environment into profi t and cost saving opportunities

One of the provisions of EPACT-1992 mandates

open access on the transmission system to “wholesale”

customers It also provides for open access to “exempt

wholesale generators” to provide power in direct

compe-tition with the regulated utilities This provision fostered

bilateral contracts (those directly between a generator

and a customer) in the wholesale power market The

regulated utilities then continue to transport the power

over the transmission grid and ultimately, through the

distribution grid, directly to the customer

What EPACT-1992 did not do was to allow for

“re-tail” open access Unless you are a wholesale customer,

power can only be purchased from the regulated utility

However, EPACT-1992 made provisions for the states

to investigate retail wheeling (“wheeling” and “open

access” are other terms used to describe deregulation)

Many states have held or are currently holding

hear-ings Several states either have or will soon have pilot

programs for retail wheeling The model being used is

that the electric generation component (typically 60-70%

of the total bill), will be deregulated and subject to full

competition The transmission and distribution systems

will remain regulated and subject to FERC and state

Public Service Commission (PSC) control

A new comprehensive energy bill, EPACT-2005, was

signed into law in 2005, just as this edition was being

fi nalized Look for expanded discussion of EPACT-2005

in future editions of this chapter This bill affects energy production, including renewables, energy conservation, regulations on the country’s transmission grids, utility deregulation as well as other energy sectors Tax incen-tives to spur change are key facets of EPACT-2005

ELECTRIC INDUSTRY DEREGULATION TIME LINE

1992 - Passage of EPACT and the start of the debate

1995 & 1996 - The fi rst pilot projects and the start of

special deals Examples are: The automakers in Detroit, New Hampshire programs for direct purchase including industrial, commercial and residential, and large user pilots in Illinois and Massachusetts

1997 - Continuation of more pilots in many states and

almost every state has deregulation on the islative and regulatory commission agenda

leg-1998 - Full deregulation in a few states for large users

(i.e., California and Massachusetts) Many states have converged upon 1/1/98 as the start of their deregulation efforts with more pilots and the fi rst 5% roll-in of users, such as Pennsylva-nia and New York

2000 - Deregulation of electricity became common for

most industrial and commercial users and began

to penetrate the residential market in several states These included Maryland, New Jersey, New York, and Pennsylvania among others See

fi gure 24.1

2002/3- Customers have always had a “backstop” of

regulated pricing Now that the transition ods are nearing their end, customers are faced with the option of buying electricity on the open market without a regulated default price

peri-2003 - During the summer, parts of the northeast and

upper Midwest experience a massive blackout that shuts down businesses and residential customers The adequacy of the transmission system is blamed

2005 - EPACT-2005 becomes law

24.2 THE TRANSMISSION SYSTEM AND THE FEDERAL ENERGY REGULATORY COMMISSION’S (FERC) ROLE IN PROMOTING COMPETITION IN WHOLESALE POWER

Even before the passage of EPACT in 1992, FERC played a critical role in the competitive transformation

of wholesale power generation in the electric power industry Specifi c initiatives include notices of proposed

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rulemaking that proposed steps toward the expansion

of competitive wholesale electricity markets FERC’s

Order 888, which was issued in 1996, required public

utilities that own, operate, or control transmission lines

to fi le tariffs that were non-discriminatory at rates that

are no higher than what the utility charges itself These

actions essentially opened up the national transmission

grid to non-discretionary access on the wholesale level

(public utilities, municipalities and rural cooperatives)

This order did not give access to the transmission grid

to retail customers

In an effort to ensure that the transmission grid

is opened to competition on a non-discriminatory

ba-sis, Independent System Operators (ISO’s) are being

formed in many regions of the country An ISO is an

independent operator of the transmission grid and is

primarily responsible for reliability, maintenance (even if

the day-to-day maintenance is performed by others) and

security In addition, ISO’s generally provide the

follow-ing functions: congestion management, administerfollow-ing

transmission and ancillary pricing, making transmission

information publicly available, etc

24.3 STRANDED COSTS

Stranded costs are generally described as legitimate,

prudent and verifi able costs incurred by a public utility or

a transmitting utility to provide a service to a customer

that subsequently are no longer used Since the asset or capacity is generally paid for through rates, ceasing to use the service leaves the asset, and its cost, stranded In the case of de-regulation, stranded costs are created when the utility service or asset is provided, in whole or in part,

to a deregulated customer of another public utility or transmitting utility Stranded costs emerge because new generating capacity can currently be built and operated

at costs that are lower than many utilities’ embedded costs Wholesale and retail customers have, therefore, an incentive to turn to lower cost producers Such actions make it diffi cult for utilities to recover all their prudently incurred costs in generating facilities

Stranded costs can occur during the transition to

a fully competitive wholesale power market as some wholesale customers leave a utility’s system to buy power from other sources This may idle the utility’s existing generating plants, imperil its fuel contracts, and inhibit its capability to undertake planned system expansion leading to the creation of “stranded costs.” During the transition to a fully competitive wholesale power market, some utilities may incur stranded costs

as customers switch to other suppliers If power ously sold to a departing customer cannot be sold to

previ-an alternative buyer, or if other meprevi-ans of mitigating the stranded costs cannot be found, the options for recover-ing stranded costs are limited

The issue of stranded costs has become contentious

in the state proceedings on electric deregulation Utilities

Retail access is either currently available to all or some customers or will soon be

available Those states are Arizona, Connecticut, Delaware, District of Columbia, Illinois,

Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,

Oregon, Pennsylvania, Rhode Island, Texas, and Virginia

In Oregon, no customers are currently participating in

the State’s retail access program, but the law allows

nonresidential customers access Yellow colored states are

not actively pursuing restructuring Those states are

Ala-bama, Alaska, Colorado, Florida, Georgia, Hawaii, Idaho,

Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota,

Mississippi, Missouri, Nebraska, North Carolina, North

Dakota, South Carolina, South Dakota, Tennessee, Utah,

Vermont, Washington, West Virginia, Wisconsin, and

Wyoming In West Virginia, the Legislature and Governor

have not approved the Public Service Commission’s

re-structuring plan, authorized by HB 4277 The Legislature

has not passed a resolution resolving the tax issues of

the PSC’s plan, and no activity has occurred since early

in 2001 A green colored state signifi es a delay in the

restructuring process or the implementation of retail

ac-cess Those states are Arkansas, Montana, Nevada, New

Mexico, and Oklahoma California is the only blue colored

state because direct retail access has been suspended.

*As of January 30, 2003, Department of Energy, Energy

Information Administration

Figure 24.1 Status of State Electric Industry Restructuring Activity*

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have argued vehemently that they are justifi ed in

recover-ing their stranded costs Customer advocacy groups, on

the other hand, have argued that the stranded costs

pro-posed by the utilities are excessive This is being worked

out in the state utility commissions Often, in exchange

for recovering stranded costs, utilities are joining in

settle-ment agreesettle-ments that offer guaranteed rate reductions

and opening up their territories to deregulation

24.4 STATUS OF STATE ELECTRIC

INDUSTRY RESTRUCTURING ACTIVITY

Electric deregulation on the retail level is

deter-mined by state activity Many states have or are in the

process of enacting legislation and/or conducting

pro-ceedings See Figure 24.1

24.5 TRADING ENERGY

-MARKETERS AND BROKERS

With the opening of retail electricity markets in

several states, new suppliers of electricity have

devel-oped beyond the traditional vertically integrated electric

utility Energy marketers and brokers are the new

com-panies that are being formed to fi ll this need An energy

marketer is one that buys electricity or gas commodity

and transmission services from traditional utilities or

other suppliers, then resells these products An energy

broker, like a real estate broker, arranges for sales but

does not take title to the product There are independent

energy marketers and brokers as well as unregulated

subsidiaries of the regulated utility

According to The Edison Electric Institute, the

energy and energy services market was $360 billion in

1996 and was expected to grow to $425 billion in 2000

To help put these numbers in perspective, this market is

over six times the telecommunications marketplace As

more states open for competition, the energy marketers

and brokers are anticipating strong growth Energy

sup-pliers have been in a merger and consolidation mode for

the past few years This will probably continue at the

same pace as the energy industry redefi nes itself even

further Guidance on how to choose the right supplier

for your business or clients will be offered later on in

this chapter

The trading of electricity on the commodities

market is a rather new phenomenon It has been

rec-ognized that the marketers, brokers, utilities and end

users need to have vehicles that are available for the

managing of risk in the sometimes-volatile electricity

market The New York Mercantile Exchange (NYMEX) has instituted the trading of electricity along with its more traditional commodities A standard model for an electricity futures contract has been established and is traded for delivery at several points around the country

As these contracts become more actively traded, their usefulness will increase as a means to mitigate risk An example of a risk management play would be when a power supplier locks in a future price via a futures or options contract to protect its position at that point in time Then if the prices rise dramatically, the supplier’s price will be protected

24.6 THE IMPACT OF DEREGULATION

Historically, electricity prices have varied by a factor of two to one or greater, depending upon where

in the county the power is purchased See Figure 24.2 These major differences even occur in utility jurisdic-tions that are joined The cost of power has varied because of several factors, some of which are under the utilities control and some that are not, such as:

• Decisions on projected load growth

• The type of generation

• Fuel selections

• Cost of labor and taxes

• The regulatory climateAll of these factors contribute to the range of pricing Customers have been clamoring for the right to choose the supplier and gain access to cheaper power for quite some time This has driven regulators to impose utility deregulation, often with opposition from the incumbent utilities

Many believe that electric deregulation will even

out this difference and bring down the total average

price through competition There are others that do not share that opinion Most utilities are already tak-ing actions to reduce costs Consolidations, layoffs, and mergers are occurring with increased frequency As part of the transition to deregulation, many utilities are requesting and receiving rate freezes and reductions in exchange for stranded costs

One factor has remained a constant until the early 2000’s Customers have always had a “backstop” of regulated pricing until recently Now that the transition periods are nearing their end, customers are faced with the option of buying electricity on the open market without a regulated default price The risks to custom-ers have increased dramatically And, energy consultants

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and ESCOs are having a diffi cult time predicting the

direction of electricity costs

All of this provides for interesting background and

statistics, but what does it mean to energy managers

interested in providing and procuring utilities,

com-missioning, O&M (operations and maintenance), and

the other energy services required to build and operate

buildings effectively? Just as almost every business

en-terprise has experienced changes in the way that they

operate in the 90’s and 2000 and beyond, the electric

utilities, their customers and the energy service sector

must also transform Only well-prepared companies will

be in a position to take advantage of the opportunities

that will present themselves after deregulation Building

owners and managers need to be in a position to actively

participate in the early opening states The following

questions will have to be answered by each and every

company if they are to be prepared:

• Will they participate in the deregulated electric

market?

• Is it better to do a national account style supply

arrangement or divide the properties by region

and/or by building type?

• How will electric deregulation affect their

relation-ships with tenants in commercial, governmental

and institutional properties?

• Would there be a benefi t for multi-site facilities to partake in purchasing power on their own?

• Should the analysis and operation of electric regulation efforts be performed in-house or by consultants or a combination?

de-• What criteria should be used to select the energy suppliers when the future is uncertain?

24.7 THE TEN-STEP PROGRAM TO SUCCESSFUL UTILITY DEREGULATION

In order for the building sector to get ready for the new order and answer the questions raised above, this ten-step program has been developed to ease the transition and take advantage of the new opportunities This Ten Step program is ideally suited to building own-ers and managers as well as energy engineers that are

in the process of developing their utility deregulation program

Step #1 - Know Thyself

• When do you use the power

• Distinguish between summer vs winter, night vs day

Figure 24.2 Electricity Cost by State

Average Revenue from Electric Sales to Industrial Consumers by State, 1995 (Cents per Kilowatt-hour)

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• What load can you control/change

• What $$$ goal does your business have

• What is your 24 hr load profi le

• What are your in-house engineering, monitoring

and fi nancial strengths

Step #2 - Keep Informed

• Read, read, read—network, network, network

• Interact with your professional organizations

• Talk to vendors, consultants, and contractors

• Subscribe to trade publications

• Attend seminars and conferences

• Utilize internet resources—news groups, WWW,

E-mail

• Investigate buyer’s groups

Step #3 - Talk to Your Utilities (all energy types)

• Recognize customer relations are improving

• Discuss alternate contract terms or other energy

services

• Find out if they are “for” or “agin” deregulation

• Obtain improved service items (i.e., reliability)

• Tell them your position and what you want Now

is not the time to be bashful

• Renegotiate existing contracts

Step #4 - Talk to Your Future Utility(ies)

• See Step #3

• Find out who is actively pursuing your market

• Check the neighborhood, check the region, look

nationally

• Develop your future relationships

• Partner with Energy Service Companies (ESCOs),

power marketing, fi nancial, vendor and other

part-ners for your energy services needs

Step #5 - Explore Energy Services Now

(Why wait for deregulation?)

