METHODOLOGY TO IDENTIFY AND EVALUATE ENERGY SERVICES COMPANIES (ESCOS)

Transcription

1 METHODOLOGY TO IDENTIFY AND EVALUATE ENERGY SERVICES COMPANIES (ESCOS) Translated from original Metodología para identificar y evaluar empresas de servicios energéticos (ESCOS), 2007 Proyecto Desarrollo de Mercado de Energías Limpias en Chile Fundación Chile BID Fomin September 2012

2 Abbreviations HVAC: IGA: EE: ESCO: Heating, Ventilation and Air Conditioning Investment Grade Analysis Energy Efficiency Energy Service Company INN: UF: Instituto Nacional de Normalización (Chile) Unidad de Fomento (Chile)

3 Table of contents 1. INTRODUCTION DEFINITION OF AN ESCO... 2 DEFINITION OF AN INTERNATIONAL ESCO IDENTIFICATION OF SERVICES PROPOSED DEFINITION FOR CHILE BUSINESS MODELS CRITERIA FOR EVALUATING THE ESCOS EVALUATION OF THE ESCO S CAPABILITIES Business capabilities Technical Capabilities Legal capabilities Financial and administrative capabilities EVALUATION OF AN ESCO EXPERIENCE EVALUATION FORMS EXAMPLE OF THE EVALUATION OF A LOCAL ESCO EXAMPLES OF ESCOS NOUVELER Business model Market and services HEP ESCO Business model Market and services ASIAN ELECTRONICS Business model Market and services APPENDIX 1: LIST OF PARTICIPANTS IN THE COURSE: "METHODOLOGY TO IDENTIFY AND EVALUATE ENERGY SERVICES COMPANIES (ESCOS)"... 28

4 APPENDIX 2 Requirements of CORFO... 29

5 1. INTRODUCTION This methodological guide includes: ESCO business definitions and various business models A detailed description of the services offered by an ESCO The evaluation criteria for the ESCOs An evaluation formula for ESCOs in the Chilean market Examples of ESCOs. Section 2 presents descriptions of already existing ESCO worldwide, several models of ESCO businesses and the services offered by an ESCO. This section aims to introduce the ESCO concept in order to facilitate understanding of the ESCO evaluation methodology in Chile. Section 3 presents the criteria for evaluating each key aspect of an ESCO: technical, commercial, legal and financial abilities. In order to facilitate the evaluation of the ESCOs, a simple evaluation formula is presented that can be used by the ESCOs themselves, or their clients, financial institutions, investors, lawyers or any other interested organization. Section 4 presents the ESCO evaluation forms. These forms can be used by other parties, such as ESCO clients, financial institutions or government agencies. Section 5 presents an example of a form filled out by an engineering company. Finally, section 6 presents three examples of companies that have become ESCOs. This methodological guide is the result of a study conducted by Econoler International with the collaboration of Fundación Chile. It is also based on interviews with future local ESCOs and on the methodology course held June 25,

6 2. DEFINITION OF AN ESCO Energy services companies (or, ESCOs) emerged barely 25 years ago as a way to overcome the main barriers encountered during the start-up of energy efficiency (EE) projects. DEFINITION OF AN INTERNATIONAL ESCO The ESCOs, at an international level, can be defined as companies that provide integrated services for the implementation of energy efficiency (EE) projects. At the same time, these companies guarantee a level of savings that cover the costs of implementing the project for a period of time specified in a contract. Some ESCOs offer direct financing to their customers, but this occurs if the ESCO benefits from the financial support of a large parent corporation or a specific program. In most projects developed by ESCOs, the same ESCOs facilitate funding through a financial institution that maintains close business ties with them. It should be noted that the projects proposed by the ESCOs are generally energysaving projects and not just money-saving projects, such as rate change projects. However, a project can include several energy and cost saving measures, but the main purpose of the project is to generate energy savings. One of the peculiarities of the ESCOs is the use of performance contracts, by which a customer and the ESCO agree on the payment of the project s costs based on its savings. There are other providers that offer energy efficiency projects (manufacturers of efficient products, distributors, distribution companies, contractors, energy firms belonging to consulting engineers and public energy services agencies), but only the ESCOs offer comprehensive coverage of all phases of a project of this kind, for example: Marketing, Preliminary energy evaluation, Energy evaluation with an investment grade analysis (IGA), Detailed engineering design and technical specifications (engineering), Equipment supply and installation, Measurement and verification of savings, Overall project management Operation and maintenance or training, Direct financing or provision of same The ESCO may subcontract services such as engineering and equipment supplies. However, there must always be some project managementso that the energy efficiency measures can be implemented as described in the IGA. The added value that the ESCOs provide for energy users depends on the removal of most of the technical risks and some of the financial risks associated with the project. 2

