ESCO: Energy Efficiency Investment with No Money Down

by Eveline Killian on May 16, 2012

An Energy Services Company (ESCO) is a commercial business that “will identify and evaluate energy saving opportunities and then recommend a package of improvements to be paid for through savings”.[1]  Performance Contracting with an ESCO can be a very powerful tool for a company with energy saving opportunities but no upfront cash or financing options to implement the projects.  An ESCO is a one-stop shop for energy opportunity identification, quantification, financing, implementation, staff training and a guarantee that the savings will cover the costs of the project.  For a business, the bottom line is that one’s annual operating costs will not increase, because project financing and the cost of the ESCO are both covered in the energy and maintenance savings realized by the project.  In addition, the ESCO assumes the risk of under-performance.  If the savings are not achieved, the ESCO is responsible for covering the difference.

The ESCO Process

1. Initial Assessment
The process starts with a preliminary assessment by the ESCO to determine what energy saving opportunities reside in the building. Often opportunities are items such as boiler or chiller modifications, motor replacements, lighting retrofits, and the installation of a building control system. This initial assessment is performed at no cost to the owner.

2. Energy Savings Performance Contract
If both sides feel sufficient opportunities are identified in this initial assessment, the owner and ESCO begin with an Energy Savings Performance Contract.

Energy Performance Contracting: Before and After Improvements

Energy Performance Contracting: Before and After Improvements. Source: Energy Sources Coalition - http://www.energyservicescoalition.org/resources/whatis.htm

This contract initiates the comprehensive investment grade audit and details a variety of stipulations regarding construction, leases, performance guarantees, rate risks etc. The contract also states how savings will be determined: whether they are stipulated, in which case no field verification is required, or a more rigorous Measurement and Verification Protocol will be applied to verify savings over the course of the contract.

If the owner declines the implementation of the construction after this point in the process, the owner is liable for the audit costs (typically $50-$80k). If the owner proceeds, then the audit costs are rolled into the contract and the owner incurs no upfront costs.

A Performance Contract value is typically in the $1,000,000 range or up and lasts for 8-10 years, although some innovators are looking at how to apply the ESCO model on smaller projects with less savings potential. During the contract time period the energy savings are used to pay off the investment so the annual out-of-pocket costs for the owner do not increase.

3. Financing and Return on Investment
Project financing is typically arranged through a third party who is familiar with the ESCO and can value the savings guarantee appropriately. When financing costs are identified, a full contract delineating the efficiency measures, cost savings, construction costs, ESCO costs, financing costs and guaranteed savings is developed for a complete picture of the return on investment.

4. Construction and Staff Training
The ESCO is usually responsible for the entire construction process. In some cases, the contracts can allow for the owner to manage construction providing more transparency in the process. The owner’s involvement is typically to coordinate the work within their facility to minimize disruption to work flow and occupants. The ESCO uses commissioning to validate construction and provides training to ensure the maintenance staff understands how to operate new building systems. The owner then ensures proper maintenance of the equipment throughout the contract period.

5. Savings Verification and Annual Costs Reconciliation
The ESCO verifies savings that are not stipulated using meters and utility and maintenance billing analysis to verify the project’s overall savings. The return on investment calculations quantify the net operating cost gain or loss to the owner. The loan that funds the project is paid from the savings. In the event that the savings are not adequate to cover the loan payment, depending on the circumstances, the ESCO will pay the difference based on the savings guarantee. The ESCO typically receives a significant share of the savings in excess of the loan payment to cover their costs and help mitigate risk. If the project produces excess savings, we have seen owners reinvest in their building to allow for capital upgrades that may otherwise be unfeasible or accelerate the pay off of the project’s loan.

Advantages and Disadvantages of Performance Contracting

The most obvious advantage to working with an ESCO on a Performance Contract is that the owner does not have to take out a loan or invest any money upfront and that the return on investment is guaranteed. It is a very secure investment, with limited liability and financial risk. It produces a detailed assessment of the energy saving opportunities of the building, as well as providing a turn-key construction process that does not require the owner’s involvement.

The disadvantage of an ESCO’s involvement is that, in order to maximize profits, ESCOs often focus on lower cost measures with easy-to-predict savings and they often do not take a comprehensive approach which will provide deeper savings, but at a significantly higher cost. For example, lighting and mechanical system modifications will be suggested, but building envelope improvements (which typically have a very long payback period) will not be included. This is a lost opportunity in the sense that lighting measures with a 9-month payback can help reduce the envelope improvements’ 8 year payback when bundled together in one package. Another obvious disadvantage to using an ESCO is that it costs more money than if the owner would perform the project themselves. The ESCO’s overhead and profit are included in the project’s costs. If the owner hires an energy services company to perform the comprehensive energy audit and then implements the project alone (financing and construction), all of the savings will go directly to the owner.