• Implement “standard” energy projects such as

lighting, HVAC, etc

• Investigate district cooling/heating

• Explore selling your central plant

• Calculate square foot pricing

• Buy comfort, Btus or GPMs; not kWhs

• Outsource your Operations and Maintenance

• Consider other work on the customer side of the

meter

Step #6 - Understand the Risks

• Realize that times will be more complicated in the

• Determine the value of a fl at price for utilities

• Be wary of losing control of your destiny-turning over some of the operational controls of your en-ergy systems

• Realize the possibility some companies will not be around in a few years

• Determine how much risk you are willing to take

in order to achieve higher rewardsStep #7 - Solicit Proposals

• Meet with the bidders prior to issuing the Request For Proposal (RFP)

• Prepare the RFP for the services you need

• Identify qualifi ed players

• Make commissioning a requirement to achieve the results

Step #8 - Evaluate Options

• Enlist the aid of internal resources and outside consultants

• Narrow the playing fi eld and interview the fi ists prior to awarding

nal-• Prepare a fi nancial analysis of the results over the life of the project—Return on Investment (ROI) and Net Present Value (NPV)

• Remember that the least fi rst cost may or may not

be the best value

• Pick someone that has the fi nancial and technical strengths for the long term

• Evaluate financial options such as leasing or shared

Step #9 - Negotiate ContractsRemember the following guidelines when negotiat-ing a contract:

• The longer the contract, the more important the escalation clauses due to compounding

• Since you may be losing some control, the contract document is your only protection

• The supplying of energy is not regulated like the supplying of kWhs are now

• The clauses that identify the party taking bility for an action, or “Who Struck John” clauses, are often the most diffi cult to negotiate

responsi-• Include monitoring and evaluation of results

• Understand how the contract can be terminated and what the penalties for early termination areStep #10 - Sit Back and Reap the Rewards

• Monitor, measure, and compare

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• Don’t forget Operations & Maintenance for the

Aggregation is the grouping of utility customers

to jointly purchase commodities and/or other energy

services There are many aggregators already formed or

being formed in the states where utility deregulation is

occurring There are two basic forms of aggregation:

1 Similar Customers with Similar Needs

Similar customers may be better served via

aggre-gation even if they have the same load profi les

• Pricing and risk can be tailored to similar

cus-tomers needs

• Similar billing needs can be met

• Cross subsidization would be eliminated

• Trust in the aggregator; i.e BOMA for offi ce

building managers membership

2 Complementary Customers that May Enhance the

Total

Different load profi les can benefi t the aggregated

group by combining different load profi les

• Match a manufacturing facility with a fl at or

inverted load profi le to an offi ce building that

has a peaky load profi le, etc

• Combining of load profi les is more attractive to

a supplier than either would be individually

Why Aggregate?

Some potential advantages to aggregating are:

• Reduction of internal administration expense

• Shared consulting expenses

• More supplier attention resulting from a larger

bid

• Lower rates may be the result of a larger bid

• Lower average rates resulting from combining

dis-similar user profi les

Why Not Aggregate?

Some potential disadvantages from aggregating

are:

• If you are big enough, you are your own

aggrega-tion

• Good load factor customers may subsidize poor

load factor customers

• The average price of an aggregation may be lower than your unique price

• An aggregation cannot meet “unique” customer requirements

Factors that affect the decision on joining an tion

aggrega-Determine if an aggregation is right for your situation by considering the following factors An understanding of how these factors apply to your operation will result in an informed decision

• Size of load

• Load profi le

• Risk tolerance

• Internal abilities (or via consulting)

• Contract length fl exibility

• Contract terms and conditions fl exibility

• Regulatory restrictions

24.9 IN-HOUSE VS OUTSOURCING

The end user sector has always used a combination

of in-house and outsourced energy services Many large managers and owners have a talented and capable staff

to analyze energy costs, develop capital programs, and operate and maintain the in-place energy systems Oth-ers (particularly the smaller players who cannot justify

an in-house staff) have outsourced these functions to

a team of consultants, contractors, and utilities These relationships have evolved recently due to downsizing and returning to the core businesses In the new era of deregulation, the complexion of how energy services are delivered will evolve further

Customers and energy services companies are ready getting into the utility business of generating and delivering power Utilities are also getting into the act

al-by going beyond the meter and supplying chilled/hot water, conditioned air, and comfort In doing so, many utilities are setting up unregulated subsidiaries to pro-vide commissioning, O&M, and many other energy services to customers located within their territory, and nationwide as well

A variety of terms are often used: Performance Contracting, Energy System Outsourcing, Utility Plant Outsourcing, Guaranteed Savings, Shared Savings, Sell/Leaseback of the central plant, Chauffage (used in Europe), Energy Services Performance Contract (ESPC), etc Defi nitions are as follows:

• Performance Contracting

Is the process of providing a specifi c improvement

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such as a lighting retrofi t or a chiller change-out,

usually using the contractor’s capital and then

pay-ing for the project via the savpay-ings over a specifi c

period of time Often the contractor guarantees a

level of savings The contractor supplies capital,

engineering, equipment, installation,

commission-ing and often the maintenance and repair

• Energy System Outsourcing

Is the process of divesting of the responsibilities

and often the assets of the energy systems to a

third party The third party then supplies the

commodity, whether it be chilled water, steam,

hot water, electricity, etc., at a per unit cost The

third party supplier then is responsible for the

improvement capital and operations and

mainte-nance of the energy system for the duration of the

contract

Advantages

The advantages of a performance contract or an

energy system outsourcing project revolves around four

major areas:

1 Core Business Issues

Many industries and corporations have been

re-examining all of their non-core functions to

deter-mine if they would be better served by outsourcing

these functions Performance contracting or

out-sourcing can make sense if someone can be found

that can do it better and cheaper than what can be

managed by an in-house staff Then the building

managers can oversee the contractor and not the

complete operation This may allow the building

to devote additional time and resources to other

core business issues such as increasing revenues

and reducing health care costs

2 Monetization

One of the unique features of a performance

con-tract or an energy system outsourcing project is

the opportunity to obtain an up front payment

There is an extreme amount of fl exibility available

depending upon the needs The amount available

can range from zero dollars to the approximate

current value of the installation The more value

placed on the up front payment will necessarily

cause the monthly payments to increase as well as

the total amount of interest paid

3 Deferred Capital Costs

Many electrical and HVAC energy systems are at

an age or state of repair that would necessitate

the infusion of a major capital investment in the near future These investments are often required

to address end-of-life, regulatory and effi ciency sues Either the building owner or manager could provide the capital or a third party could supply

is-it and then include the repayment in a commodis-ity charge plus interest; (“there are no free lunches”)

4 Operating CostsThe biggest incentive to a performance contract

or an energy system outsourcing project is that if the right supplier is chosen with the right incen-tives, then the total cost to own and operate the central plant can be less The supplier, having expertise and volume in their core area of energy services, brings this to reality With this expertise and volume, the supplier should be able to pur-chase supplies at less cost, provide better-trained personnel and implement energy and maintenance saving programs These programs can range from capital investment of energy saving equipment to optimizing operations, maintenance and control programs

Disadvantages

Potentially, there are several disadvantages to undertaking a performance contract or an outsourcing project The items identifi ed in this section need to be recognized and mitigated as indicated here and in the Risk Management section

1 Loss of Control

As with any service, if it is outsourced, the service

is more diffi cult to control The building is left with depending upon the skill, reliability and dedication

of the service supplier and the contract to obtain satisfactory results Even with a solid contract; if the supplier does not perform or goes out of busi-ness, the customer will suffer (see the Risk Man-agement section) Close coordination between the building and the supplier will be necessary over the long term of the contract to adjust to changing conditions

2 Loss of FlexibilityUnless addressed adequately in the contract, changes that the building wants or needs to make can cause the economics of the project to be ad-versely affected Some examples are:

• Changes in hours of operation

• New systems that require additional cooling

or heating, such as an expansion or

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renova-tion, conversion of offi ce or storage space to

other uses, additional equipment requiring

additional cooling, etc

• Scheduling outages for maintenance or

re-pairs

• Using in house technicians for other services

throughout the building If this situation

oc-curs in current operation, provisions for

ad-ditional building staff or having the supplier

make the technician available needs to be

ar-ranged If additional costs are indicated, they

should be included in the fi nancial analysis

3 Cost Increases

This only becomes a disadvantage if the contract

does not adequately foresee and cover every

con-tingency and changing situation adequately To

protect themselves, the suppliers will try to put

as much cost risk onto the customer as possible

It is the customer and the customer’s consultants

and attorneys responsibility to defi ne the risks and

include provisions in the contract

Financial Issues

The basis for success of a performance contract

or an energy system outsourcing project is divided

between the technical issues, contract terms, supplier’s

performance and how the project will be fi nanced These

types of projects are as much (if not more) about the

fi nancial deal than the actual supplying of a commodity

or a service (See Chapter 4 -Economic Analysis and Life

Cycle Costing) The answers to some basic questions will

help guide the decision making process

• Is capital required during the term of the project?

The question of the need for capital is one of the

major driving factors of a performance contract

or an energy outsourcing project Capital invested

into the HVAC and electrical systems for effi ciency

upgrades, end of life replacements, increased

reli-ability or capacity and environmental

improve-ments can be fi nanced through the program

• Who will supply the capital and at what rate?

The answer to the question of who will be

supply-ing the capital should be made based upon your

ability to supply capital from internal operations,

capital improvement funds, borrowing ability and

any special financing options such as tax free

bonds or other low interest sources If capital is

needed for other uses such as expansions and other

revenue generating or cost reduction measures,

then energy system outsourcing may be a good choice

• Is there a desire to obtain a payment up front?

As stated previously, a performance contract or energy system outsourcing project presents the opportunity to obtain a payment up front for the assets of the HVAC and electrical systems How-ever, any up-front payment increases the monthly payment over the term of the contract and should

be considered similar to a loan

• Does the capital infusion and better operations generate enough cash fl ow to pay the debt?

This is the sixty-four dollar question Only by performing a long-term evaluation of the eco-nomics of the project with a comparison to the

in house plan can the fi nancial benefi ts be fairly compared A Net Present Value and Cash Flow analysis should be used for the evaluation of a performance contract or energy system outsourc-ing project It shows the capital and operating im-pact of the owner continuing to own and operate

a HVAC and electrical systems This is compared

to a third party outsourced option The analysis should be for a long enough period to incor-porate the effect of a major capital investment This is often done for a 20-year period This type

of analysis would allow the building owner or manager to evaluate the fi nancial impact of the project over the term of the contract Included in the analysis should be a risk sensitivity assess-ment that would bracket and defi ne the range of results based upon changing assumptions

Other Issues

1 Management and Personnel Issues

• Management - Usually, an in-house manager will need to be assigned to manage the supplier and the contract and to verify the accuracy of the billing

An in-house technical person or an outside tant should have the responsibility to periodically review the condition of the equipment to protect the long-term value of the central plant

consul-• Personnel - Existing employees need to be ered This may or may not have a monetary conse-quence due to severance or other policies If there

consid-is an impact, it needs to be refl ected in the analysconsid-is

It would usually be to the building’s benefi t if the years of knowledge and experience represented by the current engineers could be transferred to the

Trang 10

new supplier Another personnel concern is the

effect on the moral of the employees due to their

fear of losing their jobs

2 Which services to outsource?

Where there are other services located in the

cen-tral plant that are not outsourced, these need to be

identifi ed in the documents These could include

compressed air for controls, domestic water, hot

water, etc A method of allocating costs for shared

services will need to be established and managed

through the duration of the contract

3 Product specifi cations

The properties of the supplied service need to be

adequately described to judge if the supplier is

meeting the terms of the contract Quantities like

temperature, water treatment values, pressure, etc

needs to be well defi ned

4 Early Termination

There should be several options in the contract for

early termination The most obvious is for lack of

performance In this case, lack of performance can

range from total disruption of service to not

meet-ing the defi ned values of the commodity to lettmeet-ing

the equipment deteriorate There should also be

the ability to have the building owner terminate

the contract if the building owner decides that they

want to take the central plant in-house or fi nd

an-other contractor If the supplier is in default, then

a “make whole” payment would be required of the

building to terminate the contract in this case

Risk Management

As with any long-term commitment, the most

important task is to identify all of the potential risks,

evaluate their consequences and probability and then

to formulate strategies that will mitigate the risks This

could be in the form of the contract document language

or other fi nancial instruments for protection One of the

most important areas of risk management mitigation is

to choose a supplier that will deliver what is promised

over the entire contract period

1 How to Choose a Supplier

In addition to price, the following factors are

im-portant to the success of a project and should be

evaluated before selecting a supplier

be adequately addressed, such as:

