United States: DOE’s New $55 Billion ESPC Solicitation

A Move from "Show me the Money" to "Share the Money"

On March 23, 2015, the U.S. Department of Energy (DOE) released a Request for Proposals (RFP) for the implementation of energy savings performance contracts (ESPCs) at any U.S. federal government site worldwide. The intent is to award up to 12 indefinite delivery, indefinite quantity (IDIQ) contracts, with a target of two of those contracts to be awarded to two small businesses. Although bidding is limited to energy service companies, as explained below, this is still a great opportunity for teaming and/or subcontracting and financing some of the most innovative projects of this decade. With smaller government spending and more focus on holding contractors accountable, DOE's ESPC program may be a blueprint for government contractors moving forward. The total contract ceiling is $55 billion.

Key Take-Aways

  • The deadline for responses is April 29, 2015, at 9 a.m. ET.
  • The RFP states that "particular emphasis should be placed on the assessment of renewable energy opportunities."

The contracting process DOE is using for this solicitation (Solicitation No. DE-SOL-0006380) is the two-step "IDIQ" or "indefinite delivery/ indefinite quantity" contracting process. IDIQ contract awards can be viewed as "hunting licenses" for winners to bid for specific projects under delivery orders, or task orders against the IDIQ contract. Task order contracts are subject to competition among entities already awarded an IDIQ contract for specific projects or services. Ultimately, DOE is using the IDIQ contracting process to issue Energy Savings Performance Contracts (ESPCs).

Background on DOE'S ESPC Program

ESPCs allow federal agencies to contract with contractors for various energy and energy-savings projects, with limited to no up-front capital costs, minimizing the need for Congressional appropriations. As authorized by 42 U.S.C. section 8287, an ESPC is a contract awarded to an energy service company (ESCO) for up to 25 years that provides for the design, acquisition, financing, installation, testing, operation, and maintenance and repair of identified Energy Conservation Measures (ECMs) at one or more locations. Under an ESPC, the ESCO incurs the costs of project implementation, including audits, acquiring and installing equipment, and training personnel, in exchange for a predetermined price (or percentage of savings). Payment to the ESCO is contingent upon realizing a guaranteed stream of future savings, with excess savings accruing to the federal government. At the expiration of the multi-year ESPC, the counterparty federal agency assumes all of the cost savings.

Source: DOE Federal Energy Management Program

The RFP

DOE's RFP is intended to create a list of qualified contractors capable of implementing ECMs that reduce energy and water consumption or costs, increase renewable energy use, and/or reduce energy and water-related O&M costs. Some of the suggested categories of ECMs include
(RFP, Attachment J-3):

This is a potentially very large solicitation – $55 billion – and the task order ordering period is 60 months, with an additional 18-month "Option 1 Ordering Period." The anticipated ordering periods are:

Base Ordering Period: February 24, 2016 – February 23, 2021

Option Ordering Period 1: February 24, 2021 – August 23, 2022

The contract award pool ceiling will be applied to task orders on a first-in, first-awarded basis.

Some of the key issues potential bidders and subcontractors should consider include:

Renewable Energy and Energy Storage Renewable energy is emphasized in the RFP, which may present some unique opportunities for inside-the-fence renewable energy projects. Attachment J-3 contains a list of ESPC technology categories and ECMs that may be evaluated as part of a project. However, the list is not intended to be inclusive of all potential ECMs that may be authorized under a task order:

A suggested list of ECMs that shall be considered during the development of a TO project is provided in Attachment J-3. Particular emphasis should be placed on assessment of renewable energy opportunities. This IDIQ contract may be modified in the future to add ECMs that are not currently authorized but may be subsequently authorized. The contractor is encouraged to seek out all energy conservation opportunities present in a given facility. (RFP, C.2.1)

One of the listed categories on Attachment J-3 is "Electrical Peak Shaving/Load Shifting," and some of the ECMs suggested in the various categories include thermal energy storage, demand reduction, demand response controls, fuel cells, and power quality upgrades, all of which suggests that electrical energy storage could also have a role as an ECM.

