By Peter V.K. Funk, Jr.
Mission Critical magazine
October 12, 2012

There is a saying that you never know what your insurance policy actually covers until you submit a claim and receive a check. The same can be said of a product guarantee: a consumer may find out what it covers only when something goes wrong.

Energy savings guarantees add a wrinkle: both parties may only find out what the guarantee when the customer claims that the energy savings equipment did not deliver the guaranteed savings. How could an energy services contractor not understand its own guarantee?

The short answer is that it could happen in several situations, such as when a promise of savings is written in very general language and included within an equipment and services proposal to a facility owner: “We will save [your company] at least 20% in energy costs. The [equipment] will pay for itself within 3 years.” The proposal is incorporated into the contract. The cost of energy rises. The project doesn’t deliver the cost savings expected by the customer.

The customer notifies the seller to “pay up” on its guarantee. The seller responds, “we provided a 20% reduction in the facility’s use of electric power. The only reason you did not achieve more cost savings is that there was an increase in the cost of power.” The facility responds, “We were promised energy cost savings.” The seller calls its lawyer who advises that ambiguous language is generally construed against the drafting party and that the Uniform Commercial Code (UCC) warranty disclaimer in the General Conditions of the seller’s contract only applies to warranties that are not stated. In this case, however, the proposal became a part of the contract and therefore was stated. The lawyer also advises that Article 2 of the UCC only applies to sales of goods, and the seller’s contract covers providing a combination of equipment and services to customers. Result – the customer collects on the guarantee and the seller restructures its contracting process and revises the General Conditions.

The dangers of misunderstood guarantees cuts both ways. In another situation, the customer relied upon a different type of energy savings guarantee. Like the above guarantee, this one also stated that, “We will save [your company] at least 20% in energy costs. The [equipment] will pay for itself in 3 years.” The customer did not focus, however, upon the provision in the contract’s General Provisions, which stated that all guarantees and calculations of savings are based upon the cost of energy per kWh, KW or Therm upon the date of the contract. In this second case, when the price of energy increased and the customer’s total cost of energy increased, the customer was unsuccessful in collecting under the guarantee.

Although each of the above disputes had a different outcome, in each case the customer enjoyed increased savings benefits from the installed equipment as the price of energy increased. In each case, a poorly written guarantee resulted in a needless misunderstanding and a dispute.

Lessons learned

Energy savings guarantees should be written carefully and attention should be paid by each party to the type of guarantee being offered. Guarantees are more than part of the pitch; they are a specific promise that, if not met, can be the path to liability on the part of any seller or regret on the part of any customer that fails to understand the guarantee.

In contrast to the simple examples described above, energy savings guarantees can be complex and have many moving parts. The following example is taken verbatim (except that the seller’s name is omitted and product unidentified) from an on-line brochure seeking to sell [units] to data centers.

Save up to 78% on your Data Center Cooling energy, with a guaranteed 3 Year (ROI) Return on Investment...

[Seller] Guarantees all its projects efficiencies. [Seller] will either purchase an Efficiency Insurance Policy to protect your investment or establish a joint account for the customer that [Seller] will deposit a portion of the profit from the project into that account. When the efficiency and ROI of the project is validated by the customer’s 3rd party reviewer, those moneys’ will be distributed monthly through the first year to [Seller] Solutions. In the event that the efficiency measures and ROI do not meet the guaranteed levels, the customer receives the difference in operational costs per hour on any occurrence from that account for the first year.

In addition to the fact that this guarantee is difficult to understand, a number of questions and concerns, for both seller and customer, jump out from the above description of a guarantee that will require negotiation and, hopefully, resolution in the final signed contract.

In the quoted language, Seller is putting the determination as to whether the CRAC unit performed efficiently and will achieve the guaranteed ROI entirely in the hands of the customer’s reviewer. Shouldn’t the third party reviewer be required to be well-qualified and apply specific review standards? Questions that a customer should ask might include the following: Is the (joint account versus insurance) decision to be entirely in the seller’s hands or does the customer have a say? If insurance, which party pays the premium? If a joint account, how are seller’s profits to be determined? What portion of seller’s profit is to be deposited and will there be a floor upon the amount of savings to be deposited? What withdrawal requirements will be imposed upon the account? How is the “difference in operational costs” mentioned in the last sentence to be calculated and what is to constitute an “occurrence?” For these reasons, it would be difficult to interpret this guarantee if it were to be incorporated as-is into the contract. As noted above, any ambiguities would likely be construed against the seller.