• Maintenance and repair costs

• Areas served (i.e., expansions/renovations/contractions)

• Regulations; building specifi c, environmental, OSHA, local codes, etc

• Utility deregulation

4 Other Risks

• The impact of planned or unplanned outages

of the central plant

• The consequences of the supplier not being able to maintain chilled water temperature or steam pressure

• “Take or Pay” This provision of a contract requires the customer to pay a certain amount even if they do not use the commodity

• Defaults and Remedies

24.10 SUMMARY

This chapter presented information on the ing world of the utility industry in the new millennium Starting in the 80’s with gas deregulation and the pas-sage of the Energy Policy Act of 1992 for electricity, the method of providing and purchasing energy was changed forever Utilities began a slow change from vertically integrated monopolies to providers of regu-lated wires and transmission services Some utilities

Trang 11

chang-continued to supply generation services, through their

unregulated enterprises and by independent power

producers in the deregulated markets while others sold

their generation assets and became “wires” companies

Customers became confused in the early stages of

de-regulation, but by the end of the 1990’s some became

more knowledgeable and successful in buying

deregu-lated natural gas and electricity

In the early 2000’s, diffi culties have developed in

the deregulated utility arena California rescinded

de-regulation (except for existing contracts) after shortages,

rolling blackouts and price increases sent the utilities

into a tailspin The great blackout of 2003 raises concerns

about the reliability of the transmission system And the

loss of regulated rates provides more challenges to

cus-tomers and their consultants However, many

custom-ers continue to participate in the deregulated markets

to obtain reduced (or stable) prices, reduce their risk

of big price swings and incorporate energy reduction

programs with energy procurement programs

Another result of deregulation has been a

re-exami-nation by customers of outsourcing their energy needs

Some customers have “sold” their energy systems to

energy suppliers and are now purchasing Btus instead

of kWhs The energy industry responded with energy

service business units to meet this new demand for

out-sourcing Performance contracting and energy system

outsourcing can be advantageous when the organization

does not have internal expertise to execute these projects

and when other sources of capital are needed However,

performance contracting and energy system outsourcing

is not without peril if the risks are not understood and

mitigated Before undertaking a performance contract or

energy system outsourcing project, the owner or

man-ager fi rst needs to defi ne the fi nancial, technical, legal

and operational issues of importance Next, the proper

resources, whether internal or outsourced, need to be

marshaled to defi ne the project, prepare the Request

for Proposal, evaluate the suppliers and bids, negotiate

a contract and monitor the results, often over a long period If these factors are properly considered and executed, the performance contract or energy system outsourcing often produce results that could not be obtained via other project methods

BIBLIOGRAPHY

Power Shopping and Power Shopping II, A publication of the

Building Owners and Managers Association (BOMA) International, 1201 New York Avenue, N.W., N.W., Suite

300, Washington, DC 20005.

The Changing Structure of the Electric Power Industry: Historical Overview, United States Department of Energy, Energy

Information Administration, Washington, DC.

The Ten Step Program to Successful Utility Deregulation for ing Owners and Managers, George R Owens PE CEM,

Build-President Energy and Engineering Solutions, Inc (EESI),

9449 Penfi eld Ct., Columbia, MD 21045.

Performance Contracting and Energy System Outsourcing, George

R Owens PE CEM, President Energy and Engineering Solutions, Inc (EESI), 9449 Penfi eld Ct., Columbia, MD 21045.

Generating Power and Getting It to The Consumer, Edison Electric

Institute, 701 Pennsylvania Ave NW, Washington, DC, 20004.

The Changing Structure of the Electric Power Industry: An Update,

US Department of Energy, Energy Information tration, DOE/EIA-0562(96)

Adminis-PJM Electricity Futures, New York Mercantile Exchange

(NY-MEX) web page, www.nymex.com

SOME USEFUL INTERNET RESOURCES

10 Step paper - www.eesienergy.com State activities - www.eia.doe.gov/cneaf/electricity/chg_str/ State regulatory commissions www.naruc.org

Utilities - www.utilityconnection.com Maillist - AESP-NET@AESP.org

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ERIC A WOODRUFF, PH.D., CEM, CEP, CLEP

Johnson Controls, Inc

25.1 INTRODUCTION

Financing can be a key success factor for projects

This chapter’s purpose is to help facility managers

understand and apply the fi nancial arrangements

avail-able to them Hopefully, this approach will increase

the implementation rate of good energy management

projects, which would have otherwise been cancelled or

postponed due to lack of funds

Most facility managers agree that energy

manage-ment projects (EMPs) are good investmanage-ments Generally,

EMPs reduce operational costs, have a low risk/reward

ratio, usually improve productivity and even have been

shown to improve a fi rm’s stock price.1 Despite these

benefi ts, many cost-effective EMPs are not implemented

due to fi nancial constraints A study of manufacturing

facilities revealed that fi rst-cost and capital constraints

represented over 35% of the reasons cost-effective EMPs

were not implemented.2 Often, the facility manager does

not have enough cash to allocate funding, or can not get

budget approval to cover initial costs Financial

arrange-ments can mitigate a facility’s funding constraints,3

al-lowing additional energy savings to be reaped

Alternative finance arrangements can overcome

the “initial cost” obstacle, allowing fi rms to implement

more EMPs However, many facility managers are either

unaware or have diffi culty understanding the variety

of fi nancial arrangements available to them Most

facil-ity managers use simple payback analyses to

evalu-ate projects, which do not reveal the added value of

after-tax benefi ts.4 Sometimes facility managers do not

implement an EMP because fi nancial terminology and

contractual details intimidate them.5

To meet the growing demand, there has been a

dramatic increase in the number of fi nance companies

specializing in EMPs At a recent World Energy

Engi-neering Congress, fi nance companies represented the

most common exhibitor type These fi nanciers are

intro-ducing new payment arrangements to implement EMPs

Often, the fi nancier’s innovation will satisfy the unique

customer needs of a large facility This is a great service

however, most fi nanciers are not attracted to small ties with EMPs requiring less than $100,000 Thus, many facility managers remain unaware or confused about the common fi nancial arrangements that could help them implement EMPs

facili-Numerous papers and government programs have been developed to show facility managers how to use quantitative (economic) analysis to evaluate fi nancial arrangements.4,5,6 (Refer to Chapter 4 of this book.)

Quantitative analysis includes computing the simple payback, net present value (NPV), internal rate of return (IRR), or life- cycle cost of a project with or without fi nancing Although

these books and programs show how to evaluate the economic aspects of projects, they do not incorporate qualitative factors like strategic company objectives, (which can impact the fi nancial arrangement selection) Without incorporating a facility manager’s qualitative objectives, it is hard to select an arrangement that meets all of the facility’s needs A recent paper showed that qualitative objectives can be at least as important as quantitative objectives.9

This chapter hopes to provide some valuable mation, which can be used to overcome the previously mentioned issues The chapter is divided into several sections to accomplish three objectives Sections 2 and

infor-3 introduce the basic fi nancial arrangements via a simple

example In sections 4 and 5, fi nancial terminology is defi ned and each arrangement is explained in greater detail while applied to a case study The remaining sec-

tions show how to match fi nancial arrangements to different

projects and facilities.

25.2 FINANCIAL ARRANGEMENTS:

A SIMPLE EXAMPLE

Consider a small company “PizzaCo” that makes frozen pizzas, and distributes them regionally PizzaCo uses an old delivery truck that breaks down frequently and is ineffi cient Assume the old truck has no salvage value and is fully depreciated PizzaCo’s management would like to obtain a new and more effi cient truck to reduce expenses and improve reliability However, they

do not have the cash on hand to purchase the truck Thus, they consider their fi nancing options

Trang 14

25.2.1 Purchase the Truck with a Loan or Bond

Just like most car purchases, PizzaCo borrows

money from a lender (a bank) and agrees to a monthly

re-payment plan Figure 25.1 shows PizzaCo’s annual

cash fl ows for a loan The solid arrows represent the

fi nancing cash fl ows between PizzaCo and the bank

Each year, PizzaCo makes payments (on the principal,

plus interest based on the unpaid balance), until the

balance owed is zero The payments are the negative

cash fl ows Thus, at time zero when PizzaCo borrows

the money, they receive a large sum of money from the

bank, which is a positive cash fl ow (which will be used

to purchase the truck)

The dashed arrows represent the truck purchase as

well as savings cash fl ows Thus, at time zero, PizzaCo

purchases the truck (a negative cash flow) with the

money from the bank Due to the new truck’s greater

ef-fi ciency, PizzaCo’s annual expenses are reduced (which

is a savings) The annual savings are the positive cash

fl ows The remaining cash fl ow diagrams in this chapter

utilize the same format

PizzaCo could also purchase the truck by selling a

bond This arrangement is similar to a loan, except

in-vestors (not a bank) give PizzaCo a large sum of money

(called the bond’s “par value”) Periodically, PizzaCo

would pay the investors only the interest accumulated

As Figure 25.2 shows, when the bond reaches maturity,

PizzaCo returns the par value to the investors The

equipment purchase and savings cash flows are the

same as with the loan

25.2.2 Sell Stock to Purchase the Truck

In this arrangement, PizzaCo sells its stock to raise

money to purchase the truck In return, PizzaCo is

ex-pected to pay dividends back to shareholders Selling

stock has a similar cash fl ow pattern as a bond, with a

few subtle differences Instead of interest payments to

bondholders, PizzaCo would pay dividends to

share-holders until some future date when PizzaCo could buy the stock back However, these dividend payments are not mandatory, and if PizzaCo is experiencing fi nancial strain, it does not need to distribute dividends On the other hand, if PizzaCo’s profi ts increase, this wealth will

be shared with the new stockholders, because they now own a part of the company

25.2.3 Rent the Truck

Just like renting a car, PizzaCo could rent a truck for an annual fee This would be equivalent to a true lease The rental company (lessor) owns and maintains the truck for PizzaCo (the lessee) PizzaCo pays the rental fees (lease payments) which are considered tax-deductible business expenses

Figure 25.3 shows that the lease payments (solid arrows) start as soon as the equipment is leased (year zero) to account for lease payments paid in advance Lease payments “in arrears” (starting at the end of the

fi rst year) could also be arranged However, the leasing company may require a security deposit as collateral Notice that the savings cash fl ows are essentially the same as the previous arrangements, except there is no equipment purchase, which is a large negative cash fl ow

at year zero

Figure 25.1 PizzaCo’s Cash Flows for a Loan.

Figure 25.2 PizzaCo’s Cash Flows for a Bond.

Figure 25.3 PizzaCo’s Cash Flows for a True Lease.

Trang 15

In a true lease, the contract period should be

short-er than the equipment’s useful life The lease is

cancel-able because the truck can be leased easily to someone

else At the end of the lease, PizzaCo can either return

the truck or renew the lease In a separate transaction,

PizzaCo could also negotiate to buy the truck at the fair

market value

If PizzaCo wanted to secure the option to buy the

truck (for a bargain price) at the end of the lease, then

they would use a capital lease A capital lease can be

structured like an installment loan, however

owner-ship is not transferred until the end of the lease The

lessor retains ownership as security in case the lessee

(PizzaCo) defaults on payments Because the entire cost

of the truck is eventually paid, the lease payments are

larger than the payments in a true lease, (assuming

similar lease periods) Figure 25.4 shows the cash fl ows

for a capital lease with advance payments and a bargain

purchase option at the end of year fi ve

There are some additional scenarios for lease

ar-rangements A “vendor-fi nanced” agreement is when

the lessor (or lender) is the equipment manufacturer

Alternatively, a third party could serve as a fi nancing

source With “third party fi nancing,” a fi nance company

would purchase a new truck and lease it to PizzaCo

In either case, there are two primary ways to repay the

lessor

1 With a “fi xed payment plan”; where payments are

due whether or not the new truck actually saves

money

2 With a “fl exible payment plan”; where the

sav-ings from the new truck are shared with the third

party, until the truck’s purchase cost is recouped

with interest This is basically a “shared savings”

arrangement

25.2.4 Subcontract Pizza Delivery to a Third Party

Since PizzaCo’s primary business is not delivery,

it could subcontract that responsibility to another pany Let’s say that a delivery service company would provide a truck and deliver the pizzas at a reduced cost Each month, PizzaCo would pay the delivery service company a fee However, this fee is guaranteed to be less than what PizzaCo would have spent on delivery Thus, PizzaCo would obtain savings without investing any money or risk in a new truck This arrangement is analogous to a performance contract

com-This arrangement is very similar to a third-party lease and a shared savings agreement However with a performance contract, the contractor assumes most of the risk, (because they supply the equipment, with little

or no investment from PizzaCo) The contractor also

is responsible for ensuring that the delivery fee is less than what PizzaCo would have spent For the PizzaCo example, the arrangement would designed under the conditions below

• The delivery company owns and maintains the truck It also is responsible for all operations re-lated to delivering the pizzas

• The monthly fee is related to the number of pizzas delivered This is the performance aspect of the contract; if PizzaCo doesn’t sell many pizzas, the

fee is reduced A minimum amount of pizzas may be

required by the delivery company (performance tractor) to cover costs Thus, the delivery company

con-assumes these risks:

1 PizzaCo will remain solvent, and

2 PizzaCo will sell enough pizzas to cover costs, and

3 the new truck will operate as expected and will actually reduce expenses per pizza, and

4 the external fi nancial risk, such as infl ation and interest rate changes, are acceptable

• Because the delivery company is fi nancially strong and experienced, it can usually obtain loans at low interest rates

• The delivery company is an expert in delivery; it has specially skilled personnel and uses effi cient equipment Thus, the delivery company can de-liver the pizzas at a lower cost (even after adding

a profi t) than PizzaCo

Figure 25.5 shows the net cash fl ows according to PizzaCo Since the delivery company simply reduces

Figure 25.4 PizzaCo’s Cash Flows for a Capital Lease.

