Using Uncertainty Modeling to Optimize M&V in ESPC Projects

1. Using Uncertainty Modeling to Optimize M&V in ESPC Projects Discussion Document 10/31/02

2. Overview • Context: Concern about level of M&V • Difficult to reach consensus on a specific project • General concern about the degree of stipulation and utility bill reduction • Can we add value to the current M&V decision-making process (largely qualitative) by incorporating uncertainty modeling (more quantitative)? • Can we do this without complex (expensive) analysis?

3. Role of M&V in ESPC • Maintain the integrity of the ESPC program • Identify risk parameters and assign responsibilities • Generally, ESCOs responsible for equipment “performance” and agency responsible for “operational” factors. • Define required measurement parameters and protocol • Future role: Help correlate interest rates with energy savings uncertainty

4. M&V Decision-making in ESPCs – Current Status • Available Tools • FEMP M&V Guide – based on IPMVP • Risk/Responsibility matrix • M&V decision support flowchart • ASHRAE Guideline 14 • Limitations – Lack of “context-specific” guidance • What is the risk tolerance of ESCO and agency? • What is the “optimal” (not ideal) level of analysis, given data, time, and budget constraints for a given project?

5. M&V Decision-making in ESPCs – Proposed Improvement • Apply quantitative uncertainty analysis to optimize M&V, considering: • Savings uncertainty • Cost of reducing uncertainty via M&V • Risk tolerances of the agency and ESCO • This allows agency and ESCO to make a more informed decision • Tradeoff M&V value (uncertainty reduction) and M&V cost

6. This is not new! • FEMP M&V Guidelines already recommend use of uncertainty analysis • Section 2.5: Selection of M&V methods & rigor • Appendix D: Sampling guidelines • FEMP Method A Detailed Guidelines • Section 3.1: Considering uncertainty • Section 3.2: How stipulations apportion risks and responsibilities • We also don’t need to invent new science! • Apply well-established risk management techniques for FEMP context

7. ESPC Cash-flow Model • Payments to ESCO <= Total cost savings • Total Cash flow during ESPC is (supposed to be) less than before ESPC Savings Total Energy + O&M Cost Savings ESCO Payment Energy + O&M Energy + O&M Agency Cash flow ($) During ESPC Before ESPC

8. ESPC Cash-flow Model • In reality, there are uncertainties around each cash flow component weather, energy prices, etc. Savings ESCO Payment ESCO Payment + = + = Energy + O&M Energy + O&M Energy + O&M Agency Cash flow ($) Typically fixed Equip performance, model assumptions, etc. Before ESPC During ESPC

9. Cash-flow Uncertainty vs. Risk Tolerance Expected Cash-flow Cash-flow Uncertainty Agency Risk Tolerance Risk Management Need $/yr Agency Cash-flow

10. M&V and Risk Management • Optimize M&V based on risk management needs • M&V is not an end in itself! Expected Cash-flow Uncertainty w/ no risk mgmt $0 for M&V Agency Risk Tolerance Uncertainty w/ some risk mgmt $X for M&V Uncertainty w/ more risk mgmt $2X for M&V $/yr Agency Cash-flow

11. M&V and Risk Management – Illustrative Example

12. Proposed LBNL Work (FY 2003) • Pilot Projects • Select 2-3 ESPC projects as pilots before M&V decisions are made • Analyze uncertainty (work with ESCO, PF) • Assess agency risk tolerance (discussions with agency) • Analyze costs/benefits of different M&V options • Record final decision-making process • Assess lessons learned - policy implications for FEMP • Risk assessment/management requirements • Incorporation of risk management items in contracts • Need, if any, for guidelines and tools • Leverage FEMP M&V Committee for peer-review, guidance and dissemination