Energy-efficiency incentives for industrial and commercial buildings come and go. Next up on the chopping block is the $60-million BOMA Toronto Conservation and Demand Management fund, which is designed to incent building owners and operators to undertake conservation projects on their properties. It will expire on December 31, 2010. Soon after the federal government’s ecoENERGY Retrofit Incentive for Buildings program, which targets small and medium-sized organizations, will end on March 31, 2011.
Ideally, energy retrofit projects will coincide with building maintenance or budget cycles, but the limited-time offer of incentive programs may restrict an organization’s ability to act on those incentives. That said, even with the expiration of incentive programs, a retrofit can still offer considerable savings and other benefits to a building owner/operator. Unfortunately, high up-front costs may prove to be a significant obstacle. So what’s the alternative? Another option is an energy-savings agreement (“ESA”), which offers energy-efficiency enthusiasts an opportunity to side-step the incentive question and proceed with a retrofit according to an organization’s own timeline.
A typical ESA outlines and addresses the design, construction, guarantee, and follow-up monitoring of energy-saving projects. It establishes a building’s baseline energy use, adjusted for weather and occupancy, for a fixed period of time pre-retrofit. A party other than the property owner (e.g. contractor, third-party financing company) will pay for the retrofit and earn its revenue when the building owner/operator remits energy savings realized against the baseline to the financing entity.
ESAs have been used with considerable success in the public sector in the guise of Energy Savings Performance Contracts (“ESPCs”). They are employed between a government agency and an energy service performance company (“ESCO”). The ESCO finances, installs and maintains new energy efficient equipment in the facilities at no up-front cost to the government. The ESCO is paid back from the energy savings of the contract.
According to Natural Resources Canada over 86 retrofit projects have been implemented using ESPCs, attracting $320 million in private sector investments and generating over $43 million in annual energy cost savings. The projects have been responsible for 15-20 percent in energy savings and helped to cut greenhouse-gas emissions by 285 kilotonnes. Similarly, the U.S. Department of Energy reports the implementation of over 550 ESPC projects worth $3.6 billion as of March 2010. They have resulted in savings of approximately $11 billion (U.S.) in energy costs.
There are generally two different contract options in the public sector that can be modified as needed for use in the private sector: the first-out performance contract and the shared savings performance contract. Under a first-out contract, the ESCO finances the projects and retains all the energy savings until the project is paid for or until the end of the contract, whichever occurs first. A contract may stipulate a maximum return on investment, thus triggering contract termination if the ESCO realizes its return prior to contract expiration. Should the ESCO fail to realize its return before the expiration date, the contract terminates as originally intended, and payments to the ESCO stop.
With a shared-savings contract, the ESCO and building owner/operator each receive an agreed-upon percentage of energy savings over the life of the contract. The catch here is that even though a building owner/operator may start to realize a financial benefit earlier than a first-out performance contract, this type of contract will run for a longer period of time. Otherwise, the two contracts are substantially similar.
In addition to scheduling freedom, an ESA benefits a building owner/operator by allowing it to (i) incur a limited up-front financial sacrifice; (ii) realize energy and maintenance cost savings post-ESA; (iii) reduce GHG emissions; (iv) demonstrate sustainable values to its stakeholders; and (v) increase property value and marketability of a building by updating or replacing old or obsolete equipment with newer, more efficient technologies that result in higher-quality systems, fewer breakdowns and reduced maintenance. Improved lighting, better air quality and more comfortable room temperatures could also reduce absenteeism and increase employee productivity.
As government intervention in the building retrofit market recedes or is modified, ESAs can help property managers deal with these changes by providing reliable benefits with minimized financial risk.
Robert J. Wakulat is an independent green energy and business lawyer residing in Toronto. Visit his blog at wakulat.blogspot.com for his views on various legal issues related to green energy.