Energy Savings Performance Contracting

Goals for Energy Savings Performance Contracts (ESPC)

ESPC has been established to:

• Promote awareness and implementation of energy efficient and renewable energy measures in public facilities by state and local governments, school districts, and institutions of higher learning that result in millions of dollars in annual energy savings while creating jobs, reducing energy consumption, improving facility infrastructure and reducing carbon emissions.  
• Develop and administer Energy Savings Performance Contracting Services for use by public entities. 
• Pre-qualify Energy Service Companies (ESCO) for participation in GESP.  
• Provide technical, contractual and financial assistance to public entities seeking to leverage ESPC to implement energy efficiency and renewable energy projects. 

Energy Savings Performance Contracts

Energy Savings Performance Contracting is a performance-based procurement and financing mechanism that leverages energy and operational savings achieved through the installation of energy efficient and renewable energy equipment and implementation of operational best practices, to finance the cost of the building retrofit and renewal project, with no net cost increase to the public entity.

An ESPC, referred to in statute §16C.144 as a Guaranteed Energy Savings Agreement, is a performance-based contract between a public entity and a qualified “Energy Services Company” (ESCO).  Principle to the agreement is a written “guarantee” from the ESCO providing that annual utility, operational, and maintenance cost-savings generated during the term of the guaranteed energy savings agreement, will meet or exceed the annual payments due under the finance agreement.  In the event the “guaranteed” savings are not achieved during any year of the agreement, the ESCO is required to reimburse the public entity for the guarantee shortfall. To achieve the “guaranteed” savings, the ESCO assumes the construction and on-going performance risk of the project.

Over the term of an ESPC, the accumulated savings resulting from decreased energy, operational and maintenance costs are used to pay for all project and financing costs including; design, bidding, equipment procurement and installation, commissioning, measurement and verification monitoring, and related project finance costs. Projects are generally structured so that the savings equal or exceed all project costs. Savings in excess of the “guarantee” are immediately accrued by the public entity in the form of reduced utility and operational costs.

The ESCO serves as the single point of accountability for the public entity throughout the agreements: auditing, design, construction, commissioning, and performance periods.

Energy Services Companies

An Energy Services Company (ESCO) is a commercial business that develops, installs, and provides financial assistance for projects designed to improve energy efficiency and maintenance costs for facilities using an ESPC. ESCOs act as the project developers for a wide range of tasks and assume the technical and performance risk associated with the project.  ESCOs are able to provide services to both public and private sector clients. 

Typical tasks performed by an ESCO: 

• Develop, design, and arrange financing for energy efficiency projects
• Install and maintain the energy efficient equipment involved
• Measure, monitor, and verify the project's energy savings
• Assume the risk that the project will save the amount of energy guaranteed

Typical energy conservation opportunities included in an ESPC:

• Architectural /Structural – roofing, doors, insulation, weather-stripping, window treatment
• Electrical – lighting retrofits, emergency power, power and distribution, IT/communications networks, life safety systems
• Mechanical – HVAC systems, plumbing and drainage, energy management and building controls  
• Property/Site – underground utilities, lighting improvements, swimming pools, ice arenas
• Renewable Energy – photovoltaic (PV) solar, thermal solar, wind, biomass, hydroelectric
• Water and Waste – water purification systems, water sewage facilities, landfill gas capturing, waste utilization
• Operational Best Practices – staff training and development programs associated with energy conservation

“Guarantees” associated with an Energy Services Performance Contract:

• Guaranteed Project Installation Costs
• Guaranteed Energy and Financial Savings 
• Guaranteed Equipment Performance

Advantages of an Energy Services Performance Contract:

• Single point of accountability – the Energy Services Company (ESCO)
• Transfers the “risk” of both construction and long-term savings to the ESCO through a performance “guarantee”
• Provides budget neutral financings, no direct impact on taxpayers
• Utilizes best value procurement practices
• Annual energy savings are monitored and verified by the ESCO

GESP Master Contract and Procurement Documents

To review the GESP Master Contract, Work Order Contract and Site-Specific RFP, refer to the Forms & Resources section.

GESP Contracting Process Overview

Project Development Process

The Guaranteed Energy Savings Program (GESP) project development process for public entities can be described as a four-step process that includes: 

Opportunity Assessment Phase

During this phase, the public entity works with DER to review their facility needs, issues and goals; utility data and building profiles; prior efficiency studies and efforts to qualify them for the GESP. Public entities, working with DER, develop a general project scope including potential energy-savings and renewable energy improvement opportunities along with needs and issues they would like to address through implementation of an Energy Savings Performance Contract (ESPC). State agencies will need to enter into an Interagency Agreement with the Department of Commerce to utilize the state GESP Master Contract. Local units of government and school districts will first need to enter into a Joint Powers Agreement with the Department of Commerce. 

Investigation Phase

During this phase, using state provided templates; a public entity advertises a Site-specific Request for Proposal (SSRFP) to pre-qualified ESCOs to provide energy savings performance contracting services.  Next, the public entity, using the GESP Master Contract, issues a Work Order Contract to the selected ESCO to perform an Investment Grade Audit (IGA) and develop a Project Proposal based on their detailed analysis of facilities included in the SSRFP. The IGA Report and Project Proposal establish the basis for the ESPC, including a guaranteed maximum price and annual guaranteed savings associated with the Energy Conservation Measures (ECM) to be implemented. 

Implementation Phase

During this phase, the ESCO will obtain quotes for project financing and the public entity will amend the Work Order Contract to include the agreed upon ECMs and associated guaranteed maximum price and annual guaranteed savings. Once the Lease Purchase Agreement and Work Order Contract Amendment have been approved, the ESCO completes the engineering and design specifications, bids the work to be performed and oversees the construction and commissioning work.

Performance Phase

During this phase, the ESCO follows the Savings Measurement & Verificaiton (M&V) plan developed in the investigation phase to quantify the energy savings achieved, and annually presents the findings in a report to the public entity and DER.  In the event that the annual guaranteed savings are not achieved, the ESCO is obligated to make payment to the public entity for the guarantee shortfall.

Contracting Process

Master Contract

The Minnesota Department of Commerce, Division of Energy Resource (DER) is program administrator for the Guaranteed Energy Savings Program (GESP).  The program provides state agencies, local units of government and school districts with the technical, contractual and financial resources necessary to implement Energy Savings Performance Contracts (ESPC). State agencies may access the State’s GESP Master Contract directly.  Local units of government and school districts will need to enter into a Joint Powers Agreement with the Department of Commerce to access the GESP Master Contract.

The following components are included in the GESP Master Contract used by program participants. Hyperlinks provided for developed documents & templates.