Innovations in Comfort, Efficiency, and Safety Solutions.
John J. "Jack"
Mc Gowan, CEM
One of the exciting new trends in Building Automation today is the growing popularity of Direct Digital Control (DDC) as a measure incorporated with Performance Contracts.
AutomatedBuildings.com has established itself as the preeminent source of technical information on Building Automation, Direct Digital Control and their convergence with Information Technology. Yet none of this technology can be applied without the sale of a system, and the market can be very fickle in it's demand for new features as well as it's willingness to pay for them. To make things more complicated, with the recent economic downturn, both public and private sector organizations are cutting back on capital spending. So once again the question often asked is "what's new and hot in the building automation market", but perhaps the more important question should be "how do owners find the money to pay for it?"
A significant trend in Building Automation was discussed recently in an unlikely place, an Energy User News article on Energy Services (State of the Art Performance Contracting, Mc Gowan, and August 2001), and it demands further discussion in this venue. One of the exciting new trends in Building Automation today is the growing popularity of Direct Digital Control (DDC) as a measure incorporated with Performance Contracts. This article highlights that important trend, and further it will serve as the inaugural piece in a series that will focus on success in selling and justifying Building Automation.
Succeeding in DDC Sales can be challenging and don't forget that some of the hardest work that is done to sell a system happens in the customers business, as the investment and the need are justified. There are numerous changes underway in the market and it certainly does not hurt that energy is a hot topic again, but the automation and performance contracting connection is significant. The performance based method of combining multiple energy measures into a turnkey package, including financing and a performance guarantee, has developed into a mature market and drives hundreds of millions in energy projects per year. For the controls industry it is exciting that these projects are starting to entail more complex systems, such as; central plant upgrades, distribution loop modifications including plate and frame heat exchanges, variable frequency pumping, combined heat and power technology and, most importantly, controls. With all eyes on California's electricity problems, ESCO's are considering all of these technologies, but they already are installing more Direct Digital Control (DDC).
Early-generation performance contracts often ignored controls but this is changing, and the discussion of Real time energy services in last months Automatedbuildings.com touched on ways that this technology enhances projects. Today these projects are implementing extensive Direct Digital Control system and more!
A significant growth trend for automation may grow out of leveraging the guaranteed savings approach to implement new and even more successful DDC projects? Performance contracts are negotiated sales that offer the opportunity to provide more comprehensive and effective systems and they are self-funding. Key benefits that will be touched on here are:
Yet this new opportunity is not without challenges and some of these will be covered as well including:
One of the exciting things about performance contracts is that they target existing buildings, ideally with high-energy costs and aging equipment. This means that the size of the market is much larger that focusing on new construction and renovation, plus owners of existing buildings have real problems that Building Automaton can solve. However, it is likely that your target geographic market will be bigger as you consider all the existing buildings that can be approached. Another factor is that the target customers for performance contracts have traditionally been public entities, but in the economic climate this concept is starting to appeal to business owners as well. With this opportunity however comes a challenge and that is, learning to sell systems directly to an owner rather than submitting a bid. This is certainly not new to most controls contractors, so the key challenge is more centered around learning how to offer these services and finance them, which is simply a different sales approach.
Without question, the next horizon for Building Automation is system integration and expanding systems to include Web-enabled services. This is particularly important with performance contracts because the savings must be monitored and verified to ensure that the system pays for itself. What this means to both the contractor and the owner is that systems are more likely to offer features, points and sequences to enhance the long term management of a facility. Everyone benefits because systems can become more comprehensive management tools.
In addition to extending system capability at the control level, there is also a dramatic opportunity to expand communication capabilities. DDC Open Systems are becoming a reality and one of the most dramatic benefits is wider access to information. With Local Area Network and Internet access, data can be made available throughout the owners business using Web-browser interface. These features raise both the visibility and the value of Building Automation.
One the most disappointing aspects of the Building Construction industry is that it naturally assumes a life cycle that does not go beyond warranty. And in many cases, warranty is simply a reactive process rather than presenting mutual benefit. Performance Contracts bring 2 distinct benefits; 1) the relationship becomes much more robust because both the owner and the contractor have a stake in success, and 2) the quality of work is enhanced because all parties understand that it must function for 10 years or more, not simply through a one year warranty. This new energy management relationship is codependent in a positive way and allows both parties to derive ongoing benefits.
Based upon that market snapshot is safe to say that Performance Contracting may be a very promising new way to get systems installed. However, as noted above, this new and hot opportunity does have challenges and those should be discussed as well. Yet it is important to note that this is a very different market, and it may not be a logical step for controls contractors to become Energy Service Companies (ESCO's). ESCO is the term widely used for companies that sell performance contracts. So before exploring the challenges, it is important to note that for many companies it may make more sense to team with an ESCO and become the control vendor of choice. Since most ESCO's subcontract implementation of many measures, this is a logical step, and it further benefits the owner because highly qualified specialists are employed for each element of the project.
Getting into the business - Risk vs. Reward
This business requires a learning curve, which must be accompanied by a conscious decision to enter a business that extends the risk / reward equation for a typical project through the financing term. Financing terms are typically 10 years, but the Federal Government can go out as long as 25 yeas! The ESCO must learn how to present this complex sales package and be willing to manage a guarantee for the term. Access to the new market requires acceptance of the risk in order to achieve the reward.
How does the guarantee work and who writes it?
By law in most states, performance contracts must have a written guarantee for the term. Further, the contractor (ESCO) must monitor the guarantee. One of the aspects of expanded systems is implementing points and sequences that allow the ESCO, as guarantor, to "measure and verify" savings. This increases the sophistication of the system, which is good, but one of the challenges is that the guarantor must use those capabilities to establish performance versus a baseline established before the project started, and report savings to the customer. Getting into the business will require managing guarantees, reporting to the customer and it may mean writing a check if the savings do not materialize.
Is it legal?
As noted above, there are laws making this a completely viable approach for funding capital projects in most states. These laws are only necessary for public entities, such as school districts however; there are no restrictions for private business owners who want to use this approach.
It is clear at this point that performance contracting holds some real merit for controls companies, little wonder that some of the largest controls companies have been active as ESCO's in the business. Yet these are not the only ESCO's and there is ample opportunity to explore partnering and strategic alliances. This approach is common with performance contracting today and benefits everyone. Those benefits are truly exciting and bring a host of new possibilities to the Building Automation market. According to the National Association of Energy Service Companies (NAESCO), an estimated $2 billions in project have been installed by ESCO's over the last 20 years! Of course these projects included a variety of measures, but with the trend toward implementing automation and a growing market, certainly this ideas is worth exploring for both contractors and owners.
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