ASHRAE AB-10-004

Abstract

<strong>INTRODUCTION</strong> <br>A fact that is virtually unknown among the general public is that over the past two decades, the US government and its agencies&#8212;civilian and military&#8212;have made dramatic improvements in the energy efficiency of their standard buildings (which include offices, barracks, museums, etc.). In response to a series of legislative mandates and executive orders, the US federal government reduced the energy intensity of these buildings by nearly 30%, from 139,840 Btu per square foot in 1985 to 98,171 Btu per square foot in 2006 (USDOE 2008). <br>The cost of achieving this result was approximately $7.3 billion, which represents the total investment in federal energy efficiency projects over the period. However not all of this funding came from U.S. taxpayers. To accelerate investment in cost-effective energy conservation measures, the same laws and executive orders that mandated increases in energy efficiency at federal sites authorized and encouraged the use of private sector financing to achieve the goals. Of the $7.3 billion dollar invested, private sector financing was responsible for $3.1 billion, or about 43% of the funding. <br>The federal government is not the only institution in the US that is making use of private financing to meet its energy goals. According to one study (Hopper et al, 2005), municipal/ state governments, universities, schools and hospitals obtained somewhere between $12 and $16 billion in private financing to fund energy efficiency projects in the 20-year period from 1982 through 2002. <br>Governments in other countries are making more widespread use of private financing as well: privately financing is used to fund energy efficiency upgrades at government facilities in Canada, Australia, the United Kingdom and in several other European countries. One of the aims of European Union directive 2006/32/EC (see http://europa.eu/legislation_summaries/ energy/energy_efficiency/l27057_en.htm) is to increase the use of private financing for achieving energy efficiency goals in all of the member countries. <br>This paper describes the financial analysis of privately financed energy efficiency projects as they are implemented through Energy Savings Performance Contracts (ESPCs) at US federal government sites. In an ESPC, an Energy Services Company (ESCO) obtains private financing to design and build an energy conservation project at a government site. The ESCO and the government agency agree on the utility and other savings the project will generate, and on the methods that will be used to measure and verify those savings. The ESCO implements the project, and the government pays the ESCO from the savings generated. At least once per year, the ESCO produces a measurement and verification (M&V) report detailing measurements and calculations the ESCO has made to determine the amount of savings delivered. The contract may call for the ESCO to perform other services during the performance period including operations and maintenance (O&M) on the installed equipment. <br>The financial analysis of an ESPC consists of building a project balance sheet that considers project revenues &#8211; which come from guaranteed energy and energy-related cost savings &#8211; and project costs, which consist of debt service on the loan and performance period services such as M&V and O&M. Simple techniques from engineering economics are used to determine future costs and revenues. The project is deemed feasible if the revenue stream is sufficient to fund the necessary performance period services and pay off the debt within a specified time frame. In the U.S., the project's post-acceptance performance period &#8211; i.e., the time from agency acceptance of the project until the debt is retired &#8211; can be up to 25 years. Higher energy prices in Europe and other parts of the world often result in much shorter terms.