300 Energy Project Financing: Resources and Strategies for Success
(ROI) or internal rate of return (IRR). The expected rate of return is gov-
erned by the risk associated with the investment. Typically, the higher
the project risk, the greater the return demanded. Risk takes a variety of
forms in efficiency projects. Most risks can be measured; it is the accuracy
of the measurement (tolerance) that is important. Many risks associated
with investing in an energy or water efficiency project can be measured
using tools common to the finance industry, such as internal rate of re-
turn or customer credit-worthiness. M&V, as defined in this Protocol, is
primarily focused on risks that affect the measurement or determination
of savings from energy or water efficiency programs. These risks are de-
fined in the terms of the contracts between the participants.
This Protocol provides guidance on obtaining information needed
to reduce and manage measurement uncertainties in order to structure
project financing contracts. The value of ECM performance data can
range from useful to absolutely critical, depending on the financing
method and which party has accepted the contractual risk. For example,
an ESCO typically will not be concerned about operating hours if the
owner takes responsibility for equipment operation, though these risks
should be highlighted and understood by the parties. Different invest-
ments require different measures of performance.
Accordingly, this Protocol provides four M&V Options to accom-
modate a variety of contractual arrangements.
Although this Protocol formalizes basic M&V language and tech-
niques, it is not meant to prescribe an M&V Option for every type of
ECM. Instead, this document offers Options available, provides guid-
ance on which Option to choose and helps clarify the relationship of
various M&V Options to the risks assumed by relevant parties, and thus
places bounds on the financial risks of the deal.
2.2 DEFINITION AND ROLE OF PERFORMANCE CONTRACTS
When efficiency projects include a guarantee of performance, it is
classified as a performance contract. It is important to recognize that
there are two separate instruments in such transactions—the lending
instrument and the guarantee. The lending takes place between the
financier and the owner, or the ESCO. The guarantee is typically pro-
vided to the owner by the ESCO. Usually it guarantees the amount of
energy that will be saved at some defined pricing level, and/or that
energy savings will be sufficient to meet the financing payment obliga-
tions. However a guarantee may be as simple as a piece of equipment