Performance
contracts are all about the green
By Matt Lail
Money is tight all across the country these days. Budgets just don't stretch as far as they used to, and lenders are a more skeptical about to whom they loan money. (They're not going to loan money for any old project, after all.)
For a city or town interested in adding or improving its infrastructure and at the same time taking the necessary steps to curb costs and energy use, the above scenario can be downright depressing.
But that's where Guaranteed Energy Savings Contracts (GESC) can help.
This process – more commonly referred to as performance contracting or performance energy contracting – is all about the green: it is only used on so-called “green” (read: environmentally-friendly) projects, and it could wind up saving your entity some green.
Simply put, performance contracting “is a method to finance capital projects using the guaranteed savings of energy to pay for that capital project,” said Len Hoey, director of the State Energy Office's Utility Savings Initiative.
How it works: Local governments can enter into contracts with approved contractors (Energy Service Companies, or ESCOs) that are subject to final review by the Local Government Commission. (The State Treasurer's office oversees GESC financing.) The ESCO is the risk-taker from the financial standpoint. There's no risk to taxpayers; there's no new revenue stream needed.
“The key to what makes it enviable in many instances is that the ESCO guarantees the savings,” said Hoey. “If they don't meet the savings numbers they said they will meet, then they write the owner a check.”
North Carolina entities have been able to use performance contracting since 2002, but it was originally intended for state agencies and universities. Naturally, school systems across the state have made good use of this financing vehicle, as have the ever-growing community colleges. But few municipalities have used this method. Lexington City Schools saved almost $3 million in 2005 with GESC. (That project cost a little less than $2 million for construction.) The city of High Point, back in 2003, saved an estimated $1.6 million by using performance contracting to update its municipal office building's HVAC system. (The project cost a little more than $1.1 million.)
Tim McKinney, High Point's facilities services director, said the building's equipment was “antiquated,” and that the city was “losing it” on the HVAC end. Johnson Controls was tabbed as the ESCO, and they handled an initial energy audit of the facility.
“If you decide to go forward (with the contract) after the audit, the audit cost is absorbed into the costs” of the project, said McKinney. “If not, then you pay for the audit.”
Greensboro approved the financing method a year ago for capital improvements to its venerable Coliseum, the site of many an Atlantic Coast Conference basketball tournament, hockey matches, rock concerts and more in its 50-year history. Improvements were needed in the operations of the facility: new energy-efficient lighting; more efficient water fixtures; automation technology for energy-consuming equipment; more-efficient HVAC equipment; steam trap, boiler and chiller replacements; hands-free doors; and a new security system.
Other changes will affect water usage; low-flush urinal and toilet valves, changing from water-cooled to air-cooled ice-makers and installing faucet aerators will reduce the coliseum complex's water use by approximately 28 percent – or about 1.6 million gallons of water.
All told, the amount of gas use will decrease by more than 50 percent, the amount of electricity used will decrease by about 21 percent, and the total energy reductions are expected to reduce the Greensboro Coliseum's carbon dioxide emissions by more than three tons a year.
“Simply put, this is one of the most significant projects in Greensboro Coliseum Complex history,” said Matt Brown, the coliseum's managing director. “Many of these items aren't glamorous improvements but they are critical to not only maintaining, but improving, the operation and energy efficiency of our facility.”
The
city negotiated a 12-year contract with Siemens to do the facility's improvements.
The contract will mean guaranteed annual energy savings of about $4 million
over the dozen years of the contract. Those savings will fund the nearly-$3
million in improvements. 
“If Seimens has miscalculated the savings in any way, then they are responsible” and must pay the difference, said Brown.
The ESOCs “guarantee that it is pure energy savings that are going to pay back the debt,” said Hoey. “That means the city or county does not have to create a new revenue stream to pay off that debt.”
In addition, “by doing the energy projects, you can free up other dollars that can then go to other types of construction.”
Siemens handled a comprehensive energy audit to see what kind of annual savings could be generated from the improvements. Their projections were then verified by an independent engineer.
But the advantages don't end there.
“It is a design-build project, so the contractor actually does all of the design work as well as project management,” said Hoey. “From a technical standpoint, that frees up the time of certain staff people at the local government. … Once everything is started you need to do due diligence in the project. “
High Point's McKinney agrees. He stresses that it is vital that the local government be on top of things in the contract negotiation stages, and that the contractor must have a firm knowledge of what the customer (the municipality) expects from the project.
