During the past 20 years, the government has increased its focus on saving energy within government-owned buildings and facilities, both to address environmental concerns and to promote U.S. independence from foreign oil. Energy savings performance contracts (ESPCs) are one tool the government has used to implement the sweeping reforms required to achieve these necessary savings. This mini-article provides an overview of the ESPC process and briefly discusses how companies can become qualified to perform these contracts.
An ESPC is a type of procurement contract that creates a partnership between a state or federal agency and an energy services company (ESCO) for the purpose of making the agency’s facilities more energy efficient. First, the agency accepts initial proposals and qualifications from multiple ESCOs; then, once the agency chooses one proposal, the chosen ESCO conducts a comprehensive energy audit and identifies improvements that will save energy at the facility. The ESCO is responsible for ensuring that the improvements are “life cycle cost effective” — that is, that the benefits meet or exceed total costs over the life of the contract. With little or no up-front payment by the agency, the ESCO designs and constructs a project that meets the agency’s needs and arranges financing to pay for it. The ESCO guarantees that the improvements will generate savings sufficient to pay for the project over the term of the contract, with contract terms of up to 25 years. Thereafter, the agency conducts an annual energy audit, and annual payments to the ESCO are made from the realized savings generated from the energy-saving measures. After the contract ends, all additional cost savings accrue to the agency.
Brief History of ESPC
Through the 1986 Amendments to the National Energy Conservation Policy Act of 1978,2 Congress first authorized Federal agencies to enter ESPCs. Since that time, most states have passed similar legislation authorizing their agencies and departments to enter ESPC-type contracts.3
After Congress first approved the ESPC process, agency use of ESPC started slowly. The Department of Energy (DOE) did not publish a notice of final rulemaking inaugurating the congressionally mandated experiment in procurement reform until 1995.4 The final rule created Title 10, Code of Federal Regulations (CFR) Part 436, Subpart B — Methods and Procedures for Energy Savings Performance Contracting. At that time, the DOE also issued revised versions of the model solicitations to provide guidance to implementing federal agencies on conducting procurement actions consistent with the ESPC rules.
Even after this initial rulemaking, however, agencies did not widely use ESPCs, largely because negotiating an ESPC was a highly technical and difficult process.5 The DOE’s Federal Energy Management Program (FEMP) addressed these concerns in 1998, by creating “Super ESPCs” to simplify and shorten the ESPC negotiation process.6 FEMP-implemented Super ESPCs are indefinite-delivery, indefinite-quantity (IDIQ) contracts7 subject to specific rules that standardize the ESPC negotiation process. Agencies have the option to use the Super ESPC process to take advantage of some pre-negotiated terms and conditions. These “umbrella” contracts are competitively awarded to pre-approved energy savings companies who have demonstrated their capabilities to provide energy projects to federal customers. FEMP will provide Super ESPC contracting assistance to all agencies.8 While agencies may still choose to enter into “stand-alone” ESPCs with energy service companies using a separate competitive selection process, a Super ESPC project can be implemented in far less time than it takes to develop a stand-alone ESPC project. The general terms and conditions are established in the IDIQ contracts, and agencies implement projects by awarding delivery orders to the Super ESPC ESCOs.9
Recently, a string of energy-savings legislation and orders have brought retrofitting and energy savings measures to the forefront of agency consideration. The Energy Policy Act of 2005 (“EPAct 2005”)10 set new federal energy goals to cut energy use (compared to 2003) by two percent per year in 2006 through 2015, and to increase use of renewable energy. The EPAct 2005 also extended agency authority to enter into ESPCs until September 30, 2016. Only months ago, Congress enacted the Energy Independence and Security Act of 2007 (“EISA 2007”),11 an omnibus energy policy law that consists mainly of provisions designed to increase energy efficiency and the availability of renewable energy. EISA 2007 guaranteed the importance and legitimacy of ESPCs by permanently authorizing their use.12
Thanks to the streamlined negotiation process and the top down emphasis on achieving cost-efficient energy savings, agencies have begun to embrace ESPCs on a wider scale to meet their energy use reduction goals. To date, the DOE reports that more than 440 ESPC projects have been awarded by 20 different federal agencies in 46 states. Over $2.0 billion in private-sector funds has been invested in federal facilities through ESPCs,13 which the DOE claims has saved 16 trillion BTU annually, “equivalent to the energy used by a city of about 450,000.”14 Featured prominently on the FEMP and DOE websites are examples of the successes of Super ESPC projects. Most notably, the U.S. Food and Drug Administration (FDA) initiated an $890 million energy-saving construction project at the site of its new headquarters — a 1940s-era Navy base in White Oak, Maryland. Using a wide range of energy efficiency measures and solar energy, it has led to one of the largest Super ESPCs ever awarded.15
Who Is Qualified to Perform an ESPC?
In order to bid upon any ESPC project, a firm must be on the DOE’s Qualified List of Energy Service Companies (“DOE Qualified List”), which is maintained in accordance with the Energy Policy Act of 1992 and 10 CFR 436.32. All federal agencies use the DOE’s list in their ESPC bidding procedures, unless the agency has elected to develop its own list of qualified firms consistent with the procedures set forth by the DOE.
The DOE accepts applications for the DOE Qualified List throughout the year and each member on the list is required to re-certify for each calendar year. To be included on the DOE Qualified List, all first-time applicants must complete and submit a Statement of Qualifications on a standard form and two client questionnaires with original signatures from project clients. A Qualification Review Board (QRB), composed of representatives of the Federal Interagency Energy Management Task Force and the DOE, evaluates these applications and, on the basis of statements of qualifications received and any other relevant information, the QRB selects firms for inclusion on the qualified list if:
- the firm has provided energy-savings performance contract services or services that saved energy or reduced utility costs for not less that two clients, and the firm possesses the appropriate project experience to successfully implement the technologies that it proposes to provide;
- previous project clients provide ratings that are “fair” or better;
- the firm or any principal of the firm has neither been insolvent nor declared bankruptcy within the last five years;
- the firm or any principal of the firm is not on the list of parties excluded from procurement programs (in other words, has not been debarred by the federal government) under 48 CFR part 9, subpart 9.4; and
- there is no adverse information that warrants the conclusion that the firm is not qualified to perform energy-savings performance contracting.
If the DOE denies a firm’s application for designation as qualified to provide energy-savings performance services, it will issue a written decision and the firm may request a debriefing. The DOE may also remove a firm from the list of qualified contractors after notice and opportunity for comment for failing to update its statement of qualifications, upon credible information warranting disqualification or for “other good cause.” Any firm receiving an adverse final decision from the DOE is required to apply to the Board of Contract Appeals of the General Services Administration to exhaust its administrative remedies.
Even if a company is included on the DOE Qualified List, only pre-qualified “Super” ESCOs are considered eligible to compete for projects negotiated under FEMP’s IDIQ Super ESPC process. FEMP evaluates ESCOs interested in performing these Super ESPCs based on demonstrated capabilities to manage the development and implementation of multiple ESPC projects over a large geographic area.16 FEMP also evaluates them on their technical approach and price for one or more site-specific projects defined in DOE’s requests for proposals (RFP).
Energy saving performance contracting is here to stay. Contracting companies interested in benefiting from the government’s enthusiastic efforts to “go green” should consider applying for the DOE Qualified List and FEMP’s Super ESPC pre-approved list. While the jury is still out on just how lucrative these contracts can be, the government has proven that it is committed to continuing public-private partnerships with qualified ESCOs to achieve its energy savings needs.