Heads in the sand
Don't give way to your inner ostrich - energy conservation demands new ways of working. Break free from the constraints of the traditional contractor selection process - implement Energy Performance Contracting for a guaranteed ROI, writes Scott Pete22/01/2009 | By Scott Petersen
You could put your head in the sand; adopt the ostrich approach to a rapidly changing world. But, doing what you’ve always done, is it the right way to go, especially when the business agenda is demanding that you do more with fewer resources – that you be more energy efficient, reduce costs and deliver performance improvement? Take your journey to work. Just because you always drive the same route doesn’t mean it is still the best way to go. Rising petrol prices, tax hikes, new environmental legislation, coupled with new roads, modern, fuel∞efficient engines and alternative means of transport, will have changed the dynamic. Today, other options will, very likely, deliver a better, more efficient and financially prudent solution.
It is the same with contract tendering. The typical buying scenario, purchasing the HVAC/energy, fire and security management systems and maintenance services separately, has long prevailed. And, with the construction industry locked into this set up, it is forfeiting big business benefits, not least the opportunity to implement strategic energy demand management and make big energy and operational cost savings. The traditional contractor selection process only addresses bits of the building management puzzle; it does not tap the full value of the investments made in automation controls nor the potential energy and operational efficiencies to be gained from them.
What is an EPC?
A well-proven concept, Energy Performance Contracting (EPC) offers both a new way of working and contractor selection. A retrofit approach to reducing a facility’s energy consumption and carbon footprint, many organisations, public and private alike, have yet to see the value of it.
The 2007 Clinton Climate Initiative is, however, an exception and with Honeywell’s help, is working with the world’s 40 biggest cities to implement local EPC retrofit programmes to address a global issue – to reduce energy consumption and carbon emissions.
In short, an EPC is a self-funding initiative enabling building owners and occupiers to make capital enhancements – practical engineered improvements to existing energy plant and systems’ infrastructure – that enable better energy demand management. It uses future guaranteed savings in utility consumption to finance modernisation today – without the need for upfront capital.
The performance contractor, in guaranteeing the performance improvement, shoulders the risk. There is no risk to the customer. Put it another way: no savings and the contractor doesn’t get paid… and in fact pays the difference. Any savings beyond that predicted over the term of the contract and that’s the customer’s to bank!
A break with tradition
Clearly this results approach lends itself to a new way of working. Unlike the traditional tender selection process which is invariably governed by price, successful performance contracting is driven by results with the very best EPCs spanning ‘report to results’.
Indeed it is the buying of results, as opposed to equipment, that makes a performance contract different and this is what the customer/procurement department has to get its head around.
Granted the route to getting those results will differ with each EPC contractor bidding for the job; very likely each will have a different approach to getting results making it very difficult to compare ‘like with like’. One contractor may, for example, look to replace an ageing boiler and use mid∞range controls while another may prefer to upgrade the legacy boiler and use top∞of∞the∞range controls; different approaches, different equipment, different costs but both looking to deliver the same results – the guaranteed energy savings. Don’t feel too daunted. A trusted Energy Service Company (ESCO) such as Honeywell can advise on the procurement process.
Think about it: this new approach offers key advantages. With tendering there’s always a risk that the service provider might be tempted to cut corners to get the job done and boost their short∞term margin at the expenses of sustainable productivity gain. Even more fundamental, tendered contracts do not carry a guarantee of measurable outcome as the primary criterion.
Performance contractors, on the other hand, being bound by contractual guarantee, actively seek maximum efficiency gain and equipment uptime. Their mantra is maximum performance improvement. Granted reliable equipment and the knowledge of skilled energy engineers might cost a bit more at the outset but, long term, a much better return on investment is there for the taking. An EPC will, for example, enable a customer organisation to plug an in∞house skills shortage. It will give access to specialist resources required to implement technology optimisation into the energy mix – competent engineers who can help to plan and budget for capital improvements, maybe a boiler upgrade, new energy∞efficient lighting or a modern building management control system, and so reduce energy and operating costs, increase equipment life span and enable cumulative efficiencies over time.
Not least, their expertise can help companies to unlock a sustainable energy management strategy and so address environmental and financial targets. Many Honeywell customers have, for example, been able to realise operational cost savings of 20 percent or more – money that has been redirected to facility modernisation or directly to the bottom line. And, don’t forget, the money to fund the necessary enhancements is, very likely, already being spent, but on wasted energy – as much as 20 percent according to the UK Carbon Trust. Much better to turn it into a revenue stream.
In the UK for example, an EPC brought about a significant reduction in CO2 emissions and slashed the Royal Gwent Hospital’s energy bill. In fact Honeywell guaranteed savings of £1.13m and in 2007 delivered £1.5m, the extra £400,000 going straight to Gwent NHS Trust. In the Netherlands a similar initiative is helping to save more than €150,000 annually on the Atrium Hospital Complex’s utility bill.
Calling a new mind set
Whereas the traditional tendering process is based on exact drawings, building specifications and bills of quantities – and very likely presented as one of three competitive bids with the complication and expense of a lot of post-contract negotiations – an EPC sees the performance contractor adopt a very different start point.
Take Honeywell as an example. It will conduct an audit of a facility’s infrastructure to establish a mutually agreed baseline and identify where energy consumption can be trimmed and by how much. With this common understanding in place, it then falls to Honeywell to implement practical solutions and preventative maintenance services that deliver on the promised energy efficiencies. Throughout the term of the contract, the equipment upgrades and system enhancements are monitored and evaluated so as to track performance and measure results. This is on-going over the full term of the contract with savings reconciled annually.
From a customer perspective, contractor pre-qualification is a critical first step…yet it is a step without risk, as that is borne by the contractor. Do it right and you stand to make big energy and operational cost savings as well as raise comfort levels and productivity. You’ll enjoy peace∞of∞mind and be free to focus on what you do best – better patient care in the case of the aforementioned hospital complexes.
Of course, you’ll want a performance contractor with a proven track record in automation control technologies, a skilled project team and financial stability (EPCs can be as long as 25 years so you’ll want a supplier that you know will be in it for the long term) and the organisational structure to deliver. Added to that, an open book approach is essential to the spirit of true partnering.
Honeywell has been in the energy management services business for more than 100 years and was a pioneer of the EPC concept in North America. Over the past 25 years it has successfully implemented more than 5,000 energy efficiency projects around the world, savings its customers in schools, healthcare, airports, industry, Government and commerce more than £1.7bn. Indeed half of all Honeywell products and services target energy conservation.
Frost & Sullivan awarded the company an Industry and Advancement Award for its industry-leading approach to energy demand management. “Honeywell not only demonstrates a clear expertise in energy services but also possesses a keen knowledge and understanding of a shifting and volatile energy landscape,” says F&S research analyst, Devin Castleton. “It has a robust track record in developing a full-circle strategy that actively monitors and controls energy supply, energy-using assets and real-time interaction between supply and demand.”
Independent recognition, combined with a proven track record, can help steer the prospective EPC buyer’s final selection process – to adopt what is, in essence, a speculative proposal backed by the credentials of the bidder. So don’t let your inner-ostrich rule. Lift you head; look around; get a new mind set. It’ll help you to do things differently.
Not least, with energy being such a big and growing operational expense, an EPC is a sound choice when it comes to delivering on environmental and financial goals.
