Delivering Efficiency with Performance Contracting Huge Savings from Energy Performance Contracting in Government Buildings The Pot of Gold: Why Use PC?

WHAT IS PERFORMANCE CONTRACTING? Type of Design/Build Project with a Performance Guarantee Turnkey service Audit + engineering + construction + commissioning + O&M + long-term savings measurement Delivers comprehensive utility savings Serves all public market segments Project savings are used to pay project costs Third-party financing Competitive market delivers low cost tax exempt financing

BENEFITS OF THE GUARANTEED ENERGY SAVINGS APPROACH Replace aging equipment with new equipment Decreased equipment repairs and lower future maintenance costs Optimized equipment performance through performance monitoring and project commissioning

ECONOMIC BENEFITS Access to 3rd party financing for needed capital energy improvements Enhanced local economies through the ESCO’s use of local engineers and subcontractors Freed-up budget dollars to fund other building needs

BENEFITS OF GUARANTEED ENERGY SAVINGS OPERATIONS Improved facility energy efficiency and reduced energy costs Reliable and persistent long-term energy saving project performance Improved indoor air quality (IAQ) and building comfort conditions Better overall management and control of facility equipment schedules

Guaranteed Energy Savings Delivered by ESCOs NAESCO has about 30 member ESCOs Many are subsidiaries of larger companies with offices and large staffs in many states Some are smaller companies with just a few offices which focus on specific regions

ESCO INDUSTRY SIZE

ESCO Market Segments - 16% average annual growth in performance-based contract revenues since 2000 -- Note we used broader definition of performance-based agreements compared to 2001 survey: - includes traditional performance contracts (e.g., guaranteed savings, shared savings, etc.) AND agreements involving performance risk for large onsite generation facilities (e.g., chauffage, build/own/operate, and contracts that guarantee an energy price and/or plant output, etc.)

ESCO Contracting Arrangements - 16% average annual growth in performance-based contract revenues since 2000 -- Note we used broader definition of performance-based agreements compared to 2001 survey: - includes traditional performance contracts (e.g., guaranteed savings, shared savings, etc.) AND agreements involving performance risk for large onsite generation facilities (e.g., chauffage, build/own/operate, and contracts that guarantee an energy price and/or plant output, etc.)

Technology/Project Types RENEWABLES -- some companies told us they included green building in this category Other services include, O&M, water conservation, non-energy improvements)

Technical Assistance for Guaranteed Energy Savings Projects Selecting an ESCO for a Project-Sample RFP and Evaluation Forms/ Review and Evaluation of Proposals Review of the Investment Grade Audit Sample Contract Documents Negotiation of Technical Contract Terms Review of Project Savings Performance Review of Project Economics/Finance Performance Contracting Elements 11

Sample of IL ESPC Projects Began with a Single Project in 1984-85 $20M in State EPC Projects Installed in 1995 (University ,Corrections, Health Care,Office) $69M Five Phases at CHA 1997-2012 Higher ED (e.g.$63M UIC and $92M EIU ) $60M P1 and P2 $40M at Cook County $30M at Chicago Public Schools $17M City of Decatur Performance Contracting Elements 12

TYPICAL PROJECTS 95% of the projects installed lighting or HVAC or both Projects are usually financed over 15 to 20 year terms 23% median electric savings The Pot of Gold: Why Use PC?

2005 - Present (Current Era) “DEREGULATION AND EXPANDING SERVICES” ESCO INDUSTRY TODAY 2005 - Present (Current Era) “DEREGULATION AND EXPANDING SERVICES” Deal Drivers: Low interest rates Contract terms in excess of 15 years Emphasis on comprehensive capital improvements Extensive use of tax-exempt lease financing Federal market sector opens up in a big way Major efforts by the federal government and some states to increase the number of EPC projects The Pot of Gold: Why Use PC?

