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Energy Savings Performance Contracts for Renewable Energy Projects

An energy savings performance contract (ESPC) is a partnership between a Federal agency and an energy service company (ESCO) that enables the agency to achieve energy savings projects with no up-front capital cost and without special appropriations from Congress. Agencies use ESPCs because they deliver guaranteed improvements, savings, and performance. In a Federal construction project, an agency might be able to use an ESPC to fund a particular renewable energy system, or more broadly, to incorporate a range of energy measures.

This page provides targeted guidance for agencies investigating the possibility of using an ESPC to integrate renewable energy into a Federal construction project. Because both renewable energy and new construction are less common for ESPCs, this section discusses three key topics.

Identifying a Renewable Energy Provider

DOE selected 16 ESCOs through a competitive process to implement an indefinite delivery, indefinite quantity (IDIQ) energy savings performance contract. This process streamlines the implementation of an ESPC with one of these providers. However, a site-specific approach may provide more options if an agency is looking specifically at renewable energy as these selections were made based on a wide range of energy conservation measures.

A site-specific approach broadens the field of qualified bidders so that both firms with specialized capabilities and pricing in that particular renewable technology can be brought into consideration. Although one of the 16 pre-qualified providers may also be competitive on a renewable energy system, having access to a wider range of bidders may enable an agency to implement a renewable project at lower cost and with more specific technology expertise.

Determining Ownership of the Equipment

Meeting agency energy goals on a construction project is likely not tied to the ownership of the renewable energy system, but rather the ability to take credit for the renewable energy generated by a system – preferably from one located on the Federal site where the energy is used so the agency can claim the renewable energy goal bonus for a project on Federal land.

The ownership of the renewable energy assets can have a significant impact on the overall economics of the renewable energy systems as certain tax benefits and other financial incentives can be realized by commercial entities but not by Federal entities. Incentives for renewable technologies vary widely from state to state, utility to utility, and even by local area. However, as with tax benefits, the types of owner entities eligible for these benefits are often limited to commercial, industrial, and residential owners. Federal agencies often do not qualify as they do not pay taxes.

Ownership of renewable energy assets by the ESCO can give the agency effective access to these tax benefits and incentives by passing along a lower energy cost to the agency. The ownership treatment of the renewable energy system should be structured to meet the goals of the agency in the most cost-effective manner. If the agency plans for ownership to remain with the ESCO for tax incentive or other financial purposes, the parties should consult a tax attorney to ensure that contract provisions do not limit those incentives.

Ownership of the equipment is a separate issue from ownership of the renewable energy from the system, which can also be important in financing a project and determining its value to the agency. An agency may decide to let the developer own the renewable energy certificates (RECs) from a project if they have a high value at that location in order to reduce the costs of the project. The agency can then work with the developer or pursue a completely separate transaction to acquire low-cost replacement RECs so that it can still claim the bonus for a project on Federal land to satisfy the Federal renewable energy goal, adjust the agency's Scope 2 greenhouse gas (GHG) emissions, and ensure that the project doesn't slow progress toward energy intensity reduction goals. If the agency does not own the RECs from a project or arrange to replace them any energy it receives from the project is not considered renewable and has to be treated as conventional electricity when calculating GHG emissions and energy intensity.

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Overcoming Restrictions Use for New Construction

ESPCs have traditionally been used for building retrofits or major renovations and not for energy efficiency or renewable energy in new construction. ESPCs are ideally suited for building retrofits because of the relative ease of creating a baseline of energy usage prior to the installation of efficiency measures.

Experience with using ESPCs to integrate energy efficiency and renewable energy into new Federal construction projects in much more limited. The original statute authorizing ESPCs was not designed with new construction in mind. However, there have been pilot projects utilizing ESPCs for new construction. The General Services Administration (GSA) has pioneered some work in this area with the Evo A. Deconcini U.S. Courthouse and Federal Building in Tucson, Arizona, and again with the FDA White Oaks Campus in Silver Spring, Maryland.

One approach to using ESPCs in new construction is to create a baseline of the building's energy usage using computer building energy models before it is built. This should already be standard modeling that occurs in the integrated design of an energy-efficient building. The modeling can then tailor a scenario that specifically excludes the energy technologies planned for the ESPC. This gives a baseline of energy use and costs for the project without the ESPC measures and represents the existing building. Additional new simulations can then be run with the proposed equipment to determine life-cycle cost effectiveness of the renewable energy and other energy systems.

Another approach is to design the building as renewable energy ready and phase the installation of certain renewable energy systems just after the construction of the building. Planning for the ESPC can be done in parallel with the new construction, but the set of renewable energy and energy efficiency measures planned for inclusion in the ESPC are paid for separately from the original construction.

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