Recommended vs. Actual Escalation Rates For ESPCs: Is the Guidance Good?

Escalation rates applied to the savings from energy savings performance contracts (ESPCs) and related financed energy projects play a large role in their scope and costs. The U.S. Department of Energy’s Federal Energy Management Program (FEMP) employs the National Institute of Standards and Technology (NIST) to package projections of real (uninflated) energy prices and general inflation forecasts developed by two other federal government entities. The main output from this exercise is NIST’s Energy Escalation Rate Calculator (EERC), which is strongly recommended by FEMP for use in performance contracts and relied on by federal agencies and others conducting performance contracts as an objective source for their projects’ escalation rates. This study investigated whether the rates prescribed by EERC (and a coarser NIST tool that preceded it) have provided users with estimates that approximate actual changes in energy prices over the years. The results are encouraging: the NIST tools slightly under-estimated actual electricity prices and somewhat over-estimated those for natural gas. Concern regarding the latter is mitigated, however, because a) it is seen as due primarily to the increasing surplus of natural gas from the “fracking revolution” in the 2010s, and b) natural gas savings were found to account for only 14.4% of the total savings from the largest population of federal ESPCs (FEMP’s indefinite quantity ESPC contract, representing roughly 430 projects), compared to almost four times that (56.8%) for electricity savings. Consequently, reliance on EERC appears to be a sound policy.