What to look out for in energy management contracts

Energy. Rising energy costs and increasing environmental awareness and regulation mean that both government and industry are looking for ways to produce more energy for less and supply less energy to more users.

Traditionally, demand management relied on installing metering devices, switchgear and fine tuning the building management system. But more sophisticated solutions are now producing greater amounts and depths of data. As a result, customers expect significant returns on their capital investments.

Any plant or building that requires a demand management solution will be complex. So how do you manage the complexity of a demand management solution with the expectations enshrined in an energy performance contract (EPC), particularly one that requires you to give a performance guarantee?

There are five key areas to watch on when signing up to an EPC: drawing a baseline, installation and commissioning, the performance guarantee, maintenance and disputes.

Drawing the baseline

Determining the baseline for existing energy usage is the first thing that any sensible solutions provider should do before signing anything.

In some cases, the customer may already have a detailed feasibility study (DFS) done by a consultant. Consultants can be good advisers, but promising- and even guaranteeing – energy savings based on a third party report is probably the easiest way to run into pitfalls quickly.

Simple differences in interpreting metering data and measurement and verification methodologies can translate to large financial consequences.

If you must rely on a consultants’ report, check it thoroughly (including testing all assumptions and calculations), demand to be named on the consultants’ insurance policy, ensure the policy is large enough to cover the entire performance guarantee, and write into the EPC that you are relying on the consultant’s report.

Carrying out a DFS is a costly and resource-intensive exercise. These days, a visual walk through of the facility and a review of the energy bills is not enough. You will often need to extract and interpret large quantities of real-time data.

This can turn up surprises: in a sports stadium, one solutions provider found that the refrigerators used to store beers were the biggest consumer of energy!  But more often, HVAC, servers and lighting systems will be the culprits.  

It’s important to ensure that you have a way to get paid for the DFS. Some companies structure their energy management services so that the DFS is provided free if the customer decides to proceed with installation of the solution.

This is not a problem, but if this does not happen, there needs to be a way to recover the DFS cost. Have a binding agreement in place rather than a simple MOU or LOI will ensure you are covered.

Installation and commissioning

The DFS has been done and the customer tells you to proceed with installing the solution. Your EPC should include provisions to ensure that:

  • You have reasonable access during business hours to carry out a thorough site inspection (in case you did not carry out the DFS);
  • You have workable extension of time and variation rights if the site conditions change or there are latent conditions which were undiscoverable at the beginning;
  • If you install devices such as a co- or tri-generation plant that requires connection to the distribution network, that any costs that the distributor charges are accounted for. A number of distribution networks, particularly in urban areas, have suffered from underinvestment. Distributors often have to pay compensation if the network goes down, so they will require connections to the network to be very safe. This usually requires additional equipment. These negotiations can significantly delay the timing of the project;
  • Once equipment is installed on the site, that the responsibility for it is clear. While you do not want to hand over title to the equipment until the customer has paid for it (and you may want to consider registration under the Personal Property Security Register), it’s important to be clear who is responsible for the equipment at what stage.

The performance guarantee

The idea of a performance guarantee is simple: if the solution does not achieve the savings predicted, you pay the customer. Don’t forget to negotiate that if you achieve more than the savings, that you share some of the bounty.
The performance guarantee is probably the most negotiated part of any EPC.

The first thing for a solutions provider to do is to check the term of the customer’s current energy contract and their procurement processes. Procuring energy is not always simple. If done without attention to detail, there can be exposure to volatile spot market rates over lengthy periods of time, “hidden” fees or unnecessarily high rates.

Setting out the baseline utility rates used is also a good idea. EPCs often have a payback of many years. People will inevitably change over the lifecycle of the EPC. Critically, the measurement and verification process (M&VP) must be agreed with clarity, based on a detailed understanding of the use of the facility and what affects energy usage.

Often the M&VP will be detailed in the schedules and be written by the technical team. If the commercial team do not understand the M&VP, there is a risk that the terms in the schedule and in the body of the EPC are not aligned.

You might think that this is nothing more than stylistic difference, but the use of a capitalised term and a non-capitalised term can change the interpretation of an obligation completely. And this can mean the difference between you bearing a cost that you didn’t budget for- or not.

Maintenance

Other than the performance guarantee, maintenance is often hotly contested. Who is going to do it? How will it be done? If it is done incorrectly, does the performance guarantee still hold? Who decides?

In an ideal situation, you should have a maintenance agreement to follow the EPC. If you cannot achieve this, then at least ensure that you have the right to carry out a thorough inspection of any and all maintenance carried out, and that the M&VP provides for missed or poorly-executed maintenance.

Disputes

Is the DFS correct? Which consultant got it wrong? Who is responsible for the equipment? Is the customer entitled to a payment this year? Was the maintenance done correctly?

These are just some of the questions that can arise. In our experience, it is unwise specify that all disputes be resolved in court.

Court lists are often many months long, not to mention the costs involved. EPCs are sensitive matters, as some customers may advertise the achievement of a certain energy rating once the EPC is in place.

If disputes go to court, the dispute and all the underlying evidence becomes public knowledge. This can have a significant impact on reputations.

Instead, a stepped approach using a mixture of expert determination, senior level negotiations and mediation often works better and more quickly to resolve differences.

[Melissa Kirby is Legal Director and Strategist at Sharpe & Abel, a law and strategy firm that serves the manufacturing, engineering, infrastructure and technical professions.]