7 2.2 IDENTIFICATION OF SERVICES The services offered by an ESCO include the sale of services, investment grade energy audits (or analyses), contract-based project development, performance contracts, feasibility studies, engineering designs, equipment performance and installation, and project management, among others. One service that differentiates ESCOs from other energy efficiency consultants is the measurement of energy savings. Project financing is offered by ESCOs that have this ability. Normally, all of these services depend on the ESCO business model. We will review in detail each service presented in Table 1. (i) Marketing - ESCO marketing techniques include the sale of equipment, the sale of professional services and the sale of integral projects. The ESCOs have managed to penetrate the energy efficiency market by offering comprehensive services that cover all phases of a project. (ii) Energy evaluation - the second row of Table 1 presents energy diagnosis services. The ESCOs have the technical ability to offer engineering level or investment grade analysis services. What distinguishes the ESCOs from other players in the market is that they generally guarantee the savings and the construction costs foreseen in the diagnosis. (iii) Design and specification - the Table s third row includes design expertise and other specifications including itemized design, drawings and specifications, and itemized cost evaluations. An (in-house or outsourced) engineering firm prepares the tender and several general firms or contractors maybid for the contract. (iv) Equipment supply - depending on the business model, the ESCO either has or does not have this expertise within the organization. If it does not, the ESCO coordinates the project and outsources the supplying of equipment to a third party. (v) Construction - an ESCO can provide construction services if it has a contractor s license and hires experienced. Otherwise, it can coordinate the project and engage a third party for the construction. These two modalities are common in the energy efficiency market. (vi) Measurement and verification - measurement and verification are essential for an ESCO. Few companies are aware of the international standards for energy savings measurement and verification and the link between measuring protocols and performance contracts. (vii) Operation and maintenance - the table s sixth row shows operating and maintenance skills. These are optional since most of the ESCOs do not directly operate or maintain the equipment. However, some ESCOs provide more extensive service and include these elements in their contracts. There are also ESCOs that specialize in these types of services, offering a "chauffage" type of contract. (viii) Financing - access to financing is an important requirement for an ESCO. We have divided the financing block into three parts: access to funding 3

8 for the construction phase, access to long-term financing and establishment of an initial capital injection to create the ESCO. o Financing the construction stage: funding for the construction stage or shortterm funding is required during the analysis, the project design and the construction stages, until the project is commissioned. Progressive payments during construction can be reduced to 0% in performance-based contracts (all payments are made only as proof of savings). This leads to big financing needs. The most common mechanism to achieve this is to make the client pay a given percentage for work done during the construction phase and the remaining portion is paid when the savings are verified. With such an agreement, the percentage normally paid in installments is 50% to 70% of the total cost of the project; the client will pay the remaining portion after proof of savings has been shown. The ESCOs should have access to bigger credit margins and be able to withstand higher interest charges during construction. This situation applies to ESCOs that provide a guarantee of performance only and where the main project financing is supplied by the client s bank or by its internal funds. o Long term financing: when the ESCOs provide long-term financing for the client, the amount of the loan that can be obtained will be based on its own holdings and on the share of debt-capital accepted by the ESCO s bank. For these types of ESCO financing resources can quickly amount to several million dollars in debt and the ESCOs will need a significantly higher initial capital. The level of risk that the ESCOs assume with long-term loans is also considerably higher, since they act like banks and usually ask for smaller subsidiary guarantees than those requested by banks. These added financing risks are normally covered by high interest charges or by adding a performance premium to the project s costs; access to big financial resources is, however, an important requirement for the ESCO. o Initial capital: Finally, the last part of the financing column is the injection of the initial capital needed to start a new ESCO or to modify an existing company s operations so it can become an ESCO. This injection of funds normally includes the initial cash flow required to establish the ESCO, including additional equipment (measurement instruments, software packages, computers, office space and furniture), additional human resources that should be hired to support the new operation, their training and the transfer of technology from the start-up phase. The initial fund is also useful during the customer development phasewhere it can be used to introduce the concept of an ESCO and the performance contracts. This phase of development varies widely from one country to another and depends on market reactions and how important the concept of energy efficiency is for potential customers. It can take from a couple of months to more than one year to introduce the company and obtain the first contracts. (ix) Project management: the ESCO integrates all the services mentioned in this section. Some of these services can be subcontracted when the ESCO does not have the appropriate skills. However, the ESCO will always be responsible for managing the subcontractors to see that the project is implemented as described in the investment-grade analysis. 4