Trang 16

PizzaCo’s operational expenses, there is only a net

sav-ings There are no negative fi nancing cash fl ows Unlike

the other arrangements, the delivery company’s fee is a

less expensive substitute for PizzaCo’s in-house delivery

expenses With the other arrangements, PizzaCo had to

pay a specifi c fi nancing cost (loan, bond or lease

pay-ments, or dividends) associated with the truck, whether

or not the truck actually saved money In addition,

Piz-zaCo would have to spend time maintaining the truck,

which would detract from its core focus: making pizzas

With a performance contract, the delivery company is

paid from the operational savings it generates Because

the savings are greater than the fee, there is a net

sav-ings Often, the contractor guarantees the savsav-ings

Figure 25.5 PizzaCo’s Cash Flows for a Performance

Contract.

Supplementary Note: Combinations of the basic fi nance

arrangements are possible For example, a shared savings

ar-rangement can be structured within a performance contract

Also, performance contracts are often designed so that the

facility owner (PizzaCo) would own the asset at the end of

the contract.

25.3 FINANCIAL ARRANGEMENTS:

DETAILS AND TERMINOLOGY

To explain the basic financial arrangements in

more detail, each one is applied to an energy

manage-ment-related case study To understand the economics

behind each arrangement, some fi nance terminology is

presented below

25.3.1 Finance Terminology

Equipment can be purchased with cash on-hand

(offi cially labeled “retained earnings”), a loan, a bond,

a capital lease or by selling stock Alternatively,

equip-ment can be utilized with a true lease or with a

perfor-mance contract

Note that with performance contracting, the

build-ing owner is not paybuild-ing for the equipment itself, but

the benefi ts provided by the equipment In the Simple

Example, the benefi t was the pizza delivery PizzaCo was not concerned with what type of truck was used.

The decision to purchase or utilize equipment is partly dependent on the company’s strategic focus If a company wants to delegate some or all of the responsi-bility of managing a project, it should use a true lease,

or a performance contact.10 However, if the company wants to be intricately involved with the EMP, purchas-ing and self-managing the equipment could yield the greatest profi ts When the building owner purchases equipment, he/she usually maintains the equipment, and lists it as an asset on the balance sheet so it can be depreciated

Financing for purchases has two categories:

1 Debt Financing, which is borrowing money from

someone else, or another fi rm (using loans, bonds and capital leases)

2 Equity Financing, which is using money from your

company, or your stockholders (using retained earnings, or issuing common stock)

In all cases, the borrower will pay an interest charge to borrow money The interest rate is called the

“cost of capital.” The cost of capital is essentially dent on three factors: (1) the borrower’s credit rating, (2) project risk and (3) external risk External risk can in-clude energy price volatility, industry-specifi c economic performance as well as global economic conditions and trends The cost of capital (or “cost of borrowing”) in-

depen-fl uences the return on investment If the cost of capital increases, then the return on investment decreases.The “minimum attractive rate of return” (MARR)

is a company’s “hurdle rate” for projects Because many

organizations have numerous projects “competing” for ing, the MARR can be much higher than interest earned from

fund-a bfund-ank, or other risk-free investment Only projects with fund-a

return on investment greater than the MARR should be accepted The MARR is also used as the discount rate

to determine the “net present value” (NPV)

25.3.2 Explanation of Figures and Tables

Throughout this chapter’s case study, fi gures are presented to illustrate the transactions of each arrange-ment Tables are also presented to show how to perform the economic analyses of the different arrangements The NPV is calculated for each arrangement

It is important to note that the NPV of a particular arrangement can change signifi cantly if the cost of capital, MARR, equipment residual value, or project life is ad-

Trang 17

justed Thus, the examples within this chapter are provided

only to illustrate how to perform the analyses The cash

fl ows and interest rates are estimates, which can vary from

project to project To keep the calculations simple,

end-of-year cash fl ows are used throughout this chapter

Within the tables, the following abbreviations and

equations are used:

Savings = pre-Tax Cash Flow

Depr = Depreciation

Taxable Income = Savings - Depreciation - Interest

Tax = (Taxable Income)*(Tax Rate)

ATCF = After Tax Cash Flow =

Savings – Total Payments – TaxesTable 25.1 shows the basic equations that are used

to calculate the values under each column heading

within the economic analysis tables

been fully depreciated, he/she can claim the book value as a tax-deduction.*

25.4 APPLYING FINANCIAL ARRANGEMENTS:

A CASE STUDY

Suppose PizzaCo (the “host” facility) needs a new

chilled water system for a specifi c process in its facturing plant The installed cost of the new system is

manu-$2.5 million The expected equipment life is 15 years, however the process will only be needed for 5 years, after which the chilled water system will be sold at an estimated market value of $1,200,000 (book value at year fi ve = $669,375) The chilled water system should save PizzaCo about $1 million/year in energy savings PizzaCo’s tax rate is 34% The equipment’s annual main-tenance and insurance cost is $50,000 PizzaCo’s MARR

is 18% Since at the end of year 5, PizzaCo expects to sell the asset for an amount greater than its book value, the

Table 25.1 Table of Sample Equations used in Economic Analyses.

———————————————————————————————————————————————————

EOY Savings Depreciation Principal Interest Total Outstanding Income Tax ATCF

——————————————————————————————————————————————————— n

n+1 = (MACRS %)* =(D) +(E) =(G at year n) =(B)–(C)–(E) =(H)*(tax rate) =(B)–(F)–(I)

———————————————————————————————————————————————————

*To be precise, the IRS uses a “half-year convention” for equipment

that is sold before it has been completely depreciated In the tax year

that the equipment is sold, (say year “x”) the owner claims only Ω

of the MACRS depreciation percent for that year (This is because

the owner has only used the equipment for a fraction of the fi nal

year.) Then on a separate line entry, (in the year “x*”), the remaining

unclaimed depreciation is claimed as “book value.” The x* year is

presented as a separate line item to show the book value treatment,

however x* entries occur in the same tax year as “x.”

Table 25.2 MACRS Depreciation Percentages.

—————————————————————————EOY MACRS Depreciation Percentages

for 7-Year Property

Regarding depreciation, the “modifi ed accelerated

cost recovery system” (MACRS) is used in the

eco-nomic analyses This system indicates the percent

de-preciation claimable year-by-year after the equipment

is purchased Table 25.2 shows the MACRS

percent-ages for seven-year property For example, after the fi rst

year, an owner could depreciate 14.29% of an equipment’s

value The equipment’s “book value” equals the remaining

unrecovered depreciation Thus, after the fi rst year, the book

value would be 100%-14.29%, which equals 85.71% of the

original value If the owner sells the property before it has

Trang 18

additional revenues are called a “capital gain,” (which

equals the market value – book value) and are taxed

If PizzaCo sells the asset for less than its book value,

PizzaCo incurs a “capital loss.”

PizzaCo does not have $2.5 million to pay for the

new system, thus it considers its fi nance options

Piz-zaCo is a small company with an average credit rating,

which means that it will pay a higher cost of capital than

a larger company with an excellent credit rating As with

any borrowing arrangement, if investors believe that an

investment is risky, they will demand a higher interest

rate

25.4.1 Purchase Equipment with

Retained Earnings (Cash)

If PizzaCo did have enough retained earnings

(cash on-hand) available, it could purchase the

equip-ment without external financing Although external

fi nance expenses would be zero, the benefi t of

tax-de-ductions (from interest expenses) is also zero Also, any

cash used to purchase the equipment would carry an

“opportunity cost,” because that cash could have been

used to earn a return somewhere else This opportunity

cost rate is usually set equal to the MARR In other

words, the company lost the opportunity to invest the

cash and gain at least the MARR from another

invest-ment

Of all the arrangements described in this chapter,

purchasing equipment with retained earnings is

prob-ably the simplest to understand For this reason, it

will serve as a brief example and introduction to the

economic analysis tables that are used throughout this

chapter

25.4.1.1 Application to the Case Study

Figure 25.6 illustrates the resource fl ows between

the parties In this arrangement, PizzaCo purchases the

chilled water system directly from the equipment

manu-facturer

Once the equipment is installed, PizzaCo recovers

the full $1 million/year in savings for the entire fi ve

years, but must spend $50,000/year on maintenance and insurance At the end of the fi ve-year project, PizzaCo expects to sell the equipment for its market value of

$1,200,000 Assume MARR is 18%, and the equipment

is classifi ed as 7-year property for MACRS depreciation Table 25.3 shows the economic analysis for purchasing the equipment with retained earnings

Reading Table 25.3 from left to right, and top to bottom, at EOY 0, the single payment is entered into the table Each year thereafter, the savings as well as the depreciation (which equals the equipment purchase price multiplied by the appropriate MACRS % for each year) are entered into the table Year by year, the taxable income = savings – depreciation The taxable income is then taxed at 34% to obtain the tax for each year The after-tax cash fl ow = savings - tax for each year

At EOY 5, the equipment is sold before the entire value was depreciated EOY 5* shows how the equip-ment sale and book value are claimed In summary, the NPV of all the ATCFs would be $320,675

25.4.2 Loans

Loans have been the traditional fi nancial ment for many types of equipment purchases A bank’s willingness to loan depends on the borrower’s fi nancial health, experience in energy management and number

arrange-of years in business Obtaining a bank loan can be

dif-fi cult if the loan ofdif-fi cer is unfamiliar with EMPs Loan officers and financiers may not understand energy-related terminology (demand charges, kVAR, etc.) In addition, facility managers may not be comfortable with the fi nancier’s language Thus, to save time, a bank that can understand EMPs should be chosen

Most banks will require a down payment and lateral to secure a loan However, securing assets can

col-be diffi cult with EMPs col-because the equipment often col-

be-comes part of the real estate of the plant For example, it

would be very diffi cult for a bank to repossess lighting fi xtures from a retrofi t In these scenarios, lenders may be willing

to secure other assets as collateral

Figure 25.6 Resource Flows for Using Retained

Purchase Amount

Equipment

Chilled Water

PizzaCo System Manufacturer

Purchase Amount

Trang 19

Figure 25.7 illustrates the resource fl ows between

the parties In this arrangement, PizzaCo purchases the

chilled water system with a loan from a bank PizzaCo

makes equal payments (principal + interest) to the bank

for fi ve years to retire the debt Due to PizzaCo’s small

size, credibility, and inexperience in managing chilled

water systems, PizzaCo is likely to pay a relatively high

cost of capital For example, let’s assume 15%

PizzaCo recovers the full $1 million/year in

sav-ings for the entire fi ve years, but must spend $50,000/

year on maintenance and insurance At the end of the

fi ve-year project, PizzaCo expects to sell the equipment

for its market value of $1,200,000 Tables 25.4 and 25.5

show the economic analysis for loans with a zero down

payment and a 20% down payment, respectively

As-sume that the bank reduces the interest rate to 14% for

the loan with the 20% down payment Since the asset

is listed on PizzaCo’s balance sheet, PizzaCo can use

depreciation benefi ts to reduce the after-tax cost In

ad-dition, all loan interest expenses are tax-deductible

25.4.3 Bonds

Bonds are very similar to loans; a sum of money is

borrowed and repaid with interest over a period of time

The primary difference is that with a bond, the issuer

(PizzaCo) periodically pays the investors only the est earned This periodic payment is called the “coupon

inter-interest payment.” For example, a $1,000 bond with a 10%

coupon will pay $100 per year When the bond matures, the issuer returns the face value ($1,000) to the investors.