Who Can Compete Eligible bidders are limited to companies that are currently listed on DOE's "Qualified List of ESCOs," or are being considered for acceptance and have been accepted by the time of the award.

However, contracting teams are allowed and, for such teams, only the prime contractor must be on the DOE Qualified List of ESCOs, or be under consideration for acceptance (Solicitation, M.6). Joint ventures are also acceptable (RFP, L.9.a). It should be noted that "key" subcontractors will be required to execute letters of commitment, which will be included in a bid (RFP, Attachment J-18).

Financing Arrangements In order to allow for the third-party financing that is critical to so many ESPC contracts, the RFP contemplates that the federal agency issuing the task order (ordering agency) will permit a financing source to establish a security interest in installed EMC(s), subject to, and subordinate to, its rights (RFP, H.9). In addition, an ESCO may be required to assign to its lenders some or all of its rights under a task order. The ordering agency is required also to consider:

  • Requests for assignments of monies due or to become due under a task order, provided the assignment complies with the Assignment of Claims Act. Requests should be provided to and approved by the ordering agency before any assignment is made.
  • Requests for the ordering agency to provide financiers copies of any cure or show-cause notice issued to the ESCO.
  • Requests by financier or secured interest holders for extension of response time to cure or show-cause notices (RFP, H.9).

In the task order phase, a bidder/contractor is required to engage in a competitive selection process for financing (RFP, H.7). In addition, during the term of a task order, an awardee is encouraged to periodically (every three to five years) evaluate the potential for refinancing or restructuring its task order loan projects, and may be required to provide a debt modification plan with its task order bid or shortly after being awarded a task order. Not surprisingly, the RFP also encourages the awardee to "consider" applying some or all of the resulting financial proceeds to the benefit of the task order project (RFP, H.7.3).

Financial, Tax, and Other Incentives The IDIQ contract specifies that the contractor will be responsible for determining the availability, value, and cost-benefit of any applicable financial, tax, or other incentives for a project, including energy efficiency and renewable energy incentives, emission reduction credits, and renewable energy credits.

Unless otherwise specified in a task order, interest in and ownership of financial, tax and other incentives resulting from a project produced on-site at a federal facility will remain with the ordering agency (RFP, C.12). However, there is at least one exception. The RFP recognizes that nongovernmental ownership of the affected energy efficiency and renewable energy and water asset may be required in order to capture the benefits of Investment and Production Tax Credits and Modified Accelerated Cost Recovery System accelerated depreciation.

Unsolicited Proposals The IDIQ contract gives awardees the opportunity to propose specific projects to federal agencies. In fact, it allows ESCOs to actively market ESPC programs and their IDIQ contracts to federal agencies.

If the ESCO subsequently submits an unsolicited proposal to a federal agency as a result of such marketing, the ordering agency must provide fair opportunity to all IDIQ awardees to be considered for award of a task order (Solicitation, H.4.C and H.4.2.A).

Bid Preparation Concerns

DOE will award IDIQ contracts to bidders whose proposals conform to the solicitation and are considered to provide the "best value" to the government with price-related and other non-price factors considered in accordance with FAR 15.101-1 (Tradeoff Process). The awards will be made based on the following five factors listed in descending order of importance, with Factors 3 and 4 equal in importance (RFP, M.3):

  1. Corporate Technical Experience and Management Approach for ESPC Projects
  2. Financial Capability
  3. Past Performance
  4. Small Business Participation
  5. Pricing

The bid preparation requirements are fairly standard, but in the context of an ESPC proposal, bidders may want to consider a few issues:

Financing The financial capability evaluation standard requires the following:

The prime contractor must demonstrate that it: 1) has sufficient capital resources to self-finance or the ability to obtain third party financing for the design, construction, and operation of an ESPC project; 2) understands the financial risks associated with this contract; and 3) has the ability to recover the investment over the life of the project (expected to be no more than 25 years)
(RFP, L.11).