9 2.3 PROPOSED DEFINITION FOR CHILE The definition presented in the previous section is the definition by Econoler International, based on their international experience. We can define an ESCO for the Chilean market, considering that the minimum for a company to be considered an ESCO is that it offer and implement integrated EE projects. We can distinguish 2 types of ESCOs: Type 1 (ESCO): only provides and implements integrated EE projects. Type 2 (Super - ESCO): provides and implements integrated EE projects, and also offers guaranteed savings with a performance contract. In both cases, the ESCO must help the client obtain the financing required for the project, but it does not need to offer any. The future Chilean ESCOs presented (list in Appendix 1) during the methodology courseagree with these definitions. 2.4 BUSINESS MODELS It should be noted that the services offered by an ESCO vary according to business models, which are closely related to the types of companies that created the ESCOs. Companies that provide ESCO services directly, or that created a subsidiary ESCO, may include, among others: Energy generation or distributor companies (electricity, gas, fuel, etc.) Consultants or engineering firms who are experts in energy efficiency Suppliers or manufacturers of efficient equipment Control (automatic control) equipment manufacturers Contractors in general, electricians or mechanics Table 1 summarizes and compares the typical services offered by an ESCO throughout an energy efficiency project compared with those offered by other energy services providers. As you can see, the ESCOs are able to offer a full range of benefits, while the other players in the market can offer certain services partially or completely. There are companies which, although they do not provide some of these services are able to outsource them or to acquire the necessary experience to include the benefits offered. 5

10 Table 1 - services offered by the ESCOs and other energy services providers Services Marketing Energy Diagnosis Expertise ESCO Energy distributor Manufactu rer/ Distributo r Contractor (electrician / mechanic) Manufactu rer (control systems) General contractor Engineering firms/ consultants Sale of equipment yes yes yes yes yes yes partial Sells profesional services yes no partial partial yes yes yes Sells integrated projects yes no no yes yes yes partial Evaluates of savings yes yes partial partial yes partial yes Investment-grade analysis of savings yes no no no no no no Evaluates costs/budget (engineering) yes no no no no no yes Design and specifications Construction Equipment supply Measurement and verification Project management Operation and maintenance Financing Evaluates investment-grade costs yes no no yes yes yes partial Detailed design yes no partial partial yes partial yes Plans and specifications yes no no no yes no yes Itemized cost evaluations yes no no no yes no yes (engineering) Project management yes no partial yes yes yes partial License for general contracts yes no partial yes yes yes partial Coordination yes no partial yes yes yes partial Evaluation of turnkey projects yes partial partial yes yes yes partial Purchase of equipment yes yes yes partial yes partial partial Equipment estimates yes yes yes partial yes partial partial Shipping yes yes yes partial yes partial partial Customer service yes yes yes partial yes partial partial Equipment measurement yes yes no yes yes yes yes Monitoring and verification yes no no no no no no protocol Project engineering yes yes no partial yes yes yes Integrated projects yes no no no no no no Equipment operation yes no no no yes no no Equipment maintenance yes no no yes yes no no Financing of the yes yes no yes yes yes partial construction stage Long term financing yes yes partial partial yes partial partial Initial capital yes yes no no yes no no yes = Provides the full service partial = Partially provides the service No = In order to provide the service it must be outsourced or obtain the necessary experience 6

11 3. CRITERIA FOR EVALUATING THE ESCOS 3.1 EVALUATION OF THE ESCO S CAPABILITIES The first step in evaluating an ESCO is to assess the levels of experience and skills of its experts, in order to ensure that the ESCO has the capabilities needed to sell, direct and implement ESCO projects. In order to evaluate these experts, it is always a good idea rely on existing certification programs for energy efficiency experts or auditors, if such programs are available Business capabilities Selling ESCO services to commercial or industrial customers requires some specific skills, because it is a new service for most of them. An ESCO must have qualified personnel for the sale of efficient equipment and services, because both are included in an ESCO EE project. The critical stage of the sales process or negotiation with the client is to understand their specific objectives and to evaluate the position of the ESCO in relation to the client (to propose-or not- an ESCO project). The sale process generally proceeds as follows: Evaluation of possibilities/opportunities for a client First call or first meeting with a client to meet and present the ESCO concept Preliminary validation of the client s economic solvency Client rating at the level of savings, motivation and financial solvency Preliminary audit (or analysis) Validation of financial solvency (level II) Presentation of the results to the client Agreement on the preparation of the investment grade analysis (IGA) Signing of the agreement with the client to gain his/her trust and commitment Investment grade analysis (IGA) Results of the IGA accepted by customer Risk assessment Financial plan and sources of financing Completion of the performance or implementation contract The client signs the performance or implementation contract Since the implementation of integrated projects is the ESCO s ultimate goal, the marketing and sales team should aim to close performance or implementation contracts with clients. In order to evaluate the ESCO s marketing abilities, people must be evaluated individually, given these two criteria: Skills o 5 years of experience in marketing o More than 5 years of experience in energy efficiency 7