Bonds are issued by corporations and government entities Government bonds generate tax-free income for investors, thus these bonds can be issued at lower rates than corporate bonds This benefi t provides government facilities an economic advantage to use bonds to fi nance projects

Although PizzaCo (a private company) would not

be able to obtain the low rates of a government bond, they could issue bonds with coupon interest rates com-petitive with the loan interest rate of 15%

In this arrangement, PizzaCo receives the tors’ cash (bond par value) and purchases the equip-ment PizzaCo uses part of the energy savings to pay the coupon interest payments to the investors When the bond matures, PizzaCo must then return the par value

inves-to the invesinves-tors See Figure 25.8

As with a loan, PizzaCo owns, maintains and preciates the equipment throughout the project’s life All coupon interest payments are tax-deductible At the end

de-Table 25.3 Economic Analysis for Using Retained Earnings.

——————————————————————————————————————————————

EOY Savings Depr Payments Principal Taxable Tax ATCF

Principal Interest Total Outstanding Income

——————————————————————————————————————————————

2,500,000

Net Present Value at 18%: $320,675

——————————————————————————————————————————————

Notes: Loan Amount: 0

Loan Finance Rate: 0% MARR 18%

MACRS Depreciation for 7-Year Property, with half-year convention at EOY 5

Accounting Book Value at end of year 5: 669,375

Estimated Market Value at end of year 5: 1,200,000

EOY 5* illustrates the Equipment Sale and Book Value

Taxable Income: =(Market Value - Book Value)

=(1,200,000 - 669,375) = $530,625

——————————————————————————————————————————————

Trang 20

Table 25.5 Economic Analysis for a Loan with a 20% Down-Payment,

——————————————————————————————————————————————

2,500,000

——————————————————————————————————————————————

Notes: Loan Amount: 2,000,000 (used to purchase equipment at year 0)

500,000 Tax Rate 34%

=(1,200,000 - 669,375) = $530,625

——————————————————————————————————————————————

Table 25.4 Economic Analysis for a Loan with No Down Payment.

——————————————————————————————————————————————

2,500,000

——————————————————————————————————————————————

=(1,200,000 - 669,375) = $530,625

——————————————————————————————————————————————

Trang 21

of the fi ve-year project, PizzaCo expects to sell the

equip-ment for its market value of $1,200,000 Table 25.6 shows

the economic analysis of this fi nance arrangement

25.4.4 Selling Stock

Although less popular, selling company stock is

an equity fi nancing option which can raise capital for

projects For the host, selling stock offers a fl exible

re-payment schedule, because dividend re-payments to

share-holders aren’t absolutely mandatory Selling stock is also

often used to help a company attain its desired capital

structure However, selling new shares of stock dilutes

the power of existing shares and may send an

inaccu-rate “signal” to investors about the company’s fi nancial

strength If the company is selling stock, investors may

think that it is desperate for cash and in a poor fi nancial

condition Under this belief, the company’s stock price could decrease However, recent research indicates that when a fi rm announces an EMP, investors react favor-ably.11 On average, stock prices were shown to increase abnormally by 21.33%

By defi nition, the cost of capital (rate) for selling stock is:

cost of capitalselling stock = D/P

where D = annual dividend payment

P = company stock price

However, in most cases, the after-tax cost of capital for selling stock is higher than the after-tax cost of debt

fi nancing (using loans, bonds and capital leases) This is because interest expenses (on debt) are tax deductible, but dividend payments to shareholders are not

In addition to tax considerations, there are other reasons why the cost of debt fi nancing is less than the

fi nancing cost of selling stock Lenders and bond buyers (creditors) will accept a lower rate of return because they are in a less risky position due to the reasons below

• Creditors have a contract to receive money at a certain time and future value (stockholders have

no such guarantee with dividends)

• Creditors have fi rst claim on earnings (interest is paid before shareholder dividends are allocated)

Table 25.6 Economic Analysis for a Bond.

——————————————————————————————————————————————

Net Present Value at 18%: 953,927

——————————————————————————————————————————————

=(1,200,000 - 669,375) = $530,625

——————————————————————————————————————————————

Figure 25.8 Resource Flow Diagram for a Bond.

Purchase Amount

Trang 22

Pay-• Creditors usually have secured assets as collateral

and have fi rst claim on assets in the event of

bank-ruptcy

Despite the high cost of capital, selling stock does

have some advantages This arrangement does not bind

the host to a rigid payment plan (like debt financing

agreements) because dividend payments are not

manda-tory The host has control over when it will pay

divi-dends Thus, when selling stock, the host receives greater

payment fl exibility, but at a higher cost of capital

As Figure 25.9 shows, the fi nancial arrangement is

very similar to a bond, at year zero the fi rm receives $2.5

million, except the funds come from the sale of stock

Instead of coupon interest payments, the fi rm distributes

dividends At the end of year fi ve, PizzaCo repurchases

the stock Alternatively, PizzaCo could capitalize the

dividend payments, which means setting aside enough

money so that the dividends could be paid with the

interest generated

Table 25.7 shows the economic analysis for issuing

stock at a 16% cost of equity capital, and repurchasing

the stock at the end of year fi ve (For consistency of

comparison to the other arrangements, the stock price

does not change during the contract.) Like a loan or

bond, PizzaCo owns and maintains the asset Thus, the annual savings are only $950,000 PizzaCo pays annual dividends worth $400,000 At the end of year 5, PizzaCo expects to sell the asset for $1,200,000

Note that Table 25.7 is slightly different from the other tables in this chapter:

Taxable Income = Savings – Depreciation, andATCF = Savings – Stock Repurchases - Dividends

- Tax

25.4.5 Leases

Firms generally own assets, however it is the use of these assets that is important, not the ownership Leas-ing is another way of obtaining the use of assets There are numerous types of leasing arrangements, ranging

Table 25.7 Economic Analysis of Selling Stock.

——————————————————————————————————————————————

EOY Savings Depr Stock Transactions Dividend Taxable Tax ATCF

Sale of Stock Repurchase Payments Income

——————————————————————————————————————————————

Net Present Value at 18%: 477,033

——————————————————————————————————————————————

Notes: Value of Stock Sold (which is repurchased after year 5 2,500,000 (used to purchase equipment at year 0)

Cost of Capital = Annual Dividend Rate: 16% MARR = 18%

Taxable Income: = (Market Value - Book Value)

= (1,200,000 - 669,375) = $530,625

——————————————————————————————————————————————

Figure 25.9 Resource Flow Diagram for Selling Stock.

Purchase Amount

Equipment

Chilled Water System Manufacturer PizzaCo

Investors

Sell Stock Cash

Trang 23

from basic rental agreements to extended payment plans

for purchases Leasing is used for nearly one-third of all

equipment utilization.12 Leases can be structured and

approved very quickly, even within 48 hours Table 25.8

lists some additional reasons why leasing can be an

at-tractive arrangement for the lessee

Table 25.8 Good Reasons to Lease.

—————————————————————————

Financial Reasons

• With some leases, the entire lease payment is

tax-deductible

• Some leases allow “off-balance sheet” fi nancing,

preserving credit lines

Risk Sharing

• Leasing is good for short-term asset use, and

re-duces the risk of getting stuck with obsolete

equip-ment

• Leasing offers less risk and responsibility

—————————————————————————

Basically, there are two types of leases; the “true

lease” (a.k.a “operating” or “guideline lease”) and the

“capital lease.” One of the primary differences between

a true lease and a capital lease is the tax treatment In a

true lease, the lessor owns the equipment and receives

the depreciation benefi ts However, the lessee can claim

the entire lease payment as a tax-deductible business

expense In a capital lease, the lessee (PizzaCo) owns

and depreciates the equipment However, only the

in-terest portion of the lease payment is tax-deductible In

general, a true lease is effective for a short-term project,

where the company does not plan to use the equipment

when the project ends A capital lease is effective for

long-term equipment

25.4.5.1 The True Lease

Figure 25.10 illustrates the legal differences

be-tween a true lease and a capital lease.13 A true lease (or

operating lease) is strictly a rental agreement The word

“strict” is appropriate because the Internal Revenue

Service will only recognize a true lease if it satisfi es the

following criteria:

1 the lease period must be less than 80% of the

equipment’s life, and

2 the equipment’s estimated residual value must be

≥20% of its value at the beginning of the lease,

and

3 there is no “bargain purchase option,” and

4 there is no planned transfer of ownership, and

5 the equipment must not be custom-made and only useful in a particular facility

It is unlikely that PizzaCo could fi nd a lessor that would be willing to lease a sophisticated chilled water system and after fi ve years, move the system to another facility Thus, obtaining a true lease would be unlikely However, Figure 25.11 shows the basic relationship be-tween the lessor and lessee in a true lease A third-party leasing company could also be involved by purchasing

Figure 25.10 Classifi cation for a True Lease.

Does the lessor have:

≥ 20% investment in asset at all times?

≥20% residual value?

lease period ≤ 80% asset’s life?

Does lessee have:

a loan to the lessor?

a bargain purchase option?

Capital LeaseTrue Lease

Trang 24

the equipment and leasing to PizzaCo Such a resource

fl ow diagram is shown for the capital lease

Table 25.9 shows the economic analysis for a true

lease Notice that the lessor pays the maintenance and

insurance costs, so PizzaCo saves the full $1 million per

year PizzaCo can deduct the entire lease payment of

$400,000 as a business expense However PizzaCo does

not obtain ownership, so it can’t depreciate the asset

25.4.5.3 The Capital Lease

The capital lease has a much broader defi nition

than a true lease A capital lease fulfi lls any one of the

following criteria:

1 the lease term ≥80% of the equipment’s life;

2 the present value of the lease payments ≥80% of

the initial value of the equipment;

3 the lease transfers ownership;

4 the lease contains a “bargain purchase option,”

which is negotiated at the inception of the lease

Most capital leases are basically extended

pay-ment plans, except ownership is usually not transferred

until the end of the contract This arrangement is common for large EMPs because the equipment (such

as a chilled water system) is usually diffi cult to reuse

at another facility With this arrangement, the lessee eventually pays for the entire asset (plus interest) In most capital leases, the lessee pays the maintenance and insurance costs

The capital lease has some interesting tax tions because the lessee must list the asset on its bal-ance sheet from the beginning of the contract Thus, like a loan, the lessee gets to depreciate the asset and only the interest portion of the lease payment is tax deductible

implica-25.4.5.4 Application to the Case Study

Figure 25.12 shows the basic third-party fi nancing relationship between the equipment manufacturer, les-sor and lessee in a capital lease The fi nance company (lessor) is shown as a third party, although it also could

be a division of the equipment manufacturer Because the fi nance company (with excellent credit) is involved,

a lower cost of capital (12%) is possible due to reduced risk of payment default

Like an installment loan, PizzaCo’s lease payments cover the entire equipment cost However, the lease payments are made in advance Because PizzaCo is considered the owner, it pays the $50,000 annual main-tenance expenses, which reduces the annual savings to

$950,000 PizzaCo receives the benefi ts of depreciation and tax-deductible interest payments To be consistent with the analyses of the other arrangements, PizzaCo would sell the equipment at the end of the lease for its market value Table 25.10 shows the economic analysis for a capital lease

Figure 25.11 Resource Flow Diagram for a True

EOY Savings Depr Lease Principal Taxable Tax ATCF

Payments Total Outstanding Income

Trang 25

25.4.5.5 The Synthetic Lease

A synthetic lease is a “hybrid” lease that combines

aspects of a true lease and a capital lease Through

care-ful structuring and planning, the synthetic lease appears

as an operating lease for accounting purposes (enables

the Host to have off-balance sheet fi nancing), yet also

appears as a capital lease for tax purposes (to obtain

de-preciation for tax benefi ts) Consult your local fi nancing

expert to learn more about synthetic leases; they must

be carefully structured to maintain compliance with the

associated tax laws

With most types of leases, loans and bonds the

monthly payments are fi xed, regardless of the

equip-ment’s utilization, or performance However, shared ings agreements can be incorporated into certain types

sav-of leases

25.4.6 Performance Contracting

Performance contracting is a unique arrangement that allows the building owner to make necessary improvements while investing very little money up-front The contractor usually assumes responsibility for purchasing and installing the equipment, as well as maintenance throughout the contract But the unique aspect of performance contracting is that the contrac-tor is paid based on the performance of the installed equipment Only after the installed equipment actually reduces expenses does the contractor get paid Energy service companies (ESCOs) typically serve as contractors within this line of business

Unlike most loans, leases and other fi xed payment arrangements, the ESCO is paid based on the perfor-mance of the equipment In other words, if the fi nished product doesn’t save energy or operational costs, the host doesn’t pay This aspect removes the incentive to

“cut corners” on construction or other phases of the ect, as with bid/spec contracting In fact, often there is

proj-an incentive to exceed savings estimates For this reason, performance contracting usually entails a more “facility-

Figure 25.12 Resource Flow Diagram for a Capital

Lease.

Purchase Amount

Table 25.10 Economic Analysis for a Capital Lease.

