6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

News
The ins and outs of Energy Services
Agreements
January 12, 2011
By Robert J. Wakulat

Energy retro ts of industrial and commercial buildings have recently proven to be

one of the more popular initiatives for Canadian landlords and tenants (“project
proponents”) seeking to brandish their green credentials or, simply enough, to save
money. However, comprehensive retro ts can be quite costly with high initial capital
costs and long payback periods. Incentives such as the federal government’s
ecoEnergy Retro t, BOMA Toronto’s Conservation and Demand Management (CDM)
$60-million fund and Toronto Hydro’s Business Incentive Program have been
attempts to make some of these investments more palatable to building owners
and operators.

We are using cookies to give you the best experience on our website.
I agree
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 1/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

Unfortunately for energy e ciency enthusiasts, these programs can be limited-time

o ers and may not always coincide with building maintenance or budget cycles.
Some programs, such as the ecoEnergy Retro t and current BOMA Toronto CDM,
are on track to conclude their operations in the near future. Other programs, such
as the Ontario Power Authority’s 2011–2014 Commercial and Institutional Program
delivered in tandem with Local Distribution Companies and BOMA, are on the verge
of ramping up their incentive o erings.

There is an option open to a project proponent interested in implementing an

electricity conservation project but is unsure about timing, lacks access to incentive
programs or still harbours concerns about a post-incentive nancial commitment.
This solution, which may be somewhat underplayed in the private sector, is to
employ an Energy Services Agreement (ESA).

The Case for Energy Retro ts: Lighting Improvements

Energy retro ts in general, and lighting retro ts in particular, have proven
remarkably reliable in o ering predictable paybacks to project proponents. One
such cornucopia of successful projects can be found in the Greater Toronto Area’s
Pearson Eco-Business Zone. The Zone’s 12,500 businesses—along with the Toronto
and Region Conservation Authority and the Greater Toronto Airports Authority
(GTAA)—recently embarked upon a partnership called Partners in Project Green
with the mutual understanding and drive to restore, protect and enhance the area’s
natural resources.

Businesses within the zone have already demonstrated the success of retro t
projects including:
ADVERTISMENT

We are using cookies to give you the best experience on our website.
I agree
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 2/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

• Velcro Canada’s lighting retro t, which resulted in a 50% reduction in energy use,
better lighting and annual savings of more than $42,461. The company did, in fact,
o set part of the cost with a $28,000 incentive from the ecoEnergy Retro t Incentive
program but, regardless, would have enjoyed a net payback estimated at slightly
more than two years.
• Nahanni Steel Products Inc.’s $58,000 lighting retro t is expected to yield a simple
payback period of less than one year after taking advantage of incentives.
• The International Centre’s commitment to becoming a sustainable environment
and leading venue of choice for socially-minded businesses and individuals involved
reducing energy consumption by 335,000 kWh using a lighting retro t, increasing
operational e ciencies and monitoring energy usage.

• IPEX Inc.’s $102,000 lighting retro t project in 2009 yielded electricity savings of
about $56,000 per year. Incentives substantially reduced the payback period to 1.7
years but, regardless, it’s clear there was a relatively short payback regardless.
 

 
We are using cookies to give you the best experience on our website.
I agree
By
  continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 3/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

Although, each of the above projects took advantage of government incentive

programs, the gures demonstrate that these programs only accelerated what
would have otherwise been predictable and reasonably short payback periods.
However, it is understandable that if incentives are not easily accessible, then it may
make the business case more challenging for potential project proponents. An ESA
o ers one way to address this concern and could even complement some incentive
programs.

The Energy Services Agreement

An ESA outlines and addresses the design, construction, guarantee and follow-up
monitoring of energy-saving projects. Generally speaking, an ESA establishes a
building’s baseline energy use, adjusted for weather and occupancy, for a xed
period of time pre-retro t. A party other than the property owner (e.g. contractor,
third-party nancing company) will pay for the retro t and earn its revenue when
the project proponent remits energy savings realized against the baseline and
incentives payments (if applicable) to the nancing entity.

ESAs have been used with considerable success in the public sector in the guise of
Energy Savings Performance Contracts (ESPCs), which are employed between a
government agency and an energy service company (ESCO). The ESCO nances,
installs and maintains new energy-e cient equipment in the facilities at no upfront
cost to the government. The ESCO is paid back from the energy savings of the
contract.

According to Natural Resources Canada, over 86 retro t projects have been

implemented using ESPCs, attracting $320 million in private sector investments and
generating over $43 million in annual energy cost savings. The projects have been
responsible for 15-20% in energy savings and helped to cut greenhouse-gas
emissions by 285 kilotonnes. Similarly, the U.S. Department of Energy reports the
implementation
We ofgive
are using cookies to overyou550 ESPC
the best projects
experience onworth $3.6
our website. billion as of March 2010.I agree
They
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
have resulted in savings of approximately $11 billion US in energy costs.
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 4/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

Broadly speaking, contracting parties choose between two di erent contract

options: the rst-out performance contract or the shared savings performance
contract.

First-Out Performance Contract

Under this version of an ESA, the ESCO nances the project and retains all the
energy savings until the project is paid for, or until the end of the contract,
whichever occurs rst. A contract may stipulate a maximum return on investment in
this case, thereby triggering contract termination should the ESCO realize this return
prior to the contract’s expiration. Should the ESCO fail to realize its return before
contract expiration, the contract terminates as originally intended, and payments to
the ESCO stop.