12 o More than 5 years experience in marketing energy or engineering services Qualification criteria o at least 3 integrated EE projects closed o at least 2 signed performance contracts (ESCO type 2) 3.1.2Technical Capabilities An ESCO has to demonstrate that it has the engineering and management capabilities to provide a wide range of services. Technical services include, but are not limited to, the following: (i) Project development phase and audit o Preliminary audit and identification of energy savings opportunities o Investment-grade analysis: accurate evaluation of the costs and savings for several EE measures o Project development plan (ii) Construction/Implementation/Financing phase o Design services (engineering, plans and technical specifications) o Call for tender for the installation of the equipment o Management of subcontractors o Equipment supply and purchase o Management of the construction o Recycling or hazardous waste disposal (if applicable) (iii) Start-up/Guarantee/Measurement phase o Start-up and technical solution trials o Operation and continuing maintenance for implementation systems (optional) o Training personnel for the routine maintenance and operation of systems o Training for building administrators and users o Guarantee of performance and cost savings (ESCO type 2) o Measurement and verification of the performance and savings (ESCO type 2) o Measurement and greenhouse gas emissions reduction report (ESCO type 2) o Long-term sustainability, buildings with high efficiency performance (ESCO type 2) The ESCO must have technical skills to deal with a wide range of systems including, but not limited to: (i) Mechanical systems. Heating, ventilation and air conditioning systems (HVAC), energy management and control systems, hot water system, distribution systems, etc. (ii) Transportation systems, production lines with electrical motors, thermal systems (hot water, steam generation boilers, furnaces), etc. (iii) Thermal energy generation plants, distribution systems, cogeneration systems, etc. 8

13 (iv) Lighting systems. Outdoor and indoor lighting systems, controls, natural lighting strategies. (v) Surrounding systems. Windows, insulation, shading, air infiltrations, etc. (vi) Other systems: laundry, cooking equipment, swimming pools, renewable energy systems, elevators, etc. In Chile the INN has a register of energy efficiency consultants. Only registered consultants can apply for the CORFO subsidy (max. 300UF) to perform energy audits. However, according to some interviews carried out in May 2007, the registration criteria do not include test scores in energy audits (3 certificates issued by clients), and require only general experience in energy, i.e. it is not necessary to provide evidence of having carried out energy audits. It is suggested that such a requirement should be added to the list of selection criteria. We propose some criteria for the evaluating the technical skills of the ESCO engineers: (i) Project engineers Tasks o Preliminary audits and investment-grade analyses o Economic evaluation of projects and definition of energy savings o Management of projects and subcontractors o Monitoring project implementation o Measurement and verification of energy savings (ESCO type 2) Qualifications o Electrical, mechanical or industrial engineering o Having more than 5 years of EE experience o At least 5 energy audits carried out in the past 3 years o Implementation of at least 2 integrated EE projects (ii) Project manager Tasks o Supervision of project engineering teams o Approval of investment-grade analyses o Quality control of all technical phases of the projects Qualifications o Electrical, mechanical or industrial engineer o Having more than 10 years of experience in energy project management, and 5 years in energy efficiency o Monitoring the implementation of at least 2 integrated EE projects 9

14 3.1.3 Legal capabilities There are different types of contracts which are generally used in the field of energy efficiency, i.e.: 1) consultancy and management contracts and 2) performance contracts. Type 2 ESCOs, must have the skills to develop performance contracts and type 1 ESCOs, only consulting and management contracts. We describe the two types of contracts and their variations below. Consultancy and management contracts Consulting/management contracts are one of the traditional tools to regulate the implementation of energy efficiency projects. With this formula, the private company or public agency or individual who contracts the project (client) pays for technical studies and design services, as well as for the management of the project and the work. Usually the client obtains the funding directly, and in this case, the contract does not have any performance warranty clause. Those who carry out projects by applying this formula are specialized engineering /consultancy firms, equipment suppliers, and/or specialized contractors (as required). The type 1 ESCOs could also use this type of contract to implement integrated projects. This could be an implementation type contract. Performance contracts A performance contract is a contract by which an ESCO provides a guaranteed service to carry out energy efficiency projects in commercial, public or industrial sectors. This service agreement may include the completion of energy efficiency measures, professional services required for project implementations and the guarantee that the energy savings generated by the project will be enough for the ESCO to be able to charge for their services within an agreed upon period of time. The ESCO can finance the project or limit itself to help obtain the financing from a third party. In such cases, once the project is completed, the client must ensure that its normal operating budget will be enough to repay the project. The performance contract has several advantages for a client who does not have the technical or financial resources for the implementation of a project, e.g.: Negotiation with a single supplier for all the services (ESCO) Technical quality of the installation Project performance warranty No advancement of funds if the ESCO or a third party is financing the project With this formula, the ESCO assumes most of the project risks since it undertakes the responsibility of obtaining energy savings (as stated in the contract). In other words, the client minimizes the risks, except for those arising from the relationship with the ESCO during the contract period. 10

