Energy Efficiency: Partnering Successfully with an ESCO

A recent feature in The Chronicle detailed how as funds for facilities decrease, more colleges are signing performance contracts with energy services companies (ESCOs); often, an experienced ESCO can implement much needed infrastructure improvements and efficiency projects that are then paid for by energy savings. However, the Chronicle notes several cases in which poorly structured partnerships led to long negotiations late in the project or even litigation, and quotes one expert, the president of Synchronous Energy Solutions, as remarking, "If you're going to try to fix everything at the end, it's a lost cause for everyone -- the ESCO and the owner."

We turned to Bruce Colburn, chief operating officer at EPS Capital Corp., who has both taken part on many college review committees selecting ESCOs and served at an ESCO, for advice on how colleges can set up a successful partnership from the beginning -- including what to consider in the RFP, the selection process, and the contract.

The Right RFP

"Don't write an RFP asking for a book or a three-ring binder full of information. Too much information is as bad as too little."
Bruce Colburn, EPS Capital Corp

Nor will it be useful to review an overwhelming list of past projects. "Don't just ask how many projects they've done, how many large projects they've done, or whether they have a large body count of staff," Colburn warns. You really just want to know a few things:

  • Whether the ESCO has successfully completed projects of a comparable size to yours
  • Whether the ESCO has completed them recently
  • What core team you will be working with, and whether that core team has worked on previous projects together successfully

"You do not want to select an ESCO just on the basis of their list of projects," Colburn warns. "There are some firms who may overwhelm you with a list of projects, but you need to ask which of the people who worked on those projects will also work on yours. And you need to be hearing about projects that were done in the last couple of years, not a decade ago. Make sure your RFP is asking for useful information."

You want to ask for the resumes of their top 2 people who would be actively involved in your project. You also want to make sure that you are getting a list of projects that really are comparable. For example, if you are looking toward a contract for a $4 million package of energy efficiency projects and infrastructure upgrades, do not ask them about other $4 million projects they have completed. Ask about the smaller projects they have done that are comparable to the individual projects within that $4 million package, such as the $500,000 in lighting, or the HVAC upgrades you want.

Also, make sure your RFP states explicit selection criteria and how long the selection process will take. This will help both you and the ESCO avoid wasting time.

The Right Process

One common mistake is to require the ESCO to do a free audit of two or three facilities, in the absence of clear objectives for the audit and for the capital improvements or energy efficiency plan that the audit will inform. An ESCO can easily send in staff to measure everything that it is possible to measure in your facilities, but if you do not have clearly defined objectives for the audit, the information will not be that useful in solving campuswide infrastructure needs.

Colburn suggests a better approach. Set some broad objectives for the project; then invite the ESCO to bring in a few seasoned professionals who can spend a few weeks with your own team to walk through those objectives together, learn more about your specific needs, examine a few facilities, and arrive at well-defined goals. You don't just want a scattershot list of possible savings. You want a comprehensive plan that will allow you to leverage maximum energy savings to achieve the maximum infrastructure improvements, according to your own campus's needs and priorities.

"You want to find a partnership with an ESCO where they understand your goals, and you understand their approach."
Bruce Colburn, EPS Capital Corp

"This is not just about how much you can save," Colburn adds. "I know of some ESCO projects that were disasters though they saved money on paper. This was because the university entered itno a contract that was a bad fit. You need an ESCO who will solve your specific problems and operate as an extension of your office."

Besides scrapping the traditional audit for more of a think tank approach, Colburn suggests:

  • Taking the time to narrow your options to 3-4 promising candidates (not 8-10), to save time later
  • Face-to-face interviews prior to selecting an ESCO
  • Identifying a core internal team that will work closely with the ESCO not only during the selection and review but for the duration of the project

Face-to-Face Interviews

"Don't just rely on paper. Always have a face-to-face interview that includes at least 3 of the team members who plan to be actively engaged in the project."
Bruce Colburn, EPS Capital Corp

The interview is the opportunity to ensure that you are partnering with a team who will understand and be responsive to your needs. You need to:

  • Ask about their philosophy -- ensure that this is not a firm with a preset, "one size fits all" agenda.
  • Verify the core team, the 3-4 staff from the ESCO who will do this project: "You may be signing the contract with the company," Colburn remarks, "but you are also committing to a partnership with these individuals."
  • Ask what they would want to avoid -- what would they do differently on your project, based on things they have learned about past projects? This will allow you to see their problem-solving abilities, as well as how well they understand your needs.
  • Ask about their philosophy on allocating manpower. "You do not want 50 people working on a large project and giving you 50 different answers on 100 different buildings. You want about 8 people, and you want to arrive at a cohesive, coherent plan."
  • Ask them how much they plan to rely on vendor subcontractors for auditing work.

If an ESCO intends to bring in many national subcontractors, you need to be aware that these subcontractors may bring in a canned approach. You need to work with a team that has assessed your unique needs, understands how you prioritize your needs, and is able to address those needs in the way that you have both agreed.

Appointing Primary Contacts

A best practice to avoid miscommunication, red tape, and missed deadlines, is to ensure that the ESCO has consistent primary contacts with your institution. This entails selecting a core group of 3-4 staff who will serve as the "point people" throughout the partnership. Colburn recommends ensuring that the group includes representation from operations and maintenance, the business office, and academic affairs.

Having a dean or a vice provost on the team allows you to ensure that the ESCO is mindful of the needs of your facilities' users. This can be especially important with highly specialized facilities, such as research laboratories or athletics facilities. Colburn cites one case in which during an HVAC upgrade an ESCO unknowingly killed a population of fifteenth-generation laboratory rats, destroying years of research and provoking a lawsuit. In another example, there may be specific times of the year in which you will want to run as much air conditioning as possible through your athletics facility; an ESCO engaged in a energy efficiency project will need to know this, and will need to be able to plan with the appropriate stakeholder in your institution.

Make sure that there are open and direct lines of communication between the ESCO's core team and a small number of critical stakeholders at your institution.

The Right Contract

"A good ESCO contract is a teaming contract. It has rewards and responsibilities for each party clearly spelled out."
Bruce Colburn, EPS Capital Corp

Colburn suggests several characteristics of an ESCO contract that sets up both the college and the ESCO for success. First, the contract needs to allow for sharing of excess savings between the college and the ESCO, so that both parties have a vested interest in focusing attention on the long-term persistence of savings. Frequently, one party will identify midway through a project an opportunity to generate additional savings. In such cases, there needs to be an incentive for both parties to act on it. "If all excess savings go to the owner, the owner actually loses out," Colburn remarks, "because there is no incentive for the ESCO to go above and beyond, and no reward if they do."

"You need to incent and reward success. Structure the contract so the ESCO is a winning partner who will not only make sure that your project breaks even but that it does better."
Bruce Colburn, EPS Capital Corp

Second, a good practice is to allow a simple method to amend the contract at a later date with additional measures, as you find new opportunities for savings. This can be as simple as a one-page change order, but it is essential that the contract is easy to amend, so that you can add additional work when needed.

Finally, ensure that the contract identifies explicit responsibilities for each party. For example:

  • What maintenance each party is responsible for
  • A maximum review period for larger projects that require some design and approval