——————————————————————————————————————————————

2,500,000

——————————————————————————————————————————————

Notes: Total Lease Amount: 2,500,000

However, Since the payments are in advance, the fi rst payment is analogous to a Down-Payment Thus the actual amount borrowed is only = 2,500,000 - 619,218 = 1,880,782

Lease Finance Rate: 12% MARR 18%

Trang 26

wide” scope of work (to fi nd extra energy savings), than

loans or leases on particular pieces of equipment

With a facility-wide scope, many improvements

can occur at the same time For example, lighting and air

conditioning systems can be upgraded at the same time

In addition, the indoor air quality can be improved

With a comprehensive facility management approach,

a “domino-effect” on cost reduction is possible For

ex-ample, if facility improvements create a safer and higher

quality environment for workers, productivity could

increase As a result of decreased employee

absentee-ism, the workman’s compensation cost could also be

reduced These are additional benefi ts to the facility

Depending on the host’s capability to manage the

risks (equipment performance, fi nancing, etc.) the host

will delegate some of these responsibilities to the ESCO

In general, the amount of risk assigned to the ESCO

is directly related to the percent savings that must be

shared with the ESCO

For facilities that are not in a good position to

man-age the risks of an energy project, performance

contract-ing may be the only economically feasible

implementa-tion method For example, the US Federal Government used

performance contracting to upgrade facilities when budgets

were being dramatically cut In essence, they “sold” some of

their future energy savings to an ESCO, in return for

receiv-ing new equipment and effi ciency benefi ts.

In general, performance contracting may be the

best option for facilities that:

• are severely constrained by their cash fl ows;

• have a high cost of capital;

• don’t have suffi cient resources, such as a lack of

house energy management expertise or an

in-adequate maintenance capacity*;

• are seeking to reduce in-house responsibilities and

focus more on their core business objectives; or

• are attempting a complex project with uncertain

reliability or if the host is not fully capable of

managing the project For example, a lighting retrofi t

has a high probability of producing the expected cash

fl ows, whereas a completely new process does not have

the same “time-tested” reliability If the in-house energy management team cannot manage this risk, performance contracting may be an attractive alternative.

Performance contracting does have some backs In addition to sharing the savings with an ESCO, the tax benefi ts of depreciation and other economic ben-efi ts must be negotiated Whenever large contracts are involved, there is reason for concern One study found that 11% of customers who were considering EMPs felt that dealing with an ESCO was too confusing or complicated.14 Another reference claims, “with complex contracts, there may be more options and more room for error.”15 Therefore, it is critical to choose an ESCO with

draw-a good reputdraw-ation draw-and experience within the types of facilities that are involved

There are a few common types of contracts The ESCO will usually offer the following options:

• guaranteed fi xed dollar savings;

• guaranteed fi xed energy (MMBtu) savings;

• a percent of energy savings; or

• a combination of the above

Obviously, facility managers would prefer the tions with “guaranteed savings.” However this extra security (and risk to the ESCO) usually costs more The primary difference between the two guaranteed options

op-is that guaranteed fi xed dollar savings contracts ensure

dollar savings, even if energy prices fall For example, if

energy prices drop and the equipment does not save as much money as predicted, the ESCO must pay (out of its own pocket) the contracted savings to the host.

Percent energy savings contracts are agreements that basically share energy savings between the host and the ESCO The more energy saved, the higher the rev-enues to both parties However, the host has less predict-able savings and must also periodically negotiate with the ESCO to determine “who saved what” when sharing savings There are numerous hybrid contracts available that combine the positive aspects of the above options

PizzaCo would enter into a hybrid contract; percent

energy savings/guaranteed arrangement The ESCO would

purchase, install and operate a highly effi cient chilled water system The ESCO would guarantee that PizzaCo would save the $1,000,000 per year, but PizzaCo would pay the ESCO 80% of the savings In this way, PizzaCo would not need to invest any money, and would simply collect the net savings of $200,000 each year To avoid periodic negotiations associated with shared savings

*Maintenance capacity represents the ability that the maintenance

personnel will be able to maintain the new system It has been shown

that systems fail and are replaced when maintenance concerns are

not incorporated into the planning process See Woodroof, E (1997)

“Lighting Retrofi ts: Don’t Forget About Maintenance,” Energy

Engi-neering, 94(1) pp 59-68.

Trang 27

agreements, the contract could be worded such that the

ESCO will provide guaranteed energy savings worth

$200,000 each year

With this arrangement, there are no depreciation,

interest payments or tax-benefi ts for PizzaCo However,

PizzaCo receives a positive cash fl ow with no

invest-ment and little risk At the end of the contract, the ESCO

removes the equipment At the end of most performance

contracts, the host usually acquires or purchases the

equipment for fair market value However, for this case

study, the equipment was removed to make a consistent

comparison with the other fi nancial arrangements

Figure 25.13 illustrates the transactions between

the parties Table 25.11 presents the economic analysis

for performance contracting

Note that Table 25.11 is slightly different from the

other tables in this chapter: Taxable Income = Savings

– Depreciation – ESCO Payments

25.4.7 Summary Of Tax Benefi ts

Table 25.12 summarizes the tax benefi ts of each

fi nancial arrangement presented in this chapter

25.4.8 Additional Options

Combinations of the basic fi nancial arrangements

can be created to enhance the value of a project A

sam-ple of the possible combinations are described below

• Third party fi nanciers often cooperate with

perfor-mance contracting fi rms to implement EMPs

• Utility rebates and government programs may

provide additional benefi ts for particular projects

• Tax-exempt leases are available to government

facilities

• Insurance can be purchased to protect against risks relating to equipment performance, energy sav-ings, etc

• Some fi nancial arrangements can be structured as non-recourse to the host Thus, the ESCO or lessor would assume the risks of payment default How-ever, as mentioned before, profi t sharing increases with risk sharing

Attempting to identify the absolute best fi nancial arrangement is a rewarding goal, unless it takes too long As every minute passes, potential dollar savings are lost forever When considering special grant funds, rebate programs or other unique opportunities, it is important to consider the lost savings due to delay

Table 25.11 Economic Analysis of a Performance Contract.

——————————————————————————————————————————————

ESCO Principal Taxable

EOY Savings Depr Payments Total Outstanding Income Tax ATCF

Notes: ESCO purchases/operates equipment Host pays ESCO 80% of the savings = $800,000.

The contract could also be designed so that PizzaCo can buy the equipment at the end of year 5.

——————————————————————————————————————————————

Figure 25.13 Transactions for a Performance Contract.

Purchase Amount

Equipment

Chilled Water System Manufacturer

nance Co.

Bank/Fi-Payments Loan

PizzaCo

Installs Equipment, Guarantees Savings

ESCO Payments

ESCO

Trang 28

25.5 “PROS” & “CONS” OF EACH

This section presents a brief summary of the “Pros”

and “Cons” of each financial arrangement from the

host’s perspective

Loan

“Pros”:

• host keeps all savings,

• depreciation & interest payments are

tax-deduct-ible,

• host owns the equipment, and

• the arrangement is good for long-term use of

• good for government facilities, because they can

offer a tax-free rate (that is lower, but considered

• dividend payments (unlike interest payments) are

not tax-deductible, and

• dilutes company control

Use Retained Earnings

Has the same Pros/Cons as loan, and “Pro”:

• host pays no external interest charges However retained earnings do carry an opportunity cost, because such funds could be invested somewhere

• Greater fl exibility in fi nancing, possible lower cost

of capital with third-party participation

equip-• good for short-term use of equipment, an

• entire lease payment is tax-deductible “Cons”:

• no ownership at end of lease contract, and

• no depreciation tax benefi ts

Trang 29

• allows host to focus on its core business

objec-tives

“Cons”:

• potentially binding contracts, legal expenses, and

increased administrative costs, and

• host must share project savings

25.5.1 Rules of Thumb

When investigating fi nancing options, consider the

following generalities:

Loans, bonds and other host-managed

arrange-ments should be used when a customer has the

re-sources (experience, fi nancial support, and time) to

handle the risks Performance contracting (ESCO

assumes most of the risk) is usually best when a

customer doesn’t have the resources to properly

manage the project Remember that with any

ar-rangement where the host delegates risk to another

fi rm, the host must also share the savings

Leases are the “middle ground” between owning

and delegating risks Leases are very popular due

to their tax benefi ts

True leases tend to be preferred when:

• the equipment is needed on a short-term basis;

• the equipment has unusual service problems that

cannot be handled by the host;

• technological advances cause equipment to

be-come obsolete quickly; or

• depreciation benefi ts are not useful to the lessee

Capital Leases are preferred when:

• the installation and removal of equipment is

costly;

• the equipment is needed for a long time; or

• the equipment user desires to secure a “bargain

purchase option.”

25.6 CHARACTERISTICS THAT INFLUENCE

WHICH FINANCIAL ARRANGEMENT IS BEST

There are at least three types of characteristics

that can infl uence which fi nancial arrangement should

be used for a particular EMP These include facility

characteristics, project characteristics and fi nancial

ar-rangement characteristics In this section, quantitative

characteristics are bulleted with this symbol: $ The

qualitative characteristics are bulleted with this

sym-bol: ‹ Note that qualitative characteristics are ally “strategic” and are not associated with an exact dollar value

gener-A few of the Facility Characteristics include:

‹ The long-term plans of facility For example, is the facility trying to focus on core business objectives and outsourcing other tasks, such as EMPs?

$ The facility’s current fi nancial condition Credit ratings and ability to obtain loans can determine whether certain financial arrangements are fea-sible

‹ The experience and technical capabilities of house personnel Will additional resources (person-nel, consultants, technologies, etc.) be needed to successfully implement the project?

in-$ The facility’s ability to obtain rebates from the government, utilities, or other organizations For example, there are Dept of Energy subsidies avail-able for DOE facilities

$ The facility’s ability to obtain tax benefi ts For ample, government facilities can offer tax-exempt interest rates on bonds

ex-A few of the Project Characteristics include:

$ The project’s economic benefi ts Net Present Value, Internal Rate of Return and Simple Payback

‹ The project’s complexity and overall risk For ample, a complex project that has never been done before has a different level of risk than a standard lighting retrofi t

ex-‹ The project’s alignment with the facility’s term objectives Will this project’s equipment be needed for long-term goals?

long-‹ The project’s cash fl ow schedule and the variance between cash fl ows For example, there may be sig-nifi cant differences in the acceptability of a project based on when revenues are received

A few of the Financial Arrangement Characteristics include:

$ The economic benefi t of a project using a particular

fi nancial arrangement The Net Present Value and Internal Rate of Return can be infl uenced by the

fi nancial arrangement selected

Trang 30

‹ The impact on the corporate capital structure For

example, will additional debt be required to fi

-nance the project? Will additional liabilities appear

on the fi rm’s balance sheet and impact the image

of the company to investors?

‹ The fl exibility of the fi nancial arrangement For

example, can the facility manager alter the contract

and payment terms in the event of revenue

short-fall or changes in operational hours?

25.7 INCORPORATING STRATEGIC

ISSUES WHEN SELECTING FINANCIAL

ARRANGEMENTS

Because strategic issues can be important when

selecting fi nancial arrangements, the facility manager

should include them in the selection process The

fol-lowing questions can help assess a facility manager’s

needs

• Does the facility manager want to manage projects

or outsource?

• Are net positive cash fl ows required?

• Will the equipment be needed for long-term

needs?

• Is the facility government or private?

• If private, does the facility manager want the

project’s assets on or off the balance sheet?

• Will operations be changing?

From the research experience, a Strategic Issues

Financing Decision Tree was developed to guide facility

managers to the fi nancial arrangement which is most

likely optimal Figure 25.14 illustrates the decision tree,

which is by no means a rule, but it embodies some

general observations from the industry

Working the tree from the top to bottom, the

facility manager should assess the project and facility

characteristics to decide whether it is strategic to

man-age the project or outsource If outsourced, the

“per-formance contract” would be the logical choice.* If the

facility manager wants to manage the project, the next

step (moving down the tree) is to evaluate whether the

project’s equipment will be needed for long or

short-term purposes If short-short-term, the “true lease” is logical

If it is a long-term project, in a government facility, the

“bond” is likely to be the best option If the facility is

in the private sector, the facility manager should decide whether the project should be on or off the balance sheet An off-balance sheet preference would lead back

to the “true lease.” If the facility manager wants the project’s assets on the balance sheet, the Net Present Value (or other economic benefi t indicator) can help determine which “host-managed” arrangement (loan, capital lease or cash) would be most lucrative

25.8 CHAPTER SUMMARY

It is clear that knowing the strategic needs of the facility manager is critical to selecting the best arrange-ment There are practically an infi nite number of fi nan-cial alternatives to consider This chapter has provided some information on the basic fi nancial arrangements Combining these arrangements to construct the best con-tract for your facility is only limited by your creativity

25.9 GLOSSARY Capitalize

To convert a schedule of cash fl ows into a principal amount, called capitalized value, by dividing by a rate

of interest In other words, to set aside an amount large enough to generate (via interest) the desired cash fl ows forever

Capital or Financial Lease

Lease that under Statement 13 of the Financial ing Standards Board must be refl ected on a company’s balance sheet as an asset and corresponding liability Generally, this applies to leases where the lessee ac-quires essentially all of the economic benefi ts and risks

Account-or the leased property

Depreciation

The amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depre-ciable life Depreciation reduces taxable income, but is not an actual cash fl ow

Energy Service Company (ESCO)

Company that provides energy services (and possibly

fi nancial services) to an energy consumer

Host

The building owner or facility that uses the ment

equip-Lender

Individual or fi rm that extends money to a borrower

*It should be noted that a performance contract could be structured

using leases and bonds.