15 Content of a performance contract METHODOLOGY TO IDENTIFY AND EVALUATE ENERGY SERVICES COMPANIES (ESCOS) Existing models of performance contracts include clauses stating what the obligations are for the ESCO and its client. A performance contractcontainsthefollowingclauses: (i) Funding mechanism The ESCO provides the funding for the project Conditions of financing: o Interest rate o Terms o Grace period Terms of payment Financial parameters: inflation rate, exchange rate, etc. (ii) Presentation of the costs to the client Hidden costs o Reimbursement is based on the expected savings and the duration of the contract o The client does not see the cost of the project Overall fixed cost o The client sees only the total cost of the project Unbundled cost o The customer sees the breakdown of the cost of the project Open book o The client participates in the selection process of the subcontractors and in negotiations to define the actual costs of the project. These costs are indexed to different variables and may vary during the construction period So, the duration of the contract is variable (iii) Duration of the contract Fixed-term o The calculation of the refund period is based on the estimation of the project s costs and savings as submitted to the client o A few months are added to the repayment period to limit the ESCO s risks (in general 6-12 months) Variable according to the following parameters o Actual cost of construction o Real savings The duration of the contract can be adjusted up to a maximum number of months or years. (iv) Client and Esco obligations o Procedures for operation and maintenance of the equipment o Operating hours o Access to the site during implementation and during the measurement and verification of savings 11

16 (v) Warranty, measurement and verification of savings Theoretical calculation of savings o Savings are based on the IGA calculations o Used with simple energy savings proposals Measurement at the end of the implementation o No contractual obligation for performance after this initial verification o Less risk and minimal M&V costs. Measurement for one year o Customer can have the option to buy the project or continue with the ESCO. o The costs of the performance guarantee could represent 6% of the cost of construction and M & V costs will be reduced and could represent up to 10% of the cost of construction. Continuous measurement o The savings are verified during the contract period. o The costs of the performance guarantee could represent 6%to 20% of the cost of construction and M & V costs will be reduced and could represent up to 20% of the cost of construction. Adjustments allowed in case of variations in the operating conditions of the building/plant, new computers are added, temperature variations, etc. (vi) Equipment ownership Conventional financing, the equipment belongs to the institution that finances it or that is requesting credit. If the ESCO finances the project, the equipment belongs to them until the end of the contract, when it is passed over to the client. Some ESCOs transfer ownership of the equipment to the client at the beginning of the project so that it can benefit from the depreciation (vii) Other key elements Price of the energy savings: set a minimum price for the energy in order to calculate the savings. If the price of energy is greatly reduced, savings will also decrease, and that could affect the ESCO s reimbursement. Definition of responsibilities for the operation, maintenance, repair and replacement of equipment. Appendices: Investment-grade analysis, measurement and verification plan. These contracts must include all the legal aspects in order to safeguard the ESCO and the client and ensure that the terms can be met by the end of the contract period. To define a model contract and the basic clauses, existing models should be analyzed and changes made to ensure conformity with Chilean law and with the country s need to ensure the development of trust between the ESCOs and their clients. Regarding the savings guarantee, its value and its duration may vary depending on the type of contract, the services offered by the ESCO and the client s requirements. The value of the savings guarantee can be calculated or measured. When it is calculated, usually the ESCO and the client agree on a value from the investment-grade analysis. 12

17 It is the simplest way of ensuring the savings value. The ESCO can also ensure measured savings, according to the measurement and verification plan established in the investment-grade analysis. In relation to the duration, the savings can be guaranteed after the project s start-up, and this value can be used for the duration of the contract. The ESCO can also measure the savings on a regular basis, for example, annually. In general, the amount of the guaranteed savings will be used to determine the payment to the ESCO. This amount may be adjusted according to the adjustment factors in the M & V plan, such as the hours of the building s operation, how many days the air conditioning or heatinghas to be used, etc. Legal capability A type 1 ESCO requires no legal expertise because it does not have to sign performance contracts. A type 2 ESCO does require it. The issue of performance contracts is new in Chile. An ESCO will need external support (another ESCO, an ESCO support program of support) at the beginning in order to develop its performance contract model. It will also need the support of a legal expert (often external) to ensure that the performance contract complies with Chilean law. After the typical contract is prepared, the ESCO will need skills to negotiate the contract with its clients, and adapt them to their requirements without compromising their interests. A type 2 ESCO should ensure that the marketing people have the necessary skills to negotiate the performance contract. The evaluation criteria for type 2 ESCOs will be to have a pre-prepared performance contract. The recommended way to evaluate the ESCO s legal capabilities would be to ensure that performance contracts have all the elements mentioned in this section Financial and administrative capabilities ESCO services depend on the ESCO s financial capabilities: If it offers project financing or not. However, an ESCO must demonstrate that it has the financing and management abilities to provide the services required for an ESCO project. Financial services include, but are not limited to, the following: (i) Project development phase and audit Project development plan including a financial analysis Analysis of the client s financial capacities Financial risk analysis (ii) Construction/implementation/financing phase Ability to finance the project, or to search for external funding Presentation of a funding plan (iii) Start-up/warranty/measuring implementation phase (Optional) performance guarantee Energy savings guarantee 13

