Performance contracting in action
Owner: Department of Public Works Water Division; Wilmington, Del.
What: 20-year, $14.5-million guaranteed energy performance contract (GEPC)
Type: Outside financing arranged by GEPC contractor
GEPC contractor: Honeywell Business Solutions
Energy audit and facility design: CH2M Hill
Energy rate negotiation: Enstrat Inc.
Anticipated return: $16 million less than a bond or revolving loan
Financing and implementing capital improvements as part of a guaranteed energy performance contract (GEPC) allows water and wastewater utilities to upgrade without tapping into tax and fee resources, thus extending the operation's overall financial capabilities.
Also known as guaranteed performance contracting (GPC), energy performance contracts (EPC), and energy services companies (ESCO), this turnkey service is sometimes compared to design-build construction contracting. Customers get a complete set of energy efficiency, renewable energy, and distributed generation measures backed with guarantees that the savings realized by a project will be enough to finance the entire project's cost, including operations and maintenance.
Considering the massive amounts of electricity and natural gas used to treat and transport water to and from customers, it only makes sense that municipalities think about such a contract when they look at upgrading their facilities.
First electricity, now water
Energy-based performance contracting emerged in the late 1970s when the U.S. Energy Department enacted the National Energy Conservation Policy Act of 1978. The law requires electric utilities to provide homeowners with energy conservation audits and other services to quell demand. Their use took off in the 1980s because the instrument also allows project financing.
In the 1990s, the Efficiency Valuation Organization/IPMVP launched the International Performance Measurement and Verification Protocol (IPMVP), which gave commercial lenders the assurance they needed to finance projects on a large scale.
Potential water/wastewater performance contracts
After the ENRON collapse in 2002 and the uncertainty of deregulation in the electric utility industry, performance contracting diminished. But with energy prices increasing; the continued lack of federal, state, and local funding for infrastructure projects; and the growing awareness of greenhouse gas emissions and the water/energy nexus, the concept is making a comeback.
The methods of capital investment using a performance contract include:
- Shared savings. A utility floats a bond based on program value and the contractor's capital or the bond is paid back with savings from the program.
- Contractor assumes all risk. Typically limited to projects with a three- to 10-year payback. (Editor's note: Our June 2011 issue's "Using vendor financing to move projects forward" points out that vendor financing for improvements in general is often limited to 10 or fewer years for similar reasons.)
- Outside financing by contractor. The contractor negotiates a financing package between the client and a financial institution
- Contractor finances the project or program.