WHY USE GUARANTEED ENERGY SAVINGS CONTRACTS? Lower Risk Address deferred maintenance Local Economic Development More Flexible Project Process Comprehensive efficiency projects Faster Project Implementation Best Value Project Design Criteria

Guaranteed Energy Savings Contracts = Risk Reduction Contractually guaranteed measured savings reduces the risk of savings erosion over time Integrated project analysis, design, and construction reduces the risk of lost savings opportunities and schedule delays Utility savings and energy performance monitoring reduces the risk of under-funding key future maintenance requirements The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Risk Reduction Up-to-date training and knowledge for facility operating personnel reduces the risk of project non-performance Ability to select services and materials based upon quality and value, rather than on lowest first cost, reduces the risk of poor equipment performance The Pot of Gold: Why Use PC?

CONVENTIONAL LOW BID PROJECT PERFORMANCE = HIGH SAVINGS EROSION RISK OVER TIME The Pot of Gold: Why Use PC?

GUARANTEED PERFORMANCE OFFERS STABLE ENERGY SAVINGS The Pot of Gold: Why Use PC?

CUMULATIVE ENERGY SAVINGS OVER TEN YEARS The Pot of Gold: Why Use PC?

SAMPLE PROJECT: SUMMARY OF ANNUAL SAVINGS Eastern IL Univ. Phase 2 $10,800,000 Energy cost savings $ 1,888,911 Operational cost savings $ 31,398 Electricity savings 4,934,513 kWh Gas savings 504,540 therms Coal savings 127,467 mmBTU Water savings 66,221,444 gallons Avoided Emissions CO2 41,506,257 lbs. SO2 150,950 lbs. NOx 52,407 lbs. The Pot of Gold: Why Use PC?

Agency Project Distribution Contract Value Annual Savings     PUBLIC HOUSING AUTHORITIES $ 86 M $ 6.4 M  SCHOOLS $ 59 M $ 4.6 M   CITY/COUNTY $ 102 M $ 6.9 M UNIVERSITY/COLLEGE $ 221 M $ 10.7 M PENDING CMS PROJECT $ 19 M $ 1 M The Pot of Gold: Why Use PC? 22

Guaranteed Energy Savings Contracts = Better Value Bid & Spec May take several years to secure sufficient funds to implement comprehensive energy projects High staff costs due to a piecemeal approach to bidding and managing each separate project Performance Contracts All funds needed for a comprehensive energy project are readily available Lower staff cost and quicker completion of a comprehensive project The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Better ValuE Bid & Spec Multiple contracts with multiple vendors can result in conflicting project requirements Energy savings are not guaranteed Performance Contracts One contract with single point accountability for project performance Long-term energy savings are guaranteed by the ESCO The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Better Value Performance Contracts Performance contracts typically contain explicit comfort and operating standards Comprehensive project implementation maximizes savings design opportunities Bid & Spec Guarantees of comfort and operating standards are not usually offered by equipment vendors Incremental project implementation misses savings design opportunities The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Better Value Bid & Spec Energy projects must compete for limited budget resources with other improvement projects No direct incentive for building staff to reduce energy costs Performance Contracts Energy projects are funded by third parties and repaid with energy and maintenance savings ESCO compensation is tied to providing energy savings over the term of the contract The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Better Value Bid & Spec Limited staff or lack of expertise may put project performance at risk Operations and maintenance budgets are usually under-funded, resulting in wasted energy Performance Contracts ESCO provides ongoing technical expertise to insure project performance Utility bill savings finance operations and maintenance required to maintain project performance The Pot of Gold: Why Use PC?

Guaranteed Energy Savings Contracts = Better Value Bid & Spec Equipment specific Lowest first cost equipment selection Slower implementation resulting Plan and spec requires a more rigid design Performance Contracts Comprehensive scope Best value LCC equipment selection Faster project delivery Design build produces flexible and innovative design solutions The Pot of Gold: Why Use PC?

Elements of a Guaranteed Energy Savings Project Selecting an ESCO for a Project The Investment Grade Audit Project Financing Structures The Energy Services Agreement “Green” Requirements in PC Projects Project Management Commissioning Monitoring and Verification (M&V) Performance Contracting Elements