Funding Solutions for Energy Projects in a Post-Stimulus World

Posted on August 5th, 2011 by

Faced with a combination of ongoing municipal and state budget cuts, pressure from citizens to keep taxes low and the looming energy efficiency mandates that require a significant number of building upgrades, the public sector is consistently looking for ways to do more with less. In each case, facility managers are often forced to defer capital expenditures and maintenance to aging equipment in order to control costs.

Consider this: Buildings are the largest consumers of energy on the planet, currently accounting for 42 percent of energy usage worldwide and generating approximately 40 percent of global greenhouse gas emissions. By 2025, the Environmental Protection Agency (EPA) predicts that buildings will account for up to 75 percent of U.S. electricity consumption, and McKinsey and Company estimates that increased efficiency in buildings would save the U.S. economy $130 billion per year. The question then arises, where do we go from here? How do publicly funded buildings achieve energy efficiency and meet mandates while addressing taxpayers’ concerns when their budgets are being cut?

With stimulus money from President Obama’s recovery plan already dispersed, public sector institutions are turning to innovative funding mechanisms that can significantly reduce, if not completely pay for, building upgrades. One such approach that also addresses the aforementioned energy challenges within public buildings is Energy Savings Performance Contracting (ESPC), which enables public sector buildings to receive energy efficiency retrofits and upgrades that pay for themselves over a guaranteed period of time.

Energy Savings Performance Contracting

An ESPC is an agreement with an energy efficiency expert that identifies and evaluates savings opportunities within a building through an energy audit, and then recommends a number of energy equipment retrofits, such as replacement or redesign of older, inefficient HVAC systems or building controls and lighting, which will save energy through more efficient operations. The savings generated on utility bills from the newly installed, more efficient equipment ultimately reverts toward paying for the cost of the capital equipment over a specified number of years – minimizing the financial risk to the public institution.

With a performance contract, upgrades of interrelated systems are bundled together into one comprehensive project that provides a customized solution based on the specific needs of each building. This approach maximizes the savings possible and allows the cost of the improvements to be a manageable expense. Many times, a performance contract assures that annual savings will be achieved and if the guaranteed level of savings is not realized, the energy services company (ESCO) that implements the performance contract must write a check to cover the shortfall, reducing the facility owner’s risk while giving the ESCO the impetus to ensure the system runs as efficiently as possible.

Through ESPCs, organization leaders and the C-level are able to leverage existing non-strategic funds toward strategic capital improvement initiatives, reduce operational and capital expenses and meet environmental requirements, all while improving the comfort of building occupants and in some cases, productivity. In a study commissioned by the International Centre for Indoor Environment and Energy at the Technical University of Denmark (DTU), results showed that students’ performance in energy-efficient buildings increased by an average of 15 percent, and up to 30 percent with improved indoor climate conditions.

In addition, most ESPCs include the installation of active energy efficiency components such as building controls, which allow facilities’ staff to measure, monitor and better control their energy consumption. With these active energy management components, facility managers can collect and analyze data to identify inefficient usage patterns, and take steps to maintain equipment or correct the inefficient usage to further improve the building’s efficiency and sustainability.

Examples of Successful Performance Contracting Projects

In 2010, the city of Houston, Texas announced its participation in a $23 million performance contract as a continuation of its participation in the William J. Clinton Foundation’s Climate Initiative (CCI) Energy Efficiency Building Retrofit Program, which is an effort to reduce energy consumption in existing buildings in major cities around the world.

Through this project, the city is implementing numerous energy conservation measures (ECMs) in seven city buildings. As a result of these retrofits, Houston is projected to save $1.8 million annually over the 15-year contract when the second phase of the project is completed in August 2011.The positive impact on the environment resulting from the city officials’ dedication to reducing energy consumption will include decreasing annual emissions of CO2 into the atmosphere by 5, 831 tons, which is equivalent to removing 1,166 cars from the roads for a year or planting 1,586 acres of trees to help restore the ecosystem balance.

In addition, numerous higher education institutions are also turning to performance contracting to meet the needs of growing student bodies, cutting both their energy costs and carbon footprints while upgrading their facilities to attract incoming talent. North Carolina State University is currently working on a $20 million performance contract to improve energy efficiency, and drive sustainable clean energy projects in 1.6 million square feet of building space across 13 campus facilities. Upon completion of the installation, the university will save more than 10 million kilowatt hours of electricity and 68,785 decatherms of natural gas annually, which is equivalent to planting 80,376 acres of trees or removing 43,158 cars from the roads over the next 15 years.

The future of Energy Savings Performance Contracting

As ESPC continues to gain momentum in the public sector, private sector companies are starting to mirror the practice to create operational energy savings and meet corporate sustainability goals. Through programs such as President Obama’s Better Buildings Initiative, which encourages commercial building owners to retrofit their facilities to curb emissions and energy costs, more private companies are being enticed to focus on energy efficiency. As a result, new financing mechanisms such as ESPC for the private sector are emerging and enabling organizations to meet their energy efficiency goals.

Written by James Potach, senior vice president, Energy Solutions, Schneider Electric and is responsible for performance contracting and power management.



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