Design

This section will review several options that the State Energy Office can consider when designing critical elements of a well-functioning ESPC program and in making the decisions that will impact the scope of technical assistance offered to support the program.

The U.S. Department of Energy (U.S. DOE) developed an Energy Savings Performance Contracting Toolkit, which is a collection of resources aimed at helping state and local communities learn more about the benefits of ESPC and the ESPC process. Best practices and resources from existing ESPC programs are included for each step. To access the toolkit, click here.

NASEO and the National Association of Energy Service Companies (NAESCO) released State ESPC Project and Program Principles in 2019. The two organizations developed these principles to support greater understanding of and confidence in ESPC as a tool at the state and local levels. To access the principles, please click here.

To access a U.S. DOE primer on ESPC for K-12 schools, please click here.

To access a U.S. DOE guide to developing a statewide ESPC program, please click here.

Program Scale and Scope

  Arkansas New Mexico Virginia
Enabling Statute https://www.arkleg.state.ar.us/Home/FTPDocument?path=%2FACTS%2F2013%2FPublic%2FACT554.pdf https://www.nmlegis.gov/sessions/01%20Regular/FinalVersions/HB0405FV.html https://law.lis.virginia.gov/vacodefull/title45.2/chapter17/article2/
Program Funding Program Funding U.S. State Energy Program funds and fee structure Fee structure and U.S. State Energy Program funds U.S. State Energy Program Funds
State Energy Office Functions Assist with drafting of Requests for Proposals (RFPs); review Investment Grade Audit (IGA) reports; review Measurement and Verification (M&V) reports (as needed) Assist with drafting of Requests for Proposals (RFPs); certify Investment Grade Audit (IGA) reports; review Measurement and Verification (M&V) reports (as needed) Virginia Department of Energy offers comprehensive project support throughout the entirety of a State Agency or public body’s ESPC project. This includes support for each and every facet of the process from document drafting to annual reconciliation meetings.
Scope Statewide: covers state and local agencies; higher education; K-12 schools; and the MUSH market Statewide: covers state and local agencies; higher education; K-12 schools; and the MUSH market Statewide: covers state agencies; local governments; higher education; and K-12 schools Statewide: covers state and local agencies and MUSH market

Program Design

Determine the goals and scope of your state’s ESPC program

What state energy goals do you want the program to support?

The goals and scope of your state’s ESPC program are often specified in your state’s ESPC enabling statute, but the State Energy Office also plays a role in promoting those goals to key stakeholders who wish to leverage ESPC for their buildings. The State Energy Office should consider discussing the goals and priorities of the program with potential customers upfront to establish proper expectations.

The Performance Contracting National Resource Center (PCNRC) provides a database of state ESPC statutes so states can compare and analyze other state statutes that govern ESPC programs. To see the database, please click here.

What sort of upgrades will the program support?

Eligible upgrades for state ESPC programs are typically defined in their ESPC-enabling statutes. That said, the list of potential upgrades is long and can include energy efficiency, water efficiency, renewable energy, and resiliency upgrades, if the cost of those upgrades is offset by utility and maintenance cost savings from other improvements.

What support should the program provide for Investment Grade Audits and ESCO selection?

An Investment Grade Audit (IGA) is a report delivered by an ESCO to a school district that outlines a building(s)’ current energy and water baseline use and provides an analysis of potential energy and water savings opportunities and the measures needed to achieve those savings. IGA reports are comprehensive and provide the school district with potential pathways towards actualizing a retrofit of school building(s). However, IGAs may come with shortcomings, including potentially ineligible savings streams; unclear pricing; pre-defined scopes by the client that can limit potential savings opportunities; and sometimes incomplete audits.

To mitigate the potential risks associated with IGA shortcomings, the State Energy Office can:

