Alternative Financing Q&As

August 31, 2005

You've asked...

Q. What can an agency do to obtain the lowest interest rate for their Energy Savings Performance Contract (ESPC) project?

A. A variety of factors influence the interest rate for an ESPC project. Some factors are within the control of the agency, and other factors are not. Factors within the control of the agency include the mix of energy technologies, certain negotiated contract terms and conditions, contract term, and the degree of measurement and verification employed.

To help ensure that federal agencies get the best value for their project, recent modifications to DOE's Super ESPC contract are intended to help federal agencies obtain the lowest interest rate for their ESPC projects. The energy service companies (ESCOs) are now required to perform a competition in the commercial marketplace for the acquisition of the project's financing. To expedite this task, the new Investor Deal Summary document will facilitate the financier's review of the project and help to convey the real project risks rather than the perceived risks, thereby enabling the financier to provide the lowest possible interest rate.

Q. Can utility rebates be applied to ESPC projects? How do I process utility rebate payments?

A. Utility rebates may be applied to offset an ESPC project's cost. It is the responsibility of the ESCO to research the availability of any financial incentive or rebate offered by the local utility that serves the facility and/or the State in which the facility is located. The ESCO is also responsible for coordinating and partnering with the Agency Contracting Officer as to the preparation of the required documentation. The anticipated incentive or rebate can be utilized as a preperformance period payment.

Federal government agencies may have difficulty accepting or processing a rebate check. The rebate may be paid directly from the utility to the ESCO as long as the rebate amount is disclosed and credited to the agency's ESPC project.

Q. Can carbon emission credits be applied to ESPC projects' energy cost savings?

A. If an agency determines that it can sell "excess" emission credits resulting from an ESPC project that reduced a facility's on-site emissions, the proceeds of that sale could be considered energy-related cost savings and could be used as a component of an ESPC project's total savings. A federal agency's sale of its emission credits is a new and uncharted area from a technical, financial, and legal perspective, and FEMP does not have authority to establish policy or pricing guidance in that area.

Q. What are ESCO "markups?" How do I negotiate the ESCO markup?

A. Markups pay for an ESCO's indirect costs, plus general & administration costs and profit. DOE's Super Energy Savings Performance Contract includes a maximum ceiling price for each ESCO's markups in contract Table B-1. The markup ceilings are specified for each energy conservation measure (ECM). Agencies may negotiate the markup percentage for each ECM. Additionally, DOE's Super ESPC contract includes Table B-2, which defines the maximum ceiling for an "Added Premium," or the sum of the basis points based on the ESCO's and financier's perception of project risk. The interest rate reflects the factors such as risk, credit rating, and project complexity.

Q. Is it legal for federal government agencies to make annual payments in advance versus monthly payments in arrears?

A. Although each federal agency is subject to its own regulations, the FEMP interpretation of FAR Part 32.402 allows annual payments in Advance of the Performance Period based on the benefit to the government through deferred finance charges associated with that performance year. Advance payment of this nature may be viewed as the government paying for something it has not received, when, in fact, the government has received equipment and installation of the equipment prior to the start of the payment stream. The government is provided the remedy of a shortfall in the guaranteed cost savings through the provisions of clause G.4 in the DOE Super ESPC contract based upon the annual Measurement and Verification Report.