Financial Analysis & Energy Performance Contracting Flashcards

What is the primary purpose of an Energy Performance Contract (EPC)?

Answer: To allow an ESCO to finance and implement energy improvements repaid through verified energy savings

An EPC enables an Energy Service Company (ESCO) to finance and implement energy efficiency measures, with repayment derived from the measured and verified energy savings achieved.

In a Guaranteed Savings EPC structure, who bears the primary performance risk if savings fall short of projections?

Answer: The Energy Service Company (ESCO)

In a Guaranteed Savings contract, the ESCO guarantees a minimum level of savings and bears the performance risk, compensating the client if actual savings fall below the guarantee.

Simple payback period for an energy efficiency project is calculated as:

Answer: Total project cost divided by annual energy cost savings

Simple payback period equals total project cost divided by annual energy cost savings, expressing how many years it takes to recover the initial investment.

Net Present Value (NPV) is used in energy project financial analysis to:

Answer: Assess the current value of future cash flows discounted to today

NPV discounts all projected future cash flows (savings minus costs) back to their present value using a discount rate, allowing comparison of project profitability in today's dollars.

What does the Internal Rate of Return (IRR) represent in energy project analysis?

Answer: The discount rate at which the NPV of a project equals zero

IRR is the discount rate that makes the net present value of all cash flows equal to zero; projects with an IRR exceeding the required rate of return are generally considered financially viable.

In the context of EPCs and M&V, what is the role of the measurement and verification process from a financial standpoint?

Answer: To provide an auditable record of savings used as the basis for ESCO payment

M&V provides a transparent, agreed-upon method for quantifying actual savings achieved, which serves as the verified basis for ESCO compensation and client reporting under an EPC.

Which of the following best describes a Shared Savings EPC structure?

Answer: The ESCO finances the project and receives a percentage of verified savings as payment

In a Shared Savings structure, the ESCO provides financing and receives an agreed percentage of verified energy cost savings over the contract term, sharing the financial benefit with the client.