Energy savings guarantees can be important to equipment purchase guarantees and form the “heart” of shared savings agreements, energy performance contracts and certain types of energy services agreements. Following are examples of certain types of energy savings guarantees:

(1) Payments Based Upon Deemed Savings. While lighting is only a small percentage of a typical data center’s electrical load, sensor-controlled light-emitting diodes can provide significant reductions in electric demand and consumption when compared to fluorescents. LEDs also produce less workspace heat than fluorescents. The cumulative beneficial effects of an LED retrofit include an improved data center power usage effectiveness factor (PUE). Since the delta between the power requirements of the units to be replaced and the new lighting units can be projected (wholly or partially) in advance based upon manufacturers’ specifications and data, the energy savings to be produced by lighting retrofit projects is sometimes determined by stipulating in advance (deeming) the level of savings to be achieved by each fixture to be used for the purposes of calculating energy savings.

Following is an example of a portion of a deemed savings provision:

Baseline Consumption. Electrical demand and electric energy consumption will be stipulated for each baseline lamp/ballast fluorescent combination based on the manufacturer’s rated consumption and demand for each lamp/ballast combination.

Energy Savings Calculation. Electric energy and demand savings will be calculated as the difference between the baseline for each fixture and the manufacturer’s data for each sensor-controlled LED fixture’s electric energy demand and consumption, adjusted for the percentage of dimming time recorded by the LED control system. Total energy savings will be calculated using the electric energy and demand savings for each fixture (calculated as provided herein) multiplied by the operating hours and actual fixture counts.

The above example shows how the savings calculation is to be performed. Of course, there are several other factors that have to be addressed such as a spot comparison between the manufacturer’s data and field experience and possible limitations upon dimming records.

(2) Payments Based Upon Achieved Savings. Following is a type of guarantee which puts the burden squarely upon the seller to produce savings based upon measured savings multiplied by an “index” price that changes, subject to a floor price, throughout the term based upon the actual cost of electric commodity to the customer:

Electric Commodity. The Unit Price per kWh to be used to determine Electric Commodity Savings with respect to each month following the Commencement Date shall be the same as the price per kWh charged Owner by the Utility during that month under Account: _______ (or successor account having the same Utility Service Classification). During the Term, the Electric Commodity Unit Price shall not be less than the Unit Price per kWh for said account charged to Owner with respect to the first month following the “Commencement Date. [Note: The contract has similar provisions for electric demand and natural gas]

Energy and Cost Savings Calculation Algorithms. The Company shall base its calculations of Savings upon the following examples. The Company may use other reasonable algorithms or methodologies to calculate Savings with the Owner’s advance written permission which may not unreasonably be withheld:

As with the prior example, this above example shows how the savings calculation is to be performed. Of course, there are several other factors that have to be addressed so as to achieve an “apples” to “apples” comparison between baseline energy consumption and post-installation energy consumption. Of particular importance is to adjust the baseline whenever the facility’s equipment, occupancy or hours of use change and to adjust for differences in degree days.

(3) After-the-fact guarantees of energy savings. In such arrangement, the seller is paid by the customer for the installation and related services and provides to the customer an energy savings guarantee that energy savings will be not less than a stated level. The first guarantees discussed in this column were “after-the-fact” guarantees.

(4) Customer performs certain tasks. Performance under an energy savings guarantee can also depend upon performance by a customer which, in order to reduce costs, undertakes to perform reciprocal tasks. For example, in a combined cogeneration and energy conservation measures (ECMs) project, a university undertook to (but failed to properly) install a building management system (BMS) which, among other things, signaled the amount of building load to the controls of the “load following” gas-fired cogeneration units. These units were interconnected to the utility grid. Without the BMS signaling the building’s electrical demand, the cogen units followed the demand of the grid and pumped power into the grid at full capacity 24/7. This problem was compounded by the fact that the outsourced cogen unit operator was paid per kWh generated and had little motivation to see cogen unit production reduced. The project did not produce savings in light of the post-project cost of gas. When the problem was finally identified, a dispute ensued that, despite threats of litigation on both sides, was resolved by the seller, at its cost, installing the BMS and related load-following equipment.

Conclusion: Energy savings guarantees provide benefits and contain pitfalls. Make sure that you understand any such guarantee and that it is written clearly before you enter into the contract.