18 The analysis of the client s financial capacities is especially important if the ESCO is financing the project, in order to be sure that the clientcan pay the ESCO, as stated in the contract terms. The search for financing is not commonly done activity by companies that offer engineering or energy efficiency consulting services. However, this aspect of ESCO projects is essential to their success. A new ESCO must develop its skills in this area. Financial capabilities The ESCO s services depend on its financial abilities: If it offers project financing or not. An ESCO which does not offer financing or provides project financing for less than $100,000 USD, needs an engineer with financial skills or a business man/woman who can do a financial evaluation and assessment of the projects and the ESCO s financial risk, and who can also look for funding for the project. This person needs more than 5 years of experience in financial analysis in general and it would be desirable that he/she have experience in energy or energy efficiency projects. An ESCO which offers more than $100,000 USD in project funding, needs an engineer with a background in finance (MBA) or a business man/woman not only to prepare the financial analyses, but also to evaluate the performance contract s financial conditions. This person needs more than 10 years of experience in the financial analysis of energy projects. Any ESCO which offers funding for a project must demonstrate that it has the ability to finance energy efficiency projects, either with its own equity for smaller investments or with financial backing to go and look for bank financing. Administrative capability At the administrative level, the ESCO should clarify which aspects of a project are typically subcontracted and it must indicate how it will manage resources outside the company. The ESCO must check that it can provide compensation to all members of the team. On the other hand, only a private or commercial enterprise can be considered as an ESCO. Public institutions, such as universities or research institutes, cannot be regarded as ESCOs, and neither can independent consultants.concept 3.2 EVALUATION OF AN ESCO EXPERIENCE Evaluation of ESCO experiences in the Chilean market is based on past achievements in the development and implementation of energy efficiency projects following the ESCO concept. Companies that want to be defined as an ESCO, must be able to provide the following information: Three letters of recommendation from clients who have received services from the applicant company in the past two years. 14

19 Able to show five investment-grade energy analyses diagnostics done in the past three years (by delivering a copy of the report or its abstract). Technical, commercial, financial and legal capacity of the company, as described in the preceding section, including the company s business name, the names of staff members who have attended training courses in Fundación Chile, professional associations which the ESCO staff belongs to, and detailed CVs of all professionals. For the type 1 integrated ESCOs information about three energy efficiency projects which have been implemented in the last two years, including: o client s name o company name o location of the company o total energy consumption for the twelve months prior to the energy analysis o recommended energy efficiency measures o implemented measures o achieved or estimated savings. o estimated and achieved costs o demonstration of help forthe clientin the search for financing For type 2 ESCOs, information on two integrated projects with a performance contract, including: o client s name o company name o location of the company o total energy consumption for the twelve months prior to the energy analysis o Suggested energy efficiency measures o Installed and implemented measures o Achieved or estimated savings. o Estimated and achieved costs o Methodology developed for measurement and verification of savings, o Payment through savings programs, o Performance contract (it must contain all the elements mentioned in section 3.1.3, contents of a performance contract). o Demonstration of help for the clientin the search for financing. An ESCO which offers project funding must provide relevant information to establish the maximum amount (in dollars) that could be financed by the ESCO and the company s maximum amount. The ESCO must provide a letter from the institution that uses the ESCO to obtain funding. It should be noted that the definition of an energy efficiency project may vary depending on the context, i.e., an energy efficiency project should be either an energy savings project or may be an energy cost savings project. Although a project may include several energy savings and cost savings measures, the project aims for savings and for energy decreases. This definition is the same for an energy efficiency project which is part of CORFO s program of financing energy audits. Like all processes, this one requires the periodic review and updating of the certification criteria. An initial annual review is suggested for the first five years of the program. Once the market develops, a review every two years is advisable. Finally, in order to register the ESCOs, the interested companies should provide information similar to the information that is required for registering as a consultant in the CORFO program, as described in Appendix 2. If a company is already registered in the CORFO program, it would only need to provide proof of registration. 15

20 4. EVALUATION FORMS In order to facilitate the evaluation of an ESCO, the following forms summarize all the criteria already mentioned in the Guide. Remember there are two types of ESCOs: Type 1 (ESCO): provides and implements integrated EE projects only. Type 2 (Super - ESCO): provides and implements integrated EE projects, and also offers a guarantee of savings with a performance contract. The first form established the ESCO s characteristics and the basic criteria that a company must meet for it to be defined as an ESCO. If a company answers "no" to one of the criteria, it cannot be defined as an ESCO and does not have to complete the following forms. A company that meets the basic requirements to be called an ESCO can continue to fill out the other two forms. Table 2 - General evaluation of the ESCO Evaluation criteria YES/NO Comments 1. Characteristics of the ESCO It is a company; it is not a public institution, such as a university neither a research institute or an independent consultant. It has at least 5 employees 2. Evaluation of the ESCO s experience Three integrated energy efficiency projects (for three different clients) implemented in the last two years. An integrated project includes: Marketing Preliminary energy assessment Energy assessment with aninvestment-grade analysis (IGA), Itemized engineering design and technical specifications (engineering) Equipment supply and installation, Measurement and verification of savings, Global project management Operation and maintenance or training, Direct financing or provision of the same The three projects are energy saving projects Two are integrated projects (for two different clients) carried out with a performance contract performance (ESCO type 2) The two performance contracts comply with the content described in section (ESCO type 2). Five energy investment-grade analyses (for five different clients) prepared in the last three years. 16

