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The Role of Measurement and Verification (M&V) in Managing Risks in Energy Efficiency Investments

  • Author(s): Kumar, Satish
  • Sartor, Dale
  • Stetz, Mark
  • Webster, Lia
  • et al.
Abstract

Energy and water efficiency projects meet a range of objectives, including upgrading equipment, improving performance, helping to achieve environmental compliance, or simply saving energy and money. All projects have one thing in common, an initial financial investment. The type of investment may be an internal allocation of funds (in-house project) or it may be a complex contractual agreement with an ESCO and/or third-party financial institution. A lack of resources to implement costly capital intensive infrastructure improvement projects such as replacement of old chiller, installation of variable speed drives, upgrading the lighting system, etc. has led to an increase in third-party financed projects. All types of financial investments have a common goal - making money or a "return" on investment. Investment performance is measured by various financial yardsticks such as simple payback, return on investment, or internal rate of return. The expected rate of return is governed 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 identified and managed. The premiums for many risks associated with investing in energy or water efficiency project can be measured using tools common to the finance industry, such as internal rate of return or customer credit-worthiness. Measurement and verification (M&V), sometimes also referred to as monitoring and verification, is a process, which is used to determine energy and demand savings. The primary application of measurement and verification is in those energy efficiency projects where the return on the capital investment is tied to the projected energy savings that will be achieved. Measurement and verification of energy savings becomes a central part of a contract if the contract payments or performance guarantee in a project is dictated by the magnitude of the energy savings that will result from the implementation of a set of energy efficiency measures e.g. the installation of an energy management control system, installation of a variable frequency drive, etc. M&V is primarily focused on risks that affect the measurement or determination of savings from energy or water efficiency programs. These risks are defined in the terms of the contracts between the participants.

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