Part of the information DOE is requiring a bidder to provide is a list of the financiers that have expressed an interest in financing energy conservation projects for the bidder. In addition, the RFP states:

The prime contractor shall provide copies of letters from the financiers demonstrating their interest. The prime contractor shall describe the proposed financing methodology and procedures that will typically be used to obtain [task order] financing with the most advantageous terms and conditions (RFP, L.11, Tab (B) description).

The RFP also requires the prime contractor to describe proposed or already-used business practices to minimize financial risk as part of its ability to manage monetary risk and withstand long-term payback periods (RFP, L.11, Tab (C) description).

Small Business Participation The small business participation bid requirements are fairly standard in the world of government contracting, but may be new to potential partners of ESCOs. All ESCO prime contractors must submit a Small Business Participation Plan in accordance with FAR Part 15.304. For planning purposes, the prime contractor must use a total contract value of $4.6 million.

In addition, all prime contractors, except small businesses, must submit a Small Business Subcontracting Plan that meets the requirements of FAR 52.219-9 (RFP, Attachment J-16), and which must be consistent with the commitments the prime contractor made in its Small Business Participation Plan.

DOE "anticipates" that a bidder's subcontracting plan "shall contain at least the following goal(s)" (RFP, L.13, Tab (B)):

The RFP cautions that the Small Business Subcontracting Plan "shall" reflect the bidder's best offer because DOE "intends to incorporate it into the IDIQ contract without discussion at time of award."

These goals may be difficult for some ESCOs to meet. However, given that Small Business Participation is a factor for scoring and these IDIQ contracts will lead to task orders over the next few years, we believe this is an opportunity for differentiation among the ESCOs and for small businesses to gain traction in this area of government contracting.

Pricing Pricing is the least-weighted of the five factors that DOE will consider in awarding the IDIQ contracts. Nevertheless, bidders will need to be careful in preparing the required materials.

A bidder is required to submit its maximum delivery percentages and interest rate spread for projects, as well as any information it believes is necessary to support this spread. It is also required to submit a sample task price proposal for a sample task project described in Attachment J-25, as well as four task order schedules. "Adequate" pricing details must accompany the price proposal, including its estimating procedures, and conditional assumptions.

Conclusion

Whether this solicitation actually results in $55 billion in task orders is going to depend a great deal on whether the federal agencies embrace ESPCs. There are three reasons to be mildly optimistic about its potential success:

First, ESPCs by their very nature do not cost federal agencies new money; they are designed to compensate contractors from the cost savings created by EMC projects. If a task order is properly designed, an agency's budget costs – including capital costs – will be "scored" by the Office of Management and Budget on an annual basis during the term of the task order, rather than all at once in the first year of the contract. This is important because if the entire cost of a multimillion-dollar ESPC contract is "scored" only in its first year, an agency can over-run its budget for energy-related services for that year.

Second, the RFP specifically gives IDIQ contractors the right to market and propose projects to federal agencies. This gives contractors an opportunity to find and develop possible EMC projects, rather than waiting for projects to be proposed by agency officials with more pressing concerns.

Third, on March 19, 2015, the administration set new goals for massive reductions in energy and water use by federal agencies in an Executive Order as part of its sustainability initiative. The IDIQ contracting phase of this RFP should be concluded by the start of the next administration, setting into motion a program in which agency officials will have a legal obligation to review proposed new EMC projects, regardless of the views of the next administration. It is worth noting that ESPCs enjoy some bi-partisan support; a current Senate bill would direct the Congressional Budget Office to calculate the cost savings from an ESPC contract on a net present value basis, to put both the costs and savings of such contracts into the same discretionary spending accounts, when it considers the budgetary effect of agency liabilities.

Given the relatively short deadline for responses to the RFP, entities interested in participating in DOE's ESPC program should begin thinking now about how they might team up with a qualified bidder, if they are not on DOE's List of Qualified ESCOs; or if they are, what subcontractors they might need and how to identify and/or contract with small businesses. Negotiating the terms of participation in a bid can take a bit of time, and the actual preparation of a bid response is generally always more time-consuming than anticipated.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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