21 The following two forms evaluate the technical and business capabilities of the companies that have the basic requirements to be defined as ESCOs. The ESCO under evaluation must obtain at least 35 points on each form in order to be considered as such. Table 3 - evaluation of the ESCO s technical capacities Evaluation criteria Maximum score Company s score 3. Evaluation of the ESCO s technical capabilities 50 Project engineers can perform the following jobs: 25 Preliminary audits and investment-grade analysis 5 Evaluation of project costs and energy savings 5 Management of projects and of subcontractors 5 Supervision of the project s implementation 5 Measurement and verification of energy savings (ESCO type 2) 5 The ESCO must have technical skills to address a wide range of systems including, but not limited to: Mechanical systems: Heating, ventilation and air conditioning systems (HVAC), energy management and control systems, hot 3 water system, distribution systems, etc. 2. Transport systems: production lines with electric motors, heating systems (hot water, steam generation boilers, furnaces), etc Thermal energy plants, distribution systems, cogeneration 1 systems etc. 4. Lighting systems. Outdoor and indoor lighting systems, controls, natural lighting strategies Surrounding systems: Windows, insulation, shading, etc Other systems: laundry, cooking equipment, swimming pools, renewable energy systems, elevators, etc. 1 Project engineers have the following qualifications: 13 They are mechanical, electrical or industrial engineers (at least 2 engineers) Each engineer has more than 5 years of experience in energy efficiency Completion of at least 4 energy audits in the past 3 years (per engineer) Implementation of at least 2 integrated energy efficiency projects 4 TOTAL

22 Table 4 - Evaluation of the ESCO s business capabilities Evaluation criteria 4. Evaluation of the ESCO s business capabilities Maximum score 50 Company s score Business 25 The sales manager has at least 5 years of experience in: Marketing of energy services or engineering Energy efficiency 5 The sales team can perform the following tasks: At a macro level: Study of the general situation of the ESCO s target market Select the market segments with the greatest potential Select a client portfolio. At the project level: Selection of a potential client Evaluation of financial solvency Sell ESCO services to clients Evaluate ESCO s technical and financial risks Present preliminary audit results Close an agreement for the preparation of investment-grade analysis (IGA) Present the results of the IGA Close the implementation or performance contract Legal (the ESCO must indicate one or the other, whichever one is appropriate) The ESCO offers animplementation contract (ESCO type 1) including: Funding mechanism (optional) Presentation of the costs to the client Duration of the contract Client and ESCO obligations Equipment ownership Definition of responsibilities for the operation, maintenance, repair and replacement of equipment. Price of energysavings The ESCO offers a performance contract whichfulfills the following content (ESCO type 2): Funding mechanism (optional) Presentation of the costs to the client Duration of the contract Warranty, measurement and verification of savings Client and ESO obligations Ownership of the equipment Definition of responsibilities for the operation, maintenance, repair and replacement of equipment. Price of energy savings Appendices: Investment-grade analysis, measurement and verification plan

23 Evaluation criteria Financial Personnel qualification: For an ESCO which does not offer project financing or funding of less than $100,000 USD : a professional with more than 5 years of experience in the financial analysis of energy projects. or An ESCO that offers project funding of more than $100,000 USD, needs a professional with more than 10 years of experience in the financial analysis of energy projects. Financial services include, but are not limited to the following: (i) Project development phase and audit Project development plan including a financial analysis Analysis of the client s financial capacities Financial risk analysis (ii) Construction/implementation/financing stage Ability to finance the project, or to look for external financing Presentation of a funding plan (iii) Start-up/warranty/measurement implementation phase Performance guarantee (ESCO type 2) The energy savings and financial warranty(esco type 2) Financial viability of the project. Maximum score Company s score TOTAL 50 19