Trang 31

with the expectation of being repaid, usually with

inter-est Lenders create debt in the form of loans or bonds If

the borrower is liquidated, the lender is paid off before

stockholders receive distributions

Lessee

The renter The party that buys the right to use

equip-ment by making lease payequip-ments to the lessor

Lessor

The owner of the leased equipment

Line of Credit

An informal agreement between a bank and a borrower

indicating the maximum credit the bank will extend

A line of credit is popular because it allows numerous borrowing transactions to be approved without the re-application paperwork

Liquidity

Ability of a company to convert assets into cash or cash equivalents without signifi cant loss For example, invest-ments in money market funds are much more liquid than investments in real estate

Leveraged Lease

Lease that involves a lender in addition to the lessor and lessee The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, usually more than half The balance is put up

Figure 25.14 Strategic Issues Financing Decision Tree.

FACILITY CHARACTERISTICS EMP CHARACTERISTICS

Manage or Outsource

Host-managed Arrangements

Time Frame

On or Off Balance Sheet

Perf.

Conf.

Govt.

Govt or Private Private

True Lease

Bond

Off Balance Sheet

Int Rate Taxes Cash Flow Timing

On Balance Sheet

Loan, Cap Lease

NPV

In-house Staff Experience

Mgmt.’s Strategic Focus Capital Will- ing

to Commit

Trang 32

by the lessor, who is both the equity participant and

the borrower With the cash the lessor acquires the

as-set, giving the lender (1) a mortgage on the asset and

(2) an assignment of the lease and lease payments The

lessee then makes periodic payments to the lessor, who

in turn pays the lender As owner of the asset, the lessor

is entitled to tax deductions for depreciation on the asset

and interest on the loan

MARR (Minimum Attractive Rate of Return)

MARR is the “hurdle rate” for projects within a

com-pany MARR is used to determine the NPV; the annual

after-tax cash fl ow is discounted at MARR (which

rep-resents the rate the company could have received with

a different project)

Net Present Value (NPV)

As the saying goes, “a dollar received next year is not worth

as much as a dollar today.” The NPV converts the worth of

that future dollar into what is worth today NPV converts

future cash fl ows by using a given discount rate For example,

at 10%, $1,000 dollars received one year from now is worth

only $909.09 dollars today In other words, if you invested

$909.09 dollars today at 10%, in one year it would be worth

$1,000.

NPV is useful because you can convert future savings

cash fl ows back to “time zero” (present), and then

com-pare to the cost of a project If the NPV is positive, the

investment is acceptable In capital budgeting, the

dis-count rate used is called the hurdle rate and is usually

equal to the incremental cost of capital

“Off-Balance Sheet” Financing

Typically refers to a True Lease, because the assets are

not listed on the balance sheet Because the liability

is not on the balance sheet, the Host appears to be

fi nancially stronger However, most large leases must

be listed in the footnotes of fi nancial statements, which

reveals the “hidden assets.”

Par Value or Face Value

Equals the value of the bond at maturity For example,

a bond with a $1,000 dollar par value will pay $1,000

to the issuer at the maturity date

Preferred Stock

A hybrid type of stock that pays dividends at a

speci-fi ed rate (like a bond), and has preference over common

stock in the payment of dividends and liquidation of

assets However, if the fi rm is fi nancially strained, it

can avoid paying the preferred dividend as it would

the common stock dividends Preferred stock doesn’t ordinarily carry voting rights

Project Financing

A type of arrangement, typically meaning that a Single Purpose Entity (SPE) is constructed The SPE serves as a special bank account All funds are sent to the SPE, from which all construction costs are paid Then all savings cash fl ows are also distributed from the SPE The SPE

is essentially a mini-company, with the sole purpose of funding a project

Secured Loan

Loan that pledges assets as collateral Thus, in the event that the borrower defaults on payments, the lender has the legal right to seize the collateral and sell it to pay off the loan

True Lease or Operating Lease or Tax-Oriented Lease

Type of lease, normally involving equipment, whereby the contract is written for considerably less time than the equipment’s life and the lessor handles all mainte-nance and servicing; also called service lease Operat-ing leases are the opposite of capital leases, where the lessee acquires essentially all the economic benefi ts and risks of ownership Common examples of equipment

fi nanced with operating leases are offi ce copiers, puters, automobiles and trucks Most operating leases are cancelable

WACC (Weighted Average Cost of Capital)

The fi rm’s average cost of capital, as a function of the proportion of different sources of capital: Equity, Debt,

Preferred Stock, etc For example, a fi rm’s target capital

and the fi rm’s costs of capital are:

before tax cost of debt = kd = 10%

cost of common equity = ks = 15%

cost of preferred stock = kps = 12%

Then the weighted average cost of capital will be:

WACC= wdkd(1-T) + wsks +wpskps where wi = weight of Capital Sourcei

T = tax rate = 34%

After-tax cost of debt = kd(1-T)

Trang 33

WACC= (.3)(.1)(1-.34) +(.6)(.15) + (.1)(.12)

WACC= 12.18%

References

1 Wingender, J and Woodroof, E., (1997) “When Firms Publicize

Energy Management Projects Their Stock Prices Go Up: How

High?—As Much as 21.33% within 150 days of an

Announce-ment,” Strategic Planning for Energy and the Environment, Vol

17(1), pp 38-51.

2 U.S Department of Energy, (1996) “Analysis of

Energy-Ef-fi ciency Investment Decisions by Small and Medium-Sized

Manufacturers,” U.S DOE, Office of Policy and Office of

Energy Effi ciency and Renewable Energy, pp 37-38.

3 Woodroof, E and Turner, W (1998), “Financial Arrangements

for Energy Management Projects,” Energy Engineering 95(3)

pp 23-71.

4 Sullivan, A and Smith, K (1993) “Investment Justifi cation

for U.S Factory Automation Projects,” Journal of the Midwest

Finance Association, Vol 22, p 24.

5 Fretty, J (1996), “Financing Energy-Effi cient Upgraded

Equip-ment,” Proceedings of the 1996 International Energy and

Environmental Congress, Chapter 10, Association of Energy

9 Woodroof, E And Turner, W (1999) “Best Ways to Finance

Your Energy Management Projects,” Strategic Planning for

En-ergy and the Environment, Summer 1999, Vol 19(1) pp 65-79.

10 Cooke, G.W., and Bomeli, E.C., (1967), Business Financial

Man-agement, Houghton Miffl in Co., New York.

11 Wingender, J and Woodroof, E., (1997) “When Firms Publicize Energy Management Projects: Their Stock Prices Go Up,”

Strategic Planning for Energy and the Environment, 17 (1) pp

38-51.

12 Sharpe, S and Nguyen, H (1995) “Capital Market

Imperfec-tions and the Incentive to Lease,” Journal of Financial

Econom-ics, 39(2), p 271-294.

13 Schallheim, J (1994), Lease or Buy?, Harvard Business School

Press, Boston, p 45.

14 Hines, V (1996),”EUN Survey: 32% of Users Have Signed

ESCO Contracts,” Energy User News 21(11), p.26.

15 Coates, D.F and DelPonti, J.D (1996), “Performance

Contract-ing: a Financial Perspective” Energy Business and Technology

Sourcebook, Proceedings of the 1996 World Energy Engineering

Congress, Atlanta p 539-543.

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DAVID E CLARIDGE

Professor

Mechanical Engineering Department

Texas A&M University

Mechanical Engineering Department

Texas A&M University

26.1 INTRODUCTION TO COMMISSIONING

FOR ENERGY MANAGEMENT

Commissioning an existing building has been

shown to be a key energy management activity over

the last decade, often resulting in energy savings of

10%, 20% or sometimes 30% without signifi cant capital

investment Commissioning is more often applied to

new buildings today than to existing buildings, but the

energy manager will have more opportunities to apply

the process to an existing building as part of the overall

energy management program Hence, this chapter

em-phasizes commissioning applied to existing buildings,

but also provides some commissioning guidance for

the energy manager who is involved in a construction

project

Commissioning an existing building provides

several benefi ts in addition to being an extremely

effec-tive energy management strategy It typically provides

an energy payback of one to three years In addition,

building comfort is improved, systems operate better

and maintenance cost is reduced Commissioning

mea-sures typically require no capital investment, though

the process often identifi es maintenance that is required

before the commissioning can be completed Potential

capital upgrades or retrofi ts are often identifi ed during

the commissioning activities, and knowledge gained

during the process permits more accurate quantifi cation

of benefi ts than is possible with a typical audit

Involve-ment of facilities personnel in the process can also lead

to improved staff technical skills

This chapter is intended to provide the energy manager with the information needed to make the de-cision to conduct an in-house commissioning program

or to select and work with an outside commissioning provider There is no single defi nition of commissioning for an existing building, or for new buildings, so several widely used commissioning defi nitions are given The commissioning process used by the authors in exist-ing buildings is described in some detail, and common commissioning measures and commissioning resources are described so the energy manager can choose how to implement a commissioning program Monitoring and verifi cation is very important to a successful commis-sioning program Some commissioning specifi c M&V issues are discussed, particularly the role of M&V in identifying the need for follow-up commissioning activi-ties Commissioning a new building is described from the perspective of the energy manager Three case stud-ies illustrate different applications of the commissioning process as part of the overall energy management pro-gram

26.2 COMMISSIONING DEFINITIONS

To commission a navy ship refers to the order or process that makes it completely ready for active duty Over the last two decades, the term has come to refer to the process that makes a building or some of its systems completely ready for use In the case of existing build-ings, it generally refers to a restoration or improvement

in the operation or function of the building systems

26.2.1 New Building Commissioning

ASHRAE defi nes building commissioning as: “the process of ensuring systems are designed, installed, functionally tested, and operated in conformance with the design intent Commissioning begins with planning and includes design, construction, start-up, acceptance, and training and can be applied throughout the life of the building Furthermore, the commissioning process encompasses and coordinates the traditionally separate functions of systems documentation, equipment start-

Trang 36

up, control system calibration, testing and balancing,

and performance testing.”1

This guideline was restricted to new buildings, but

it later became evident that while initial start-up

prob-lems were not an issue in older buildings, most of the

other problems that commissioning resolved were even

more prevalent in older systems

26.2.2 Recommissioning

Recommissioning refers to commissioning a

build-ing that has already been commissioned at least once

After a building has been commissioned during the

construction process, recommissioning ensures that the

building continues to operate effectively and effi ciently

Buildings, even if perfectly commissioned, will normally

drift away from optimum performance over time, due

to system degradation, usage changes, or failure to

cor-rectly diagnose the root cause of comfort complaints

Therefore, recommissioning normally reapplies the

original commissioning procedures in order to keep the

building operating according to design intent or it may

modify them for current operating needs

Optimally, recommissioning becomes part of a

facility’s continuing O&M program There is not yet

a consensus on recommissioning frequency, but some

consider that it should occur every 3 to 5 years If there

are frequent build-outs or changes in building use,

re-commissioning should be applied more often.2

26.2.3 Retrocommissioning

Retrocommissioning is the fi rst-time

commission-ing of an existcommission-ing buildcommission-ing Many of the steps in the

retrocommissioning process are similar to those for

com-missioning Retrocommissioning, however, occurs after

construction, as an independent process, and its focus is

usually on energy-using equipment such as mechanical

equipment and related controls Retrocommissioning

may or may not bring the building back to its original

design intent, since the usage may have changed or the

original design documentation may no longer exist.3

26.2.4 Continuous Commissioning ®45

Continuous Commissioning (CCSM) is an ongoing

process to resolve operating problems, improve comfort,

optimize energy use, and identify retrofits for

exist-ing commercial and institutional buildexist-ings and central

plant facilities CC focuses on improving overall system

control and operations for the building, as it is

cur-rently utilized, and on meeting existing facility needs

CC is much more than an operations and maintenance

program It is not intended to ensure that a building’s

systems function as originally designed, but it ensures

that the building and its systems operate optimally to meet the current uses of the building As part of the

CC process, a comprehensive engineering evaluation is conducted for both building functionality and system functions Optimal operational parameters and sched-ules are developed based on actual building conditions and current occupancy requirements

