Energy Performance Contracting FAQ

What is an Energy Performance Contract (EPC)?

An agreement that provides for design, acquisition, installation, testing, operation, and - where appropriate - maintenance and repair of energy conservation measures in a building or a group of buildings.

What motivates Public Housing Agencies (PHAs) to enter into EPCs?

The need or desire to:

• Make capital energy improvements while preserving limited budget dollars
• Reduce their utility expenses
• Reduce repair and maintenance costs caused by inadequate, aging, or obsolete equipment
• Modernize building operations
• Provide technical and operations training for building operating personnel
• Improve indoor air quality (IAQ)
• Create incentives for ESCOs to develop highly efficient projects by linking their compensation to project savings
• Conserve energy and water resources and improve the environment

What is an Energy Services Company (ESCO)?

An engineering firm that develops, finances, and installs projects designed to improve energy efficiency and maintenance costs for facilities. Many states have enacted laws to govern EPC use, which may require the ESCO to provide a savings guarantee. This reduces the potential risk to the building owner and manager. If the guaranteed savings do not materialize, the ESCO is contractually liable to pay for any shortfall. This "reconciliation" is done annually. Even in states without regulations an ESCO should always guarantee performance.

What is an Investment Grade Energy Audit?

A detailed energy (and water) audit with an accompanying engineering analysis of proposed energy conservation measures (ECMs), their costs, and savings. The Investment Grade Energy Audit should enable detailed rehab designs to be prepared and financed.

How do I finance the audit?

When building owners and the ESCO enter into a contract, the cost of the audit is financed as a part of the project. If the building owner decides not to enter into a contract after the audit is performed, the building owner pays for the audit services performed and the contract is cancelled.

What HUD regulations govern energy performance contracts?

24 CFR 85.36 – Procurement Requirements

24 CFR 990 – Revisions to the Public Housing Operating Fund Program:

24 CFR 990.170 (b) – Payable consumption level

24 CFR 990.185 – Utilities expense level: Incentives for energy conservation improvements

24 CFR 990.190 – Other formula expenses (additions)

24 CFR 965.308 – Energy Performance Contracts

What do typical Energy Conservation Measures (ECM) target?

• Appliances
• Water (toilets and other low flow fixtures)
• Lighting
• Domestic hot water and related controls
• Heating, ventilation (and cooling) systems and related controls
• Windows
• Fuel Switching
• CHP (Combined Heat & Power, or cogeneration)

What HUD incentives are available for EPCs and ECMs?

PHAs can take advantage of the add-on subsidy or the frozen rolling base subsidy. PHAs can now administer their own EPC if they meet certain qualifications as described in the new HUD Field Office EPC Procedures. This can be the more profitable route, however, using an ESCO will often be easier for the PHA.

Add-On Subsidy: A PHA can request an additional subsidy as an "add-on" to its total operating subsidy eligibility. This additional subsidy would be applied to amortizing payments for a loan contracted to finance energy-conservation improvements with a repayment period not to exceed 12 years. With HUD’s approval of a waiver request the repayment period can be extended to 20 years. The add-on subsidy is often used to do straightforward retrofits such as lighting, refrigerators and other bulk purchases.

Frozen Rolling Base: This incentive freezes the 3-year rolling base utility allowance at the level of consumption before installation of the energy improvements. This incentive applies when payments by the PHA to an ESCO or third party financier are dependent on the amount of energy cost savings realized. The PHA retains 100 percent of the cost savings during the contract period, and at least 75 percent of these yearly profits are used to pay off the loan until it is fully amortized. This portion of the profits would be applied to amortizing payments for a loan contracted to finance energy-conservation improvements with a repayment period not to exceed 12 years. With HUD’s approval of a waiver request the repayment period can be extended to 20 years. This incentive gives the PHA additional funds to use for energy-conservation improvements compared with the 3-year rolling base incentive.

Where can I find out about EPC training opportunities?

The PHECC Web site has a list of events including trainings.

How much risk is involved?

ESCOs should always work under a performance guarantee that shifts the risk to the ESCO. The guaranteed energy savings pay for the upgrades, so the PHA will have no up-front costs. If energy savings don't materialize in the end, the ESCO pays the difference. The PHA is responsible for overseeing the implementation and financial progress of the EPC to ensure proper tracking and accounting and to make sure the ESCO fulfills its contractual obligations. Measurement and Verification (M&V) provisions to assess the function of the ECMs are mandatory for every EPC, whether administered by an ESCO or the PHA.

More questions?

To contact the Public Housing Energy Conservation Clearinghouse email pheccinfo@drintl.com or call (800) 955-2232.