ESPC Step B - Contract & Energy Savings Guarantee

Following the energy audit, negotiations commenced and centered on the scope of Energy Conservation Measures (ECMs) at 92 municipal facilities, the specifics of the energy savings guarantee, financing structure, and construction schedule.

In the Spring of 2011, the City and Honeywell International signed the Energy Savings Performance Contract. The main conditions were as follows:

  • The project cost for the selected Energy Conservation Measures was $26.6 million, with provisions for inflation adjustments.
  • Honeywell International guaranteed (see side bar) that, following implementation of Energy Conservation Measures, municipal facilities will realize energy cost savings of ~$1.4 million per year. The savings from the project would be used to pay for the project and associated financing costs.
  • Anticipated payback period for these ECMs was 14 years. 

In 2013 and 2014, the City added additional projects to the scope of the ESPC work via three amendments to the original 2011 contract - 9 new solar energy installations and lighting retrofits of ~14,000 municipal streetlights and four municipal parking garages. As a result, the agreement was amended as follows:

  • The added work increased total project investment to $80 million, with provisions for inflation adjustments.
  • Honeywell International guaranteed  (see side bar) that, following implementation of Energy Conservation Measures, municipal facilities will realize energy cost savings of ~$1.7 million per year (an increase from ~$1.4 million attributable to the reduced energy usage and costs of the new LED lights).
  • The savings from the project would be used to pay for the project and associated financing costs.
  • The anticipated payback period for the new ECMs is 9 years.
  • Honeywell International also guaranteed electricity production from renewable installations. This translates to an additional $3 million a year in revenues for the City in avoided electrical costs, net-metering credits for excess electricity, as well as the sales of Solar Renewable Energy Certificates!

The Guarantee

ESPCs are typically designed to fund the cost of implementing energy conservation measures (ECMs) at no cost to the client. At the heart of an ESPC is a guarantee, usually a financial one, based on a baseline year of energy usage and associated costs.

The Worcester’s initial ESPC guaranteed $1.4 million a year in energy cost savings based on the 2009 energy use baseline and 2011 energy prices. This translates roughly to an 18% reduction in total energy use. The amended ESPC guaranteed $1.7 million a year in energy cost savings.

In a case that the guaranteed energy cost savings are not met during the 20-year agreement, Honeywell International would reimburse the City for the full shortfall amount for each year of such deficit.
In the submitted IGA, Honeywell International recommended ECMs that would have fully offset the City’s project costs (including, but not limited to, costs for actual implementation, financing, annual measurement & verification, and annual operations & maintenance). However, in Worcester’s case, a number of needed capital improvement projects were included that have an energy savings component but are typically not cost-effective to upgrade based on energy savings alone (e.g. window and roof replacements, and some HVAC measures). The City’s goal was to achieve capital improvements as well as energy efficiency improvements via the ESPC with the minimum risk and maximum return to the City.

Next Step C: Project Implementation