24 5. EXAMPLE OF THE EVALUATION OF A LOCAL ESCO In order to facilitate the evaluation of the companies interested in becoming ESCOs or in offering ESCO services, we present the evaluation of a company that has the following characteristics: Privately owned engineering firm 10 employees It carries out energy audits and energy efficiency projects It has begun to implement integrated guarantee of savings or funding projects. Table 5 - General evaluation of an engineering firm Evaluation criteria YES/NO Comments 1. Characteristics of the ESCO It is a company, it is not a public institution, such as a university or research Institute, nor is it an independent consultant. It has at least 5 employees YES YES 2. Evaluation of the ESCO s experience Three integrated energy efficiency projects (for three different clients) implemented in the last two years. An integrated project includes: Marketing Preliminary energy assessment Energy assessment with aninvestment-grade analysis (IGA), Itemized engineering design and technical specifications (engineering) Equipment supply and installation, Measurement and verification of savings, Global project management Operation and maintenance or training, Direct financing or provision of the same NO It does not provide IGA, but does offer engineering audits. It does not provide financing. The three projects are energy saving projects Two are integrated projects (for two different clients) carried out with a performance contract performance (ESCO type 2) The two performance contracts comply with the content described in section (ESCO type 2). Five energy investment-grade analyses (for five different clients) prepared in the last three years. YES N/C N/C NO Engineering audits 20

25 Although the basic requirements that define an ESCO are not present, we can fill out the other two forms to complete the entire exercise. Table 6 - Evaluation of the technical capabilities of an engineering firm Evaluation criteria Maximun score Company s score 3.Evaluation of the ESCO s technical capabilities 50 Project engineers can perform the following jobs: Preliminary audits and investment-grade analysis 5 2 (no IGA) Evaluation of project costs and energy savings 5 3 Management of projects and of subcontractors 5 5 Supervision of the project s implementation 5 5 Measurement and verification of energy savings (ESCO type 2) 5 0 The ESCO must have technical skills to address a wide range of systems including, but not limited to: Mechanical systems: Heating, ventilation and air conditioning systems (HVAC), energy management and control systems, 3 3 hot water system, distribution systems, etc. 8. Transport systems: production lines with electric motors, heating systems (hot water, steam generation boilers, 3 3 furnaces), etc. 9. Thermal energy plants, distribution systems, cogeneration 1 1 systems etc. 10. Lighting systems. Outdoor and indoor lighting systems, controls, natural lighting strategies Surrounding systems: Windows, insulation, shading, etc Other systems: laundry, cooking equipment, swimming pools, renewable energy systems, elevators, etc. 1 0 Project engineers have the following qualifications: They are mechanical, electrical or industrial engineers (at least 2 engineers) Each engineer has more than 5 years of experience in energy efficiency Completion of at least 4 energy audits in the past 3 years (per engineer) Implementation of at least 2 integrated energy efficiency projects (only one) (1 project) TOTAL 50 34,5 21

26 Table 7 - Evaluation of the business capabilities of an engineering firm Evaluation criteria Maximun score Company s score 4. Evaluation of the ESCO business capabilities 50 Business The sales manager has at least 5 years of experience in: Marketing of energy services or engineering Energy efficiency The sales team can perform the following tasks: At a macro level: Study of the general situation of the ESCO s target market Select the market segments with the greatest potential Select a client portfolio. At the project level: Selection of a potential client Evaluation of financial solvency Sell ESCO services to clients Evaluate ESCO s technical and financial risks Present preliminary audit results Close an agreement for the preparation of investmentgrade analysis (IGA) Present the results of the IGA Close the implementation or performance contract (It does not do risk evaluation or financial solvency, it does not sign agreements) Legal (the ESCO must indicate one or the other, whichever one is appropriate) The ESCO offers animplementation contract (ESCO type 1) including: Funding mechanism (optional) Presentation of the costs to the client Duration of the contract Client and ESCO obligations Equipment ownership Definition of responsibilities for the operation, maintenance, repair and replacement of equipment. Price of energysavings The ESCO offers a performance contract whichfulfills the following content (ESCO type 2): Funding mechanism (optional) Presentation of the costs to the client Duration of the contract Warranty, measurement and verification of savings Client and ESO obligations Ownership of the equipment Definition of responsibilities for the operation, maintenance, repair and replacement of equipment. Price of energy savings Appendices: Investment-grade analysis, measurement and verification plan (The contract is too simple) 22

27 Evaluation criteria Maximun score Company s score Financial Personnel qualification: For an ESCO which does not offer project financing or funding of less than $100,000 USD : a professional with more than 5 years of experience in the financial analysis of energy projects. or An ESCO that offers project funding of more than $100,000 USD, needs a professional with more than 10 years of experience in the financial analysis of energy projects. Financial services include, but are not limited to the following: (iv) Project development phase and audit Project development plan including a financial analysis Analysis of the client s financial capacities Financial risk analysis (v) Construction/implementation/financing stage Ability to finance the project, or to look for external financing Presentation of a funding plan (vi) Start-up/warranty/measurement implementation phase Performance guarantee (ESCO type 2) The energy savings and financial warranty(esco type 2) Financial viability of the project (This type of employee is not available) 5 2 (The financial risk is not evaluated) 3 0 (It does not look for financing) 3 3 TOTAL Conclusions: The company has almost all the technical capabilities to be classified as an ESCO This company is missing quite a few business capabilities to manage the risks of an ESCO business. Using the evaluation results, a company can easily identify its weaknesses and overcome them. 23