Financial Analysis & Energy Performance Contracting Flashcards

What is a Power Purchase Agreement (PPA) in the context of on-site energy generation?

Answer: An agreement where a third party owns and operates generation equipment and sells the output to the host site at an agreed rate

In a PPA, a third-party developer owns, operates, and maintains the generation system (e.g., solar) and sells the electricity produced to the host customer at a predetermined rate, often below retail utility rates.

In financial analysis of energy projects, 'cost avoidance' differs from 'cost savings' in that:

Answer: Cost avoidance represents the value of not incurring costs that would have been incurred without the project

Cost avoidance is the value of expenditures prevented by an efficiency measure (e.g., avoiding a rate increase), while cost savings are reductions in actual expenditures compared to the established baseline.

When establishing the financial baseline for an EPC, which factor is most critical to document accurately?

Answer: Pre-retrofit energy consumption and cost data reflecting normal operations

The pre-retrofit baseline must accurately capture normal operational energy use and costs so that savings can be measured against a defensible reference point throughout the contract.

What is the typical role of an independent third-party M&V agent in an EPC?

Answer: To provide unbiased verification of savings calculations, protecting both the client and ESCO

An independent M&V agent provides objective, unbiased verification of savings, which protects both parties by ensuring that reported savings are accurate and agreed measurement protocols are followed.

Life Cycle Cost Analysis (LCCA) in energy project evaluation considers:

Answer: All costs and savings over the project's life, including capital, operations, maintenance, and energy

LCCA evaluates the total cost of ownership over a project's lifespan, encompassing initial investment, ongoing O&M costs, energy savings, and residual value to determine overall cost-effectiveness.

In EPC financial modeling, what is the purpose of a sensitivity analysis?

Answer: To assess how changes in key assumptions (energy prices, savings rates) affect project financial outcomes

Sensitivity analysis tests how variations in uncertain inputs — such as future energy prices, occupancy, or savings estimates — impact key financial metrics like NPV and IRR, revealing project risk.

An adjustment clause in an EPC is used to:

Answer: Modify the baseline or savings calculations to account for changes in operating conditions from the baseline period

Adjustment clauses (or 'baseline adjustments') reconcile the measurement baseline to reflect changes in occupancy, production, weather, or equipment use that differ from baseline conditions, ensuring fair savings attribution.