1. Using Uncertainty Modeling to Optimize M&V in ESPC Projects Discussion Document 10/31/02

2. Overview Context: Concern about level of M&V Difficult to reach consensus on a specific project General concern about the degree of stipulation and utility bill reduction Can we add value to the current M&V decision- making process (largely qualitative) by incorporating uncertainty modeling (more quantitative)? Can we do this without complex (expensive) analysis?

3. Role of M&V in ESPC Maintain the integrity of the ESPC program Identify risk parameters and assign responsibilities Generally, ESCOs responsible for equipment “performance” and agency responsible for “operational” factors. Define required measurement parameters and protocol Future role: Help correlate interest rates with energy savings uncertainty

4. M&V Decision-making in ESPCs – Current Status Available Tools FEMP M&V Guide – based on IPMVP Risk/Responsibility matrix M&V decision support flowchart ASHRAE Guideline 14 Limitations – Lack of “context-specific” guidance What is the risk tolerance of ESCO and agency? What is the “optimal” (not ideal) level of analysis, given data, time, and budget constraints for a given project?

5. M&V Decision-making in ESPCs – Proposed Improvement Apply quantitative uncertainty analysis to optimize M&V, considering: Savings uncertainty Cost of reducing uncertainty via M&V Risk tolerances of the agency and ESCO This allows agency and ESCO to make a more informed decision Tradeoff M&V value (uncertainty reduction) and M&V cost

6. This is not new! FEMP M&V Guidelines already recommend use of uncertainty analysis Section 2.5: Selection of M&V methods & rigor Appendix D: Sampling guidelines FEMP Method A Detailed Guidelines Section 3.1: Considering uncertainty Section 3.2: How stipulations apportion risks and responsibilities We also don’t need to invent new science! Apply well-established risk management techniques for FEMP context

7. ESPC Cash-flow Model Payments to ESCO <= Total cost savings Total Cash flow during ESPC is (supposed to be) less than before ESPC Before ESPC During ESPC Energy + O&M Energy + O&M ESCO Payment Savings Total Energy + O&M Cost Savings Agency Cash flow ($)

8. ESPC Cash-flow Model In reality, there are uncertainties around each cash flow component Before ESPCDuring ESPC Energy + O&M Energy + O&M ESCO Payment Savings Agency Cash flow ($) Energy + O&M ESCO Payment ++= weather, energy prices, etc. Equip performance, model assumptions, etc. Typically fixed =

9. Cash-flow Uncertainty vs. Risk Tolerance Agency Risk Tolerance Cash-flow Uncertainty Agency Cash-flow $/yr Expected Cash-flow Risk Management Need

10. M&V and Risk Management Optimize M&V based on risk management needs M&V is not an end in itself! Agency Risk Tolerance Uncertainty w/ no risk mgmt $0 for M&V Agency Cash-flow $/yr Expected Cash-flow Uncertainty w/ some risk mgmt $X for M&V Uncertainty w/ more risk mgmt $2X for M&V

11. M&V and Risk Management – Illustrative Example ProjectCapitalUncertaintyM&V – Risk Management Lighting Retrofit MediumLowAgency mostly stipulates savings and absorbs risk Controls/ Commission LowHighSince capital is low, agency mostly stipulates, in lieu of increased M&V costs Chiller retrofit HighMediumAgency requires increased M&V due to savings uncertainty and high capital

12. Proposed LBNL Work (FY 2003) Pilot Projects Select 2-3 ESPC projects as pilots before M&V decisions are made Analyze uncertainty (work with ESCO, PF) Assess agency risk tolerance (discussions with agency) Analyze costs/benefits of different M&V options Record final decision-making process Assess lessons learned - policy implications for FEMP Risk assessment/management requirements Incorporation of risk management items in contracts Need, if any, for guidelines and tools Leverage FEMP M&V Committee for peer-review, guidance and dissemination