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Perspectives

How to Make Performance Contracting Work at Your Utility

How to Make Performance Contracting Work at Your Utility

Contracting with an energy services company can be a wise way for water and wastewater utilities to implement efficiency improvements. Performance contracting is a powerful tool, but success usually happens only when both parties fully tap the specific knowledge each participant brings to the project, and apply best practices.

An energy services company (ESCO) is a commercial business that delivers operational efficiency improvements in a progressive design-build environment. The facility owner benefits from the savings and pays a fee to the ESCO in return. ESCOs provide a guarantee of energy savings, which are specified in a performance contract. They also provide a financial guarantee to project lenders that the savings generated will cover the debt service for any new required equipment. Black & Veatch has offered performance contracting services since 2008.

“The first key to success in working with an ESCO is to maintain reasonable expectations,” said Mike Hanna, Black & Veatch Project Manager specializing in performance contracting. “It is not as simple as it sounds. Every performance contract is a business proposition – the two parties need to share the risks and the rewards appropriately. The utility cannot transfer all of the risk to the ESCO nor expect the ESCO not to be paid reasonably for taking clearly assumed risks.”

Hanna said this issue is not necessarily a problem as long as all parties fully understand how the savings are calculated, how the savings will be measured and verified, and exactly what is being guaranteed.

“Unfortunately, some utilities and ESCOs don’t fully explore and discuss all of these issues,” Hanna said. “As a result, the utility may not clearly understand actual savings and how they are measured. This means disputes as to whether there is a shortfall may arise.”

Investing Time in Developing a Plan

Utility staff members typically are very busy, with constant demands on their time. It can be difficult to make time for an ESCO implementing a performance contract. However, those staff members understand the facility better than anyone else and know where opportunities exist better than the ESCO. It is time well-spent.

“Utility staff can be very effective at helping the ESCO identify ways to reduce capital costs in the process of achieving energy and operations savings,” said Allen B. (Blake) Childress, Senior Managing Director for Black & Veatch’s water design-build business line.

Childress suggested that the utility and ESCO jointly consider a variety of “what-if” scenarios. This way they can develop a full understanding of the situation and avoid potential difficulties.

“Clarity is the friend of both parties,” Childress noted. “While it can be time-consuming to work through how the guarantees were derived and will be verified, it will pay dividends later in the project.”

Some “what-if” examples could include:

    •  What happens if the flow to the facility increases by 25 percent? 
    •  What happens if the price of power falls by 20 percent?
    •  How will the savings change under these scenarios?
    •  How would this affect the guarantees?

If both parties understand the answers to these questions and work through them together, a basis of trust and understanding will develop, Childress stated. The contract will close more easily, and fewer problems will arise later in the project.

Financial Benefits for the Utilities

Hanna said the costs of project development are deferred until the performance contract is signed, so no money needs to change hands at that point. Additionally, the savings under a well-structured performance contract are greater than the debt service, so the total utility budget doesn’t have to increase. This means, if desired, money can be shifted from operating budgets to debt service.

“At most facilities, various types of efficiency improvements seek to decrease electrical and chemical consumption, lower maintenance costs, and possibly reduce labor costs,” Hanna said.

The key for ESCOs is that the measurement and verification approach, as well as the saving calculation, should be clear and understood by all, Hanna said.

“The calculations of savings for water and wastewater facilities can be complex,” Hanna said. “Much of the savings can depend on how the facility is operated, which, of course, is outside the ESCO’s control.”

This complexity makes it crucial for an ESCO to present clear savings calculations. While this may require extra effort from the ESCO, it will pay for itself in understanding and clarity with the utility.

 

Subject Matter Experts
Allen B. (Blake) Childress: ChildressAB@bv.com
Mike Hanna: HannaKM@bv.com

White Paper

 

Energy Savings Performance Contract

This white paper examines an initial evaluation of 20 million gallons per day (MGD) enhanced nutrient removal (ENR) wastewater treatment plant located in the Mid-Atlantic.

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