In the public sector context, the ESCO is required to declare its investment upfront,
including all costs and mark-ups. Any percentage margin allowed to the ESCO is
xed. As noted above, the building retains all subsequent energy savings at the end
of the contract or when the contract has been paid for. This may not always be the
case in the private sector where an ESCO and its client are more likely to enter into
negotiations over the payment duration. The contract will ultimately be concluded
when both sides perceive they can extract su cient bene ts from the project.

Shared Savings Performance Contract

With this contract, the ESCO and project proponent each receive an agreed-upon
percentage of energy savings over the life of the contract. The catch here is that,
even though a project proponent may start to realize a nancial bene t earlier than
a rst-out performance contract, this type of contract will run for a signi cantly
longer period. Otherwise, the two contracts are substantially similar.

  are using cookies to give you the best experience on our website.
We
I agree
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 5/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

The Energy Services Agreement’s Key Elements

Some of things that may be considered when drafting an ESA include:

• Scope: ESAs can be drafted to be limited in scope and only address a simple
lighting retro t or may prove to be more ambitious and include a package of
improvements.

• Energy Usage Records and Data: The ESCO requires access to the historical energy
consumption, building operations and occupancy data to develop a baseline utility
consumption. Some industry participants recommend a minimum of 24 months of
data. Existing facility conditions, operations and equipment needs to be carefully
recorded in order to establish an accurate baseline.

• Energy Savings Calculation: Careful drafting is required to ensure that an agreed-

upon baseline energy usage is clearly described and how future energy usage is
calculated to derive the di erence from which the energy savings will originate.

• Partial Savings: For more comprehensive projects, a project proponent may start
to realize energy savings before the full completion of the retro t. An ESCO will
probably want to ensure it captures these early savings.

• Incentive Ownership: Parties will have to agree on who will apply, monitor and
bene t from any government incentive programs for a retro t. Typically, a project
proponent will have to make the application, which means that if the funds are
being reimbursed to the ESCO, a mechanism to deliver those funds must be
created.

• Post-Installation Relationship: The ESCO and project proponent may revert to a

simple nancial arrangement post-installation, or the relationship could deepen as
the ESCO provides sta training and long-term maintenance services. This will
We are using cookies to give you the best experience on our website.
depend on the scope of the improvements. I agree
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 6/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

• Ownership of Environmental Attributes: Given the potentially signi cant reductions

of GHG emissions from a retro t, or portfolio of retro ts, it is possible there may be
some value attached to those reductions. It is important to understand which party
will take ownership of these attributes in the event they can eventually be sold on a
voluntary or mandatory carbon market.

Bene ts of Employing ESAs

• Better Buildings: Updating or replacing old and/or obsolete equipment with newer,
more e cient technologies, will result in higher-quality systems, fewer breakdowns
and reduced maintenance. Improved lighting, better air quality and more
comfortable room temperatures, could reduce absenteeism and increase employee
productivity.

• Cost Savings: Once the ESCO is compensated for its services, the project
proponent will bene t from signi cant energy savings a reduction of long-term
maintenance costs.

• Established Technology and Expertise: With the proliferation of energy retro t

incentives over the past decade, ESCOs have developed considerable experience
with improving technologies and savings calculations. Moreover, ESCOs have a
nancial incentive under an ESA to ensure the most suitable equipment is used to
achieve and maintain the promised savings.

• Limited Sacri ce: An ESA enables a project proponent to undertake an energy

e ciency project now without the necessary funds. Improvements are a ordable
even when facing budget cuts or competing priorities.

• Prudent Investment: Utilizing an ESA allows a project proponent to divert funds

that
We arewould otherwise
using cookies to give be
you spent
the beston energyon
experience bills
our into other
website.
I agree investments. For
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
governments, this means limited budgets can stretch further, putting taxpayers’
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 7/8
6/18/2020 The ins and outs of Energy Services Agreements - Energy Manager

money where it really counts. For private sector property owners, more modern,
e cient energy systems can increase property value and improve marketability of
the property.

• Reduced GHG Emissions: North American buildings contribute more than 1/3 of
the continent’s GHG emissions and energy retro ts could prove to be the cheapest,
quickest and most signi cant way to reduce them.

• Stakeholder Relationship-Building: An energy retro t is a demonstrable

contribution to sustainable development and may not only generate excitement in a
building’s community, but also enhance its goodwill in the marketplace as a
progressive green business.

Conclusion
As government intervention in the building retro t market recedes, it is clear that
the commercial real estate market and its approach to energy e ciency will be
dramatically di erent in the coming years. ESAs can help property managers deal
with these changes by providing reliable bene ts with minimized nancial risk. At
the end of these contracts, property owners will own modernized energy-e ciency
equipment and inherit substantially reduced energy bills.

Robert J. Wakulat is an independent green energy and business lawyer residing in

Toronto. CLICK HERE to visit his blog views on various legal issues related to green
energy.
 

We are using cookies to give you the best experience on our website.
I agree
By continuing to use the site, you agree to the use of cookies. To nd out more, read our privacy
policy.

https://www.energy-manager.ca/the-ins-and-outs-of-energy-services-agreements-352/ 8/8