1. M&V Part 2: Risk Assessment & Responsibility Allocation

2. 2-2 Risk & Responsibility Ø Risk Assessment F Types of Risk. F Allocating Risk. F Cost Effectiveness. Ø Responsibility Allocation F Usage F Performance F Financial

3. 2-3 Definition of Savings Energy Savings = Use Baseline - Use Post-Retrofit Costs Time ECMs installed here Baseline or adjusted baseline Baseline Measured or calculated performance Savings

4. 2-4 Definition of Savings Energy Savings = Use Baseline - Use Post-Retrofit Energy Savings = (Use Baseline  Adjustment) - Use Post-Retrofit Costs Time ECMs installed here Baseline or adjusted baseline Baseline Measured or calculated performance Savings

5. 2-5 Definition of Savings Energy Savings = Use Baseline - Use Post-Retrofit Energy Savings = (Use Baseline  Adjustment) - Use Post-Retrofit Savings, $ = (Unit Cost) (Energy Savings)

6. 2-6 Calculating Savings There are two components to energy use and energy savings: Ø Rate of energy use (Performance) Ø Hours of use (Usage) Energy use is the product of the two. Reducing the rate of energy use and/or the number of hours reduces the total energy use.

7. 2-7 Performance and Usage: Ideal Rate,kWRate,kW Hours per year Post-retrofit Energy UseBaseline Energy Use Increased Performance Reduced Operating Hours

8. 2-8 Types of Risk Energy savings are based on: Ø Performance Ø Usage While cost savings are based on: Ø Financial elements Ø Uncertainty in the energy savings PerformanceUsageFinancialUncertainty

9. 2-9 Performance Risk Ø Performance may be compromised by poor design or implementation. Ø Equipment performance may change over time due to degradation and/or poor O&M practices. Ø These are factors that the contractor normally (but not always) controls. PerformanceUsageFinancialUncertainty

10. 2-10 Usage Risk Ø Usage can be defined as: F operating hours (lighting, equipment) F occupancy or schedules F heating & cooling loads (& setpoints) F weather F production Ø These are factors that the agency (or no one) controls. PerformanceUsageFinancialUncertainty

11. 2-11 Financial Risk Energy savings must be converted to cost savings. Ø What energy rates will be used? Ø How might they change over time? Ø What other savings will be claimed? PerformanceUsageFinancialUncertainty

12. 2-12 Savings Uncertainty Ø We don’t measure savings, we measure energy use before and after- the savings are the difference. Ø We never know the exact energy use before and after- there is always some uncertainty in each. PerformanceUsageFinancialUncertainty

13. 2-13 Performance and Usage: Real Rate,kWRate,kW Hours per year Post-retrofit Energy UseBaseline Energy Use Reduced Operating Hours Increased Performance

14. 2-14 Uncertainty Risk Ø Claimed savings are always estimates because savings cannot be measured. Ø Uncertainty is introduced through: F Measurement and modeling error F Sampling error F Simplifying assumptions Ø These are factors inherent in M&V. Ø Uncertainty can be reduced but not eliminated. PerformanceUsageFinancialUncertainty

15. 2-15 Savings Uncertainty: Large PerformanceUsageFinancialUncertainty

16. 2-16 Savings Uncertainty: Small PerformanceUsageFinancialUncertainty

17. 2-17 Allocating Risk For SuperESPC, M&V only needs to show that savings guarantee has been met, not determine ‘actual’ savings. F M&V can reduce uncertainties to reasonable levels. F M&V can allocate performance, usage & financial risks to the appropriate parties.

18. 2-18 Responsibility Matrix Items that influence savings are: Ø Performance F Equipment Performance Ø Financial F Energy Prices F M&V Costs Ø Usage F Operating Hours F Loads F Weather F User Participation PerformanceUsageFinancial

19. 2-19 Equipment Performance Equipment performance is affected by design and by long-term maintenance. Ø Who is going to conduct the long-term maintenance? Ø How will long-term performance be verified? PerformanceUsageFinancial

20. 2-20 Equipment Performance Equipment performance is often linked to operations & maintenance procedures. Ø If agency conducts O&M, will contractor be responsible for poor O&M practices? Ø If contractor conducts O&M, what services and at what cost? Ø What about repair & replacement? Ø What if equipment life < contract term? PerformanceUsageFinancial

21. 2-21 Operating Hours Energy use and savings fluctuate with equipment and facility operating hours. Ø If the agency reduces operating hours and savings are not realized, is the contractor responsible? Ø If the agency increases operating hours, utility bills will increase. Will savings increase or decrease? PerformanceUsageFinancial