Recommendation

All buildings have energy saving opportunities, even the newest buildings. In our experience the first major step is identifying and quantifying the magnitude of this potential. The most cost effective manner to commence reducing one’s energy consumption is to hire an energy services or commissioning company to perform an audit. (If using a commissioning provider, ensure they have expertise in energy efficiency and can identify opportunities for capital improvements that may exceed the retrocommissioning scope.) From there, an owner can decide the best direction to take. Retrocommissioning is a great vehicle to address energy efficiency and building system performance in order to provide optimal environmental comfort to building occupants. Typically, retrocommissioning is a less costly endeavor; having less than two year payback and does not involve major capital improvements. If energy saving capital improvements with long payback periods are identified, then an energy savings performance contract with an ESCO may be an appropriate avenue to accomplish these additional savings.

 

[1] http://www.energyservicescoalition.org/resources/whatis.htm

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Data Center Efficiency: IT Side Approaches

by Ben Fowler on May 9, 2012

When as a facility operator you’re looking to reduce data center energy use, it can be difficult to know where to begin in the process of improving efficiency. Regardless of whether your organization operates a large datacenter, or a small server room, you probably face the same question: Should we start by improving efficiency of the actual IT equipment, the supporting systems such as HVAC, or both?

Where to Begin

One effective approach when tackling data center energy use is to begin by addressing load reduction first, followed by improving the efficiency of the equipment that supports/manages those loads. This is analogous to the approach often taken in building systems: when performing a major building renovation including building shell, internal loads (e.g., lighting), and central plant equipment, new central plant equipment should be sized to address the new, more efficient building load, rather than the pre-renovation loads.

To reduce data center loads, several approaches can be taken on the IT side of the equation to significantly affect energy use, some of which can be accomplished without any additional hardware investment. These primarily boil down to two areas: increasing server utilization and offloading capacity to cloud-based data center services.

Server Utilization

According to a guide recently published by the US DOE’s Federal Energy Management Program (FEMP), “The majority of servers run at or below 20% utilization most of the time, yet still draw full power during the process.”[1] Server utilization is effectively how loaded the server equipment is, as a percentage of total capacity. Technologies entering the mainstream over the past decade have begun to make significant inroads in improving server utilization, most notably, server virtualization.

Racks of telecommunications equipment in part ...

Racks of telecommunications equipment in part of a data center. (Photo credit: Wikipedia)

Server Virtualization

The primary advance which has facilitated higher server utilization rates is a technology called virtualization. In short, virtualization is a method of creating a software version of a physical hardware computer (in this case, a server). From the end user’s perspective (say, a department at a college or a sales team within a company which used to manage their own physical server) the physical-to-virtual conversion is seamless: the end user cannot tell that they have transitioned to interacting with a software version of their server: the interface is identical and performance is not noticeably impacted. From an IT side, however, the new virtual server, which formerly was only running at say, 25% capacity, can be combined with 3 other virtual servers also running at 25% capacity and then can all be placed on a single physical server operating at nearly full load. Effectively, with virtualization, many underutilized servers can be consolidated into fewer physical servers, and significant energy savings can be realized.

While server virtualization is no longer a cutting edge technology, because of relatively long server life spans, a significant amount of low hanging fruit may still exist in any given company’s IT fleet, and accomplishing these savings can be cost a cost effective approach to improved energy performance.

Cloud Services

Many opportunities exist to migrate some or all server processing and/or storage capacity to large, offsite, cloud computing services. Huge, centralized datacenters can achieve extremely high levels of efficiency–typical onsite data centers have PUE (Power-Usage-Effectiveness) values typically between 1.75 and 2.0, whereas large, cloud scale datacenters can achieve PUE’s of <1.2. A wide variety of services exist to meet a range of needs, but some include Amazon.com’s Elastic Compute Cloud (EC2), and Microsoft’s Windows Azure, to name a few.

Cloud Control –This is a picture of the Magellan management and network control racks at NERSC. To test cloud computing for scientific capability, NERSC and the Argonne Leadership Computing Facility (ALCF) installed purpose-built testbeds for running scientific applications on the IBM iDataPlex cluster. credit: Lawrence Berkeley Nat'l Lab - Roy Kaltschmidt, photographer

Not all applications are appropriate for cloud computing transition, and there are tradeoffs which should be examined on a case-by-case basis. For many applications however, significant energy and labor cost savings can be realized in shifting a portion of their datacenter load to cloud services.

Conclusion

There are a range of approaches to saving energy in the modern datacenter and some options may be less capital intensive than others. Consulting with your resident IT geek on possibilities presented by virtualization and cloud computing may be a cost effective place to start reducing energy use in a shorter time frame.

[1] Best Practices for Energy Efficient Data Center Design, US Department of Energy FEMP, March 2011, Page 1: http://www1.eere.energy.gov/femp/pdfs/eedatacenterbestpractices.pdf

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