  1. Offer to review the IGA report provided to the school district by the ESCO to analyze technical elements of the report, the potential options the school district has to make upgrades, and how those upgrades would be paid for by bill and operations and management savings. State Energy Office review of the IGA can help the school district minimize its risk with an ESPC through educating the district on key aspects of the report; interpreting the findings of the report; identifying inaccuracies within the report; and/or highlighting/offering alternative financing options for the district.
  2. Help a school district solicit ESCO interest for a project by providing sample RFP templates and sending around the RFP to its prequalified ESCOs. Usually, the school district will choose the ESCO on its own from the RFP responses. The State Energy Office can be on hand to answer any questions about the technical merits of potential ESCO proposals for the school district. This helps the school district better understand the contract it is entering into and leads to greater confidence in the project from all parties.
  3. Review ESCO responses to the RFPs posted by school districts. Reviewing the RFPs enables a State Energy Office to answer any questions the school district has about the proposals and provide clarification on any areas of confusion or ambiguity.
  4. Have staff fill some of the roles of an Owners Representative, guiding the customer throughout the ESPC process and providing expertise and support where needed. State Energy Office staff wishing to act in an Owners Representative capacity should consider taking the Performance Contracting National Resource Center’s Certificate Training Program to gain valuable information and experience. The accredited eight-module course includes an assessment at the end of each module as well as a final assessment at the end. Participants who pass all the modules receive a certificate of completion. If staff are not looking to act in an Owners Representative capacity, they may want to consider developing a prequalified Owners Representative list for the state so that schools will know who to reach out to for support.

For more information on the business case for Owner’s Representatives, please click here.

How will the program prequalify ESCOs to operate in the state?

ESCO prequalification at the state level is a process by which states evaluate ESCOs to determine if they have the capacity to implement ESPC projects in the state. State ESPC programs require ESCOs to be prequalified by the state before they can do business with potential customers within that state. The prequalification process makes it easier for public entities to solicit bids from ESCOs and streamlines the selection process. The state usually releases an RFP to solicit proposals from interested ESCOs that asks for specific information related to the ESCO’s ability to be bonded or source funding, its experience working on similar projects to ESPC, and other supporting information that supports its claim to be viable for ESPC projects.

  • Arkansas uses a standing RFP to pre-qualify ESCOs that are interested in participating in the program. The responses are reviewed by State Energy Office staff to ensure that the ESCOs meet all the requirements. ESCOs must requalify every five years. To view the RFP that Arkansas releases for ESCO prequalification, please click here.
  • In New Mexico, the State Energy Office works with the New Mexico State Purchasing Office to issue an RFP for companies to implement ESPC projects. Currently, New Mexico has State Price Agreements with eight companies using open book pricing to implement projects. A public facility can call any company on the list to conduct an IGA. Once the IGA is certified, the entity can continue to implement the project with the same company. To review the RFP that New Mexico uses to prequalify ESCOs, please click here.
  • Virginia Energy uses an RFP to pre-qualify ESCOs. ESCOs that prequalify are approved to operate in the state for ten years. The current prequalification period is valid from 2019-2029. The open enrollment period for ESCOs to prequalify themselves is from July 1 – August 31 every two years. During open enrollment, all ESCOs within the program must submit documentation and screening to maintain pre-qualification status. To review the RFP that Virginia uses to prequalify ESCOs, please click here.

What support should the program provide to help school districts source financing?

While many projects will use ESCO-sourced financing to fund their improvements, State Energy Offices can assist with school districts that are interested in using other financing for their projects. One way they can do this is by developing and operating a Revolving Loan Fund to provide direct financing for projects. State Energy Revolving Loan Funds can provide capital at below market rates for financing retrofits for schools, making them an advantageous choice to leverage if they are available. Conversely, the State Energy Office could also connect the school district with third-party financiers so they can shop around for the best rates for their project to keep costs lower.

If your office is looking to establish a Revolving Loan Fund to support ESPC projects, NASEO’s Revolving Loan Fund Program-in-a-Box can help get your office started. States such as Arkansas and Texas use this approach. To explore that Box, please click here.

  • Arkansas uses a Revolving Loan Fund to support its ESPC program through offering below-market interest rate loans (.4 percent) to entities interested in using ESPC to finance upgrades. The fund is replenished as customers pay off loans, and the Arkansas Energy Office adds any de-obligated SEP funds to the fund each year to increase its lending capacity. To see the application for the program, please click here.

How should the program conduct Measurement and Verification of energy savings?

Measurement and Verification (M&V) of the savings provided by the measures installed by the ESCO helps ensure that the school district is receiving the savings it was guaranteed in the contract it signed. Proper M&V enables school districts to recuperate any shortfalls in energy savings promised by the ESCO and prevent the project from adding costs to the school district’s budget as a result. If energy savings shortfalls are discovered through M&V, the school district can have the ESCO cover the loss through providing monetary compensation, installing additional efficiency measures to make up for the shortfall, or some combination of both.

