19 Aug

There’s been a trend over recent decades, at first with large contractors, to offer energy efficiency infrastructure upgrades that pay for themselves through reduced utility bills. That’s excellent! But, it’s how the project cost is derived that may not be optimized for the client.

Crash Course on Energy Savings Contracts

First, let’s understand how these deals are usually structured. The building owner will either take out a loan/lease involving some upfront capital, or the project(s) will be contractor/supplier financed to reduce the upfront money. Once the project is done, the owner will either pay their utility bill plus the loan/lease, or they will pay some combination of the difference between utility bills and an adjusted baseline version that predicts what their bills would have been if the project never happened. The latter option will always involve measurement and verification services that can add 2-5 percent to a project cost and there are a host of exceptions that can negate savings guarantees. In either case, these are acceptable ways to structure a deal provided they fit the client’s cash flow requirements with the limitations clearly explained.

Where Does the Money Go?

Second, a crucial point to understand about commercial construction projects is how the costs are distributed. In our region, roughly two-thirds of a retrofit project’s price is in the equipment. For a building owner to have the lowest total cost of ownership (installed cost, lifetime energy cost and maintenance), this portion of the contract has to be competitively bid amongst multiple suppliers. When a supplier is chosen as the sole provider of equipment and services for an efficiency program, two things are certain to happen: the best solution available may not be recommended because they don’t represent the manufacturer with the best equipment, and the main force of competition that can reign in project cost has been removed.

What Neutral Really Means

So, here’s where it goes off the rails. Some energy projects and programs are priced backwards meaning after the audit has determined all of the efficiency measures to implement with annual savings calculated, the project is priced just under the total savings to be ‘budget neutral.’ Another way of saying that is nearly all of the money the owner will save is going to be paid out to someone else, or it’s the maximum amount an owner is willing to pay for new equipment and services.

A Better Way

This practice is part of the reason Renegade Energy was formed to bring the competitive bid construction model to the local energy services industry. Something about the neutral approach just felt wrong especially with tight budgets all around. What we design and implement are budget positive programs that bring the highest value with the lowest cost of ownership while focusing on cash flow, building value and comfortable occupants. I’d be happy to share this vision and how it applies to your building anytime.

Opportunity is missed by most people because it is dressed in overalls and looks like work.

– Thomas A. Edison

One Response to ““Budget Neutral” Simply Costs Too Much”

  1. Jeremy Hobbs

    Chris thank you for your insight! As an equipment supplier I am encouraged and hope more read this blog and speak to you about how they can save money.

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