26.3 THE COMMISSIONING PROCESS

IN EXISTING BUILDINGS

There are multiple terms that describe the sioning process for existing buildings as noted in the previous section Likewise, there are many adaptations

commis-of the process itself The same practitioner will ment the process differently in different buildings, based

imple-on the budget and the owner requirements The process described here is the process used by the chapter au-thors when the owner wants a thorough commissioning job The terminology used will refer to the continuous commissioning process, but many of the steps are the same for retrocommissioning or recommissioning The model described assumes that a commissioning pro-vider is involved, since that is normally the case Some (or all) of the steps may be implemented by the facility staff if they have the expertise and adequate staffi ng levels to take on the work

CC focuses on improving overall system control and operations for the building, as it is currently utilized, and on meeting existing facility needs It does not ensure that the systems function as originally designed, but en-sures that the building and systems operate optimally to meet the current requirements During the CC process, a comprehensive engineering evaluation is conducted for both building functionality and system functions The optimal operational parameters and schedules are de-veloped based on actual building conditions and current occupancy requirements An integrated approach is used

to implement these optimal schedules to ensure practical local and global system optimization and persistence of the improved operation schedules

26.3.1 Commissioning Team

The CC team consists of a project manager, one

or more CC engineers and CC technicians, and one or more designated members of the facility operating team The primary responsibilities of the team members are shown in Table 26.1 The project manager can be an owner representative or a CC provider representative

It is essential that the engineers have the qualifi cations and experience to perform the work specifi ed in the

Trang 37

table The designated facility team members generally

include at least one lead HVAC technician and an EMCS

operator or engineer It is essential that the designated

members of the facility operating team actively

partici-pate in the process and be convinced of the value of the

measures proposed and implemented, or operation will

rapidly revert to old practices

26.3.2 CC Process

The CC process consists of two phases The fi rst

phase is the project development phase that identifi es

the buildings and facilities to be included in the

proj-ect and develops the projproj-ect scope At the end of this

phase, the CC scope is clearly defi ned and a CC contract

is signed as described in Section 26.3.2.1 The second

phase implements CC and verifi es project performance

through the six steps outlined in Figure 26.1 and

de-scribed in Section 26.3.2.2

26.3.2.1 Phase 1: Project Development

Step 1: Identify Buildings or Facilities

Objective: Screen potential CC candidates with minimal

effort to identify buildings or facilities that will receive

a CC audit The CC candidate can be a building, an

entire facility, or a piece of equipment If the building is part of a complex or campus, it is desirable to select the entire facility as the CC candidate since one mechanical problem may be rooted in another part of the building

or facility

Approach: The CC candidates can be selected based on

one or more of the following criteria:

• The candidate provides poor thermal comfort

• The candidate consumes excessive energy, and/or

• The design features of the facility HVAC systems are not fully used

If one or more of the above criteria fi ts the tion of the facility, it is likely to be a good candidate for

descrip-CC CC can be effectively implemented in buildings that have received energy effi ciency retrofi ts, in newer build-ings, and in existing buildings that have not received energy effi ciency upgrades In other words, virtually any building can be a potential CC candidate

The CC candidates can be selected by the ing owner or the CC provider However, the building owner is usually in the best position to select the most promising candidates because of his or her knowledge

build-of the facility operation and costs The CC provider

Table 26.1 Commissioning team members and their primary responsibilities.

——————————————————————————————————————————————

Project Manager 1 Coordinate the activities of building personnel and the commissioning team

2 Schedule project activities

——————————————————————————————————————————————

CC Engineer(s) 1 Develop metering and fi eld measurement plans

2 Develop improved operational and control schedules

3 Work with building staff to develop mutually acceptable implementation plans

4 Make necessary programming changes to the building automation system

5 Supervise technicians implementing mechanical systems changes

6 Project potential performance changes and energy savings

7 Conduct an engineering analysis of the system changes

8 Write the project report

——————————————————————————————————————————————

Designated Facility Staff 1 Participate in the initial facility survey

2 Provide information about problems with facility operation

3 Suggest commissioning measures for evaluation

4 Approve all CC measures before implementation

5 Actively participate in the implementation process

——————————————————————————————————————————————

CC Technicians 1 Conduct fi eld measurements

2 Implement mechanical, electrical, and control system program modifi cations and changes, under the direction of the project engineer

——————————————————————————————————————————————

Trang 38

should then perform a preliminary analysis to check the

feasibility of using the CC process on candidate facilities

before performing a CC audit

The following information is needed for the

pre-liminary assessment:

• Monthly utility bills (both electricity and gas) for

at least 12 months (actual bills preferable to a table

of historic energy and demand data because meter

reading dates are needed)

• General building information: size, function, major

equipment, and occupancy schedules

• O&M records, if available

• Description of any problems in the building, such

as thermal comfort, indoor air quality, moisture, or

a CC audit, a list of preliminary commissioning sures for evaluation in a CC audit should be developed

mea-If the owner is interested in proceeding at this point, a

CC audit may be performed

Step 2: Perform CC Audit and Develop Project Scope Objectives: The objectives of this step are to:

• Defi ne owner’s requirements

• Check the availability of in-house technical port such as CC technicians

sup-• Identify major CC measures

• Estimate potential savings from CC measures and cost to implement

Approach: The owner’s representative, the CC project

manager and the CC project engineer will meet The pectations and interest of the building owner in comfort improvements, utility cost reductions, and maintenance cost reductions will be discussed and documented The availability and technical skills of in-house technicians will be discussed After this discussion, a walkthrough must be conducted to identify the feasibility of the owner expectations for comfort performance and im-proved energy performance During the walkthrough, the CC engineer and project manager will identify major

ex-CC measures applicable to the building An in-house technician should participate in this walk-through to provide a local operational perspective and input The project engineer estimates the potential savings and the commissioning cost and together with the project man-ager prepares the CC audit report that documents these

fi ndings as well as the owner expectations

prelimi-Figure 26.1 Outline of Phase II of the CC Process:

Implementation & Verifi cation

Trang 39

• Any available measured whole building level or

sub-metered energy consumption data from

stand-alone meters or the building automation system

should be utilized while preparing the report

A CC audit report must be completed that lists

and describes preliminary CC measures, the estimated

energy savings from implementation, and the cost of

carrying out the CC process on the building(s) evaluated

in the CC audit

There may be more than one iteration or variation

at each step described here, but once a contract is signed,

the process moves to Phase 2 as detailed below

26.3.2.2 Phase 2: CC Implementation and Verifi cation

Step 1: Develop CC plan and form the project team

Objectives:

• Develop a detailed work plan

• Identify the entire project team

• Clarify the duties of each team member

Approach: The CC project manager and project

engi-neer develop a detailed work plan for the project, that

includes major tasks, their sequence, time requirements,

and technical requirements The work plan is then

pre-sented to the building owner or representative(s) at a

meeting attended by any additional CC engineers and/

or technicians on the project team During the meeting,

the owner contact personnel and in-house technicians

who will work on the project should be identifi ed If

in-house technicians are going to conduct

measure-ments and system adjustmeasure-ments, additional time should

be included in the schedule unless they are going to be

dedicated full time to the CC project Typically, in-house

technicians must continue their existing duties and

can-not devote full time to the CC effort, which results in

project delays In-house staff may also require additional

training The work plan may need to be modifi ed,

de-pending on the availability and skill levels of in-house

staff utilized

Special Issues:

• Availability of funding to replace/repair parts

found broken

• Time commitment of in-house staff

• Training needs of in-house staff

Deliverable: CC Report Part I—CC Plan that includes

project scope and schedule, project team, and task duties

of each team member

Step 2: Develop performance baselines Objectives:

• Document existing comfort conditions

• Document existing system conditions

• Document existing energy performance

Approach: Document all known comfort problems in

individual rooms resulting from too much heating, cooling, noise, humidity, odors (especially from mold or mildew), or lack of outside air Also, identify and docu-ment any HVAC system problems including:

• Valve and damper hunting

• Disabled systems or components

• Operational problems

• Frequently replaced parts

An interview and walk-through may be required although most of this information is collected during the

CC audit and Step 1 Room comfort problems should

be quantifi ed using hand held meters or portable data loggers System and/or component problems should be documented based on interviews with occupants and technical staff in combination with fi eld observations and measurements

Baseline energy models of building performance are necessary to document the energy savings after commis-sioning The baseline energy models can be developed using one or more of the following types of data:

• Short-term measured data obtained from data gers or the EMCS system

log-• Long-term hourly or 15-minute whole building energy data, such as whole-building electricity, cooling and heating consumption, and/or

• Utility bills for electricity, gas, and/or chilled or hot water

The whole-building energy baseline models mally include whole building electricity, cooling energy, and heating energy models These models are generally expressed as functions of outside air temperature since both heating and cooling energy are normally weather dependent

nor-Any component baseline models should be sented using the most relevant physical parameter(s) as the independent variable(s) For example, the fan motor power should be correlated with the fan airfl ow and pump motor energy consumption should be correlated with water fl ow

repre-Short-term measured data are often the most cost effective and accurate if the potential savings of CC mea-sures are independent of the weather For example, a

Trang 40

single true power measurement can be used to develop

the baseline fan energy consumption if the pulley is to

be changed in a constant air volume system Short-term

data are useful for determining the baseline for specifi c

pieces of equipment, but are not reliable for baselining

overall building energy use They may be used with

calibrated simulation to obtain plausible baselines when

no longer term data is available

Long-term measurements are normally required

since potential savings of CC measures are weather

dependent These measurements provide the most

con-vincing evidence of the impact of CC projects

Long-term data also help in continuing to diagnose system

faults during ongoing CC Although more costly than

short-term measured data, long-term data often

pro-duces additional savings making them the preferred

data type For example, unusual energy consumption

patterns can be easily identifi ed using long-term

short-interval measured data “Fixing” these unusual

pat-terns can result in signifi cant energy savings Generally

speaking, long-term interval data for electricity, gas, and

thermal usage are preferred

Utility bills may be used to develop the energy use

baselines if the CC process will result in energy savings

that are a signifi cant fraction (>15%) of baseline use and

if the building functions and use patterns will remain

the same throughout the project

The CC engineers should provide the metering

options(s) that meet the project requirements to the

building owner or representative A metering method

should be selected from the options presented by the

CC engineer, and a detailed metering implementation

plan developed It may be necessary to hire a

meter-ing subcontractor if an energy information system is

installed prior to implementation of the CC measures

More detailed information on savings determination is

in contained the measurement and verifi cation chapter

of this handbook (Chapter 27)

Special Considerations:

• Use the maintenance log to help identify major

system problems

• Select a metering plan that suits the CC goals and

the facility needs

• Always consider and measure or obtain weather

data as part of the metering plan

• Keep meters calibrated When the EMCS system is

used for metering, both sensors and transmitters

should be calibrated using fi eld measurements

Deliverables: CC Report Part II: Report on Current

Building Performance, that includes current energy

performance, current comfort and system problems, and metering plans if new meters are to be installed Alternatively, if utility bills are used to develop the base-line energy models, the report should include baseline energy models

Step 3: Conduct system measurements and develop proposed CC measures

Objectives:

• Identify current operational schedules and lems

prob-• Develop solutions to existing problems

• Develop improved operation and control ules and setpoints

sched-• Identify potential cost effective energy retrofi t sures

mea-Approach: The CC engineer should develop a detailed

measurement sheet for each major system The sheet should list all the parameters to be measured, and all mechanical and electrical parts to be checked The

cut-CC engineer should also provide measurement training

to the technician if a local technician is used to form system measurements The CC technicians should follow the procedures on the cut-sheets to obtain the measurements using appropriate equipment

per-The CC engineer conducts an engineering analysis to develop solutions for the existing problems; and de-velops improved operation and control schedules and setpoints for terminal boxes, air handling units (AHUs), exhaust systems, water and steam distribution systems, heat exchangers, chillers, boilers, and other components

or systems as appropriate Cost effective energy retrofi t measures can also be identifi ed and documented during this step, if desired by the building owner

Special Considerations:

• Trend main operational parameters using the EMCS and compare with the measurements from hand meters

• Print out EMCS control sequences and schedules

• Verify system operation in the building and pare to EMCS schedules

com-Deliverable: CC Report Part III: Existing System

Condi-tions This report includes:

• Existing control sequences and setpoints for all major equipment, such as AHU supply air tem-perature, AHU supply static pressures, terminal box minimum airfl ow and maximum airfl ow val-ues, water loop differential pressure setpoints, and

Tiêu đề	Utility Deregulation and Energy System Outsourcing
Tác giả	George R. Owens, P.E. C.E.M.
Trường học	Energy and Engineering Solutions, Inc.
Chuyên ngành	Energy Management
Thể loại	Chương

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