To support M&V implementation, a State Energy Office-run ESPC program could:

  • Provide standardized methods and terms for measuring and verifying energy and cost savings to assure greater school district confidence in performance.
  • Verify that school district representatives clearly understand their ESPC savings guarantees and the baselines against which energy and cost savings are measured.
  • Document terms relating to operation and maintenance requirements for the installed equipment; adjustment of energy savings calculations for weather, usage, and other factors; utility rate escalation; and other factors affecting the calculation of savings and fulfilment of the savings guarantee. The program could also include in the methods and terms of how commissioning, school district staff operations and management training, and post-installation M&V will be conducted and funded. The State Energy Office could consider documenting and retaining the agreement, including customer understanding of it, for staff training and future reference.

To better understand the business case for M&V in ESPC projects, please click here.

To better understand the ESPC savings guarantee, please click here.

The ESPC program should also confirm that M&V reports and other materials are reviewed by a technical consultant, whether from the customer’s organization, a cognizant state agency, or a third party, to assure that ESPC conditions, including guaranteed savings, are met. The program should file and track M&V reports and related materials (ideally by the customer, the oversight agency, or the ESCO) for easy access and reporting to the State Energy Office or landlord/general services agency and to fulfill responses to legitimate requests (e.g., legislative inquiries and audits or freedom of information requests). This is crucial when internal staff turnover occurs to preserve institutional knowledge of active and previous projects. While NASEO and NAESCO’s State ESPC Program and Project Principles recommend including M&V for the entire length of the ESPC contract, states have a range of requirements for M&V:

  • Arkansas requires one year of M&V for projects utilizing the standard ESPC program; however, this requirement increases to three years if the project also opts to use funding from the RLLF program, with any monitoring beyond those periods being voluntary.
  • In New Mexico, the ESCO develops the M&V reports, which are then reviewed by the third party and EMNRD for compliance with the savings guarantee. New Mexico requires M&V for the entire term of the contract.
  • Virginia is required by statute to include M&V for the entire term of the contract.

The U.S. Department of Energy’s eProject eXpress software provides a streamlined, tailored pathway for state and local governments and ESCOs to document, track, and demonstrate the ongoing value of their ESPC projects and programs. It enables organizations to communicate the ongoing impact of their ESPC projects and programs and helps to demonstrate successes and progress towards goals and highlight defined metrics, including utility and cost savings, emissions reductions, and job creation. States and schools can require ESCOs selected to execute projects to utilize eProject eXpress with those projects to track savings.

The software offers several benefits to State Energy Offices and school districts using it to track their ESPC projects, including:

  • Quick, streamlined data entry by energy service companies (ESCOs);
  • Easy report generation and retention for future use by owners;
  • Free, secure web-based storage that protects customer data; and
  • Access to key ESPC project documents and data in perpetuity, reducing continuity challenges with staff transitions.

To learn more about eProject eXpress, please click here.

To view the eProject eXpress QuickStart Guide (or the entire Help/Documentation page), please click here.

How will the program require ESCOs to meet the savings guarantees?

When M&V finds that guaranteed savings were not achieved, the State Energy Office or Owners’ Representative can help the school district determine if the ESCO did not fulfill its contractual requirements and, if so, help the district pursue remedies in accord with the contract. The first action ESCOs can take is to install additional retrofit measures to make up for the shortfall in utility bill savings. The second action they can take is to directly financially compensate the school district for the savings shortfall. The final option is a hybrid approach, where the ESCO installs additional measures and pays for part of the shortfall to the district.

  • In New Mexico, the state’s enabling legislation requires that the savings are guaranteed. If the savings are not realized the ESCO must investigate the facility to determine the cause. If the savings were miscalculated the ESCO must make up the difference. The customer and the ESCO can also meet and determine the new savings if major changes have been made to a facility that were not anticipated during the IGA and contract development. EMNRD receives annual M&V reports from the ESCOs.
  • In Arkansas, ESCOs must submit annual M&V reports to both the building owner and the Arkansas Energy Office within thirty days of annual reconciliation. If necessary, the ESCO must compensate the building owner for any underperformance of energy conservation measures within thirty days of annual reconciliation.
  • Virginia requires ESPCs to include in the contract a written guarantee that the ESCO shall annually reimburse the contracting entity for any savings shortfalls that may occur during the life of the contract. Virginia requires ESCOs to submit annual M&V reports to determine if the contracting entity is receiving the agreed-upon savings.

How will the program fund its technical assistance offerings?