22. 2-22 Operating Hours If hours are stipulated: Ø How were values estimated? Ø Are they reasonable? Ø What happens if agency changes schedule or facility usage? If hours are measured: Ø When were they measured? Ø What precision and confidence? PerformanceUsageFinancial

23. 2-23 Operating Hours Office Space Ø M-F 9-5: 2,080 hours/year Ø M-F 9-9: 3,120 hours/year Continuous operation Ø 24/7: 8,760 hours/year Nighttime Lighting Ø Photocell control: 4,380 hours/year PerformanceUsageFinancial

24. 2-24 Loads The agency may make changes that affect equipment loads (e.g, additional air conditioning). Ø If loads increase and savings increase, who benefits? Ø If loads and savings decrease, who is responsible? PerformanceUsageFinancial

25. 2-25 Loads How will savings estimates be affected if: Ø The agency adds or removes loads? Ø Adds building space? Ø Removes building space? Ø Changes thermostat settings? PerformanceUsageFinancial

26. 2-26 Loads Constant Baseline Energy Use (of affected systems) Reduced Energy Use Agency Savings Reduced Energy Use Contractor Payments Before ESCPDuring ESPC After ESPC Contract Contract Contract PaymentsPayments Other Loads

27. 2-27 Loads Increase Baseline Energy Use (of affected systems) Reduced Energy USe Agency Savings Reduced Energy Use Contractor Payments Before ESCPDuring ESPC After ESPC Contract Contract Contract PaymentsPayments Other Loads

28. 2-28 Weather No one controls the weather. Ø How shall the baseline be adjusted for weather conditions? Ø What happens in mild seasons when promised savings may not materialize? Ø What happens in severe seasons? PerformanceUsageFinancial

29. 2-29 Weather 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Contract Year SavingsSavings Actual Estimated Guaranteed Savings can be adjusted to account for mild weather conditions. PerformanceUsageFinancial

30. 2-30 Weather Typical normalization procedures: Ø Regression modeling on HDD & CDD. Ø Building simulation. Sources of weather data: Ø Typical Meteorological Year (TMY). Ø Data from Nat’l Climatic Data Center. Ø Site measured. PerformanceUsageFinancial

31. 2-31 User Participation Some measures require users to interact with equipment for proper operation (or at least not override it.) Ø If a measure does not work because the users do not use something as intended, is the contractor responsible? PerformanceUsageFinancial

32. 2-32 User Participation How will user interaction be maintained (or minimized)? Ø Training? Ø Annual verification and reporting? Ø Lockboxes (e.g., on thermostats)? PerformanceUsageFinancial

33. 2-33 Energy Prices Energy prices fluctuate. In a long-term contract, how will the saved energy be valued? Ø On current rates fixed for the contract? Ø On real rates that fluctuate over time? Ø On fixed rates that escalate for inflation? PerformanceUsageFinancial

34. 2-34 Energy Prices Ø Fixed rates are easiest to understand, but may not be realistic in 15+ year contract. Ø No one can predict what future rates will do. Sudden price escalation can make savings seem to disappear. Ø Escalating rates for assumed inflation minimizes risk and reflects real economics. PerformanceUsageFinancial

35. 2-35 Energy Prices PerformanceUsageFinancial

36. 2-36 Energy Prices PerformanceUsageFinancial

37. 2-37 Energy Prices PerformanceUsageFinancial

38. 2-38 Energy Prices Ø Use marginal rates*, not blended or average rates. Ø Rate or fuel changes: F Value baseline use at old rate, new use at new rates. Ø Demand charges: F Demand savings calculations not trivial. F Beware of ratchet clauses! *Cost of last kWh or therm. PerformanceUsageFinancial

39. 2-39 Energy Prices Baseline: Ø Use 1 to 3 years of utility rates plus common sense. Ø Treat price spikes and anomalies carefully. Escalation: Ø Use NIST Guidelines (BLCC) for energy price escalation. PerformanceUsageFinancial

40. 2-40 M&V Costs Ø The agency pays the contractor for M&V services rendered. Need to balance M&V rigor with project risk. Ø Law of Diminishing Returns applies. Ø Typically, initial M&V costs will be 3% to 15% of the capital cost; annual M&V costs will be 3 to 15% of the savings. PerformanceUsageFinancial

41. 2-41 M&V Costs M&V Rigor M&V Cost Value of information $ PerformanceUsageFinancial

42. 2-42 Review Questions Ø Why might utility costs increase despite a successful SuperESPC project?