M&V Part 2: Risk Assessment & Responsibility Allocation

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

2. Risk & Responsibility • Risk Assessment • Types of Risk. • Allocating Risk. • Cost Effectiveness. • Responsibility Allocation • Usage • Performance • Financial

3. ECMs installed here Baseline Baseline or adjusted baseline Savings Costs Measured or calculated performance Time Definition of Savings • Energy Savings = UseBaseline - UsePost-Retrofit

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

5. Definition of Savings • Energy Savings = UseBaseline - UsePost-Retrofit • Energy Savings = (UseBaseline Adjustment) - UsePost-Retrofit • Savings, $ = (Unit Cost) (Energy Savings)

6. Calculating Savings • There are two components to energy use and energy savings: • Rate of energy use (Performance) • 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. Performance and Usage: Ideal Post-retrofit Energy Use Baseline Energy Use Rate, kW Increased Performance Reduced Operating Hours Hours per year

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

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

10. Performance Usage Financial Uncertainty Usage Risk • Usage can be defined as: • operating hours (lighting, equipment) • occupancy or schedules • heating & cooling loads (& setpoints) • weather • production • These are factors that the agency (or no one) controls.

11. Performance Usage Financial Uncertainty Financial Risk • Energy savings must be converted to cost savings. • What energy rates will be used? • How might they change over time? • What other savings will be claimed?

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

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

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

15. Performance Usage Financial Uncertainty Savings Uncertainty: Large

16. Performance Usage Financial Uncertainty Savings Uncertainty: Small

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

18. Performance Usage Financial Responsibility Matrix • Items that influence savings are: • Performance • EquipmentPerformance • Financial • Energy Prices • M&V Costs • Usage • Operating Hours • Loads • Weather • User Participation

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

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

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

22. Performance Usage Financial Operating Hours • If hours are stipulated: • How were values estimated? • Are they reasonable? • What happens if agency changes schedule or facility usage? • If hours are measured: • When were they measured? • What precision and confidence?

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

24. Performance Usage Financial Loads • The agency may make changes that affect equipment loads (e.g, additional air conditioning). • If loads increase and savings increase, who benefits? • If loads and savings decrease, who is responsible?

25. Performance Usage Financial Loads • How will savings estimates be affected if: • The agency adds or removes loads? • Adds building space? • Removes building space? • Changes thermostat settings?

26. Loads Constant Payments Agency Savings Contractor Payments BaselineEnergy Use(of affected systems) ReducedEnergy Use ReducedEnergy Use Other Loads Other Loads Other Loads Before ESCP During ESPC After ESPC Contract Contract Contract

27. Loads Increase Payments Contractor Payments Agency Savings BaselineEnergy Use(of affected systems) ReducedEnergy Use ReducedEnergy USe Other Loads Other Loads Other Loads Before ESCP During ESPC After ESPC Contract Contract Contract

28. Performance Usage Financial Weather • No one controls the weather. • How shall the baseline be adjusted for weather conditions? • What happens in mild seasons when promised savings may not materialize? • What happens in severe seasons?

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

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

31. Performance Usage Financial User Participation • Some measures require users to interact with equipment for proper operation (or at least not override it.) • If a measure does not workbecause the users do not use something as intended, is thecontractor responsible?

32. Performance Usage Financial User Participation • How will user interaction be maintained (or minimized)? • Training? • Annual verification and reporting? • Lockboxes (e.g., on thermostats)?

33. Performance Usage Financial Energy Prices • Energy prices fluctuate. In a long-term contract, how will the saved energy be valued? • On current rates fixed for the contract? • On real rates that fluctuate over time? • On fixed rates that escalatefor inflation?

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

35. Performance Usage Financial Energy Prices

36. Performance Usage Financial Energy Prices

37. Performance Usage Financial Energy Prices

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

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

40. Performance Usage Financial M&V Costs • The agency pays the contractor for M&V services rendered. Need to balance M&V rigor with project risk. • Law of Diminishing Returns applies. • 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.

41. Performance Usage Financial M&V Costs M&V Cost $ Value of information M&V Rigor

42. Review Questions • Why might utility costs increase despite a successful SuperESPC project?