States fund ESPC programs that provide technical assistance and are overseen by State Energy Offices or other state agencies using different approaches.1

The first approach is to use U.S. State Energy Program (SEP) funds to support technical assistance efforts. Flexible SEP funds can support a variety of technical assistance offerings for building owners, including:

  • Review of Investment Grade Audits and measurement and verification reports
  • Assistance with ESCO selection;
  • Education of key stakeholders on ESPC, including technical assistance training on ESPCs for key school personnel and for ESCOs to discuss the school context for ESPCs;
  • Assistance with contract development between ESCO and customer;
  • Prequalification of ESCOs to operate in the state; and
  • Providing relevant paperwork that customers need to complete to move forward with ESPC.

State Energy Offices with active programs avoid using SEP funds to directly fund projects (unless those funds are part of an existing Revolving Loan Fund or other financing program) and instead find more value in leveraging funds to build out support infrastructure for schools to find private financing to fund their ESPC projects.

A second approach is to utilize a self-sustaining fee structure like the ones used in Kansas, New Mexico, and Washington. This form of ESPC program funding mechanism can support program administration, provision of technical and business/administrative assistance, updating and improvement of documents and guides, and tracking and reporting of ESPC performance at the program level. A small fee as part of each ESPC contract can self-fund ESPC programs and make it easier for State Energy Offices to provide comprehensive support, while freeing up other sources of capital for the State Energy Office to utilize in pursuit of complementary energy goals.

State Energy Offices can also blend these approaches to fund their programs, charging fees for specific services but funding the rest of the program’s technical assistance through SEP funding.

  • Arkansas funds its program primarily using SEP funds but also charges a flat rate of 0.3 percent per project phase (minimum of $7,500, maximum of $30,000). Projects with no debt issuance beyond the IGA and M&V are charged a fee of $4,000 per project phase.
  • Kansas’ Facility Conservation Improvement Program, the ESPC program run by the Kansas Corporation Commission, uses a fee structure that adjusts based on the cost of the project. As the project cost increases, the fee charged by the program decreases accordingly. To review the fee schedule, please click here.
  • New Mexico charges a fee of one percent of total project costs to reimburse third-party reviewers for their work on the IGA and M&V reports. This fee also partially funds the work done by the staff in the State Energy Office. SEP funds and state funds cover the remainder of the costs incurred by the State Energy Office to manage the program. The State Energy Office is considering raising the fee to 1.5 percent to better align its costs with other programs.
  • Virginia funds its comprehensive ESPC technical assistance program entirely using SEP funds.
  • Washington state’s Department of Enterprise Services self-funds its ESPC program through a fee structure. The fees cover the costs of twelve engineers that provide technical assistance to public sector and MUSH market customers looking to use ESPC to make improvements. To see the fee structure, please click here.
  Arkansas New Mexico Virginia
Fee Structure Program charges a flat rate of 0.3 percent per project phase (minimum of $7,500, maximum of $30,000). Projects with no debt issuance beyond the IGA and M&V are charged a fee of $4,000 per project phase. Program charges a fee of 1 percent of total project cost to reimburse third-party reviewers and cover other program costs The Virginia State Energy Office does not build fees into its contracts
IGA Support? Yes; review of IGA reports for client Yes, review and certification of IGA reports for clients Yes; review of IGA reports for client
Eligible Entities State agencies; local governments; higher education; K-12 schools State agencies; local governments; higher education; K-12 schools State agencies; local governments; higher education; K-12 schools
Prequalify ESCOs? Yes. A list of prequalified ESCOs can be found on the Arkansas Energy Office’s website at https://www.adeq.state.ar.us/energy/initiatives/performance.aspx Yes. EMNRD developed a state price agreement similar to a GSA agreement that they use to qualify ESCOs for use by the state. ESCOs provide open-book pricing to interested customers under the agreement. Yes. A list of prequalified ESCOs can be found on Virginia Energy’s website at https://www.energy.virginia.gov/energy-efficiency/documents/ESPC/Important%20Links/Contract%20Summary%2012.2021.pdf
Eligible Upgrades Any upgrade that reduces energy costs and does not degrade the level of service and is verifiable by IPMVP A modification to a facility that is designed to reduce energy consumption or conservation-related operating costs Any energy efficiency or operational efficiency that includes an alteration for the betterment of an existing facility
Require M&V? Required for one year, then optional afterwards. Projects using funds from the state’s RLF require three years of M&V. Required for the life of the contract Required for the life of the contract

1 Some successful ESPC programs are managed by state agencies other than the State Energy Office. For example, Washington state’s ESPC program is overseen by the state’s Department of Enterprise Services, while Maryland’s ESPC program is run by the state’s Department of General Services.