IMPACT OF M&V ON INTEREST RATES FOR ESPC PROJECTS

1. IMPACT OF M&V ON INTEREST RATES FOR ESPC PROJECTS Presented by: Russ Dominy, Navy/Marine Corps ESPC Team 5 Nov. 02

2. DoD/DoE Steering Committee Agenda • Discussed “No-offset” provision • What it is • Principle & Interest for capital cost paid regardless of savings • Performance period costs only paid if savings are realized • Issues regarding the offset • Transfers performance risk from ESCO/Financier to Govt. • Is it legal? • Effects project interest rate for less credit worthy companies • Unfair to ESCO’s with good credit rating • Consensus not to pursue implementation of provision

3. Impact of Interest Rates on M&V • DoD Steering Committee polled • Not aware of any impact one way or the other • Provided names/phone numbers of Financier POC’s • 4 Financiers contacted • Varied responses

4. Conclusions • M&V may have an impact on interest rates • 25-50 basis points differential potential • Factors include: • Method used • How well plan is defined • Financial health/past performance of ESCO • Term

5. Financier One • M&V Method used does impact rates • Methods A&B minimal impact • Methods C&D more risky (less quantifiable data) • Applies when this option comprises 56% or more of total project savings • Combining options viewed as less project risk • Term, % of savings used to pay contractor factors • Impact potential 25-50 basis points

6. Financier Two • M&V Method used may impact rates • Stipulated savings more desirable • More stringent M&V approach, more project performance risk • Determing factors include • Financial health/Size/Past Performance of ESCO • Project Term • Technology • Impact potential 25-50 basis points

7. Financier Three • M&V method not a factor in determining rate • Expectation that project must meet terms of EPACT: • Govt. only pays for realized savings • The more defined the M&V plan the better • Trust that Govt.. has validated the savings potential • Offset provision frowned on • Savings may be inadequate to cover costs • Under review, stop payment decision may be made

8. Financier Four • M&V Method used does impact rates • 3 Risk categories factored into rates • Contractor risk • T for C/T for D • Contract term • Terms & conditions • M&V length • Project risk • Equipment (technologies) • M&V method • O&M responsibilities • Term

9. Financier Four(Continued) • Participant Risk • Credit quality • Past performance • Experience • Less ongoing M&V or option A preferred • No offset provision provides 50-75 basis point reduction • M&V method held in reserves