“The good thing about the energy savings contract is when you are writing it, there are some opportunities to massage the finer points of the contract. … The cons are really on the understanding that they must have people that understand the building and its system and have the hours to dedicate on the front end. Due diligence must be performed by someone with substantial knowledge.”
Hoey guards against attempting to use performance contracting for just any type of facilities improvements or construction.
“There are circumstances where it is not appropriate. The buildings need to have stable occupancy and the building is going to need to be there for the terms of the contract. It is not perfect for every type of project.”
The Greensboro Coliseum, for instance, is replacing its boiler and some air-handling equipment – pieces that have served the complex for more than 48 years.
“You need to make sure the equipment life is longer than the terms of the contract,” Hoey said.
There are some “soft” savings involved with this type of contracting. McKinney said that before the project, High Point's municipal office building was going through close to two cases of fluorescent light bulbs a week.
“Since 2003, we have replaced approximately 20 bulbs and 10 ballasts. In addition, Johnson Controls takes the ones that are burned out and gives us new ones at no cost.”
He says the savings to the city – just because of the light bulbs and ballasts – are about $15,000.
“It is absolutely critical that in the writing of the contract, you have someone who knows about the systems and knows what the long-term calculations will be.”
The experience, in Greensboro and High Point, has been positive. McKinney noted that Johnson Controls miscalculated the annual savings – but the result was no skin off the city's back. Johnson Controls cut a check for roughly $88,000 to the city after the first year of the arrangement, $50,000 the next year, around $45,000 the year after that and $34,000 this year.
“They've absolutely lived up to their end of the bargain, and the city of High Point has benefited immensely. We are spending approximately $5,000-6,000 a month less on power – that's dollars, not consumption. It really speaks volumes as to how much we've saved.
“By picking the right company, the check has already has always been on time.”
(McKinney noted that the customer does pay an annual monitoring fee to the ESCO. For High Point, that comes to roughly $10,000 a year.)
Hoey is available to aid those that are interested in going the performance contracting route. The State Energy Office can provide resources and handle preliminary audits, help craft an RFP, review the responses to the RFP “at a comment-type level,” according to Hoey, and help with the investment-grade audit and then the financial contract. The State Energy Office website ( http://www.energync.net/programs/usi.html ) offers template documents online for those entities that are considering using performance contracting in the future.
“It is a very worthwhile strategy to look at, but they need to look at it carefully so as not to be talked into something that may not be the right way to do it,” he said. “I'm very enthused, but I recognize it's not a one-size-fits-all solution to everything.”
But in those situations where it can be done, this financing method has been a godsend – especially when a local government can tell the public that it is improving its community's quality of life, making the operations more efficient – all without raising taxes one penny.
“I hear very clearly from the community in general that they want a balance between saving money and being fiscally responsible, but also being environmentally responsible,” said Mitch Johnson, Greensboro's city manager. “This project fits very well into this model.”
In this era of green emphasis, it's nice to know that local governments are not alone. The NCLM Green Challenge website has a number of resources at your quick disposal. But since the 1970s the State Energy Office has been offering energy-savings advice to local governments.
Along with performance contracting advice (above), the SEO offers:
-An annual energy management class through the Office of Professional Development at N.C. State University. (Participants earn a diploma);
-a utility savings program;
-one-day strategic energy plans. “This includes water,” noted Len Hoey with the office. “This is the first step in trying to make a difference. It helps you establish where we want to go and how are we going to get there”;
- energy audits. “We have a limited budget so it's first-come first-served.” A number of municipalities have taken advantage of this;
- year-round, one-day technical workshops aimed at facilities personnel. This is for employees who deal with boilers, pumps, fans, compressors, etc., said Hoey. It also takes a close look at the state's energy code; and
-oodles of training.
Some of the above services require minimal co-pay; however, all of the training is cost-free.
“The only thing we request is that if you use our services then we get some verbal commitment that you're going to do something with it,” said Hoey.
The State Energy Office is constantly evaluating its services in order to tweak when necessary.
Hoey and others with the State Energy Office will be at the NCLM Centennial Conference in October to discuss energy savings initiatives, including performance contracting. Hoey will also address spouses and guests on energy efficiency.
This article originally appeared in the August 2008 issue of Southern City.
***
Click here for information on the NCLM GREEN CHALLENGE
More energy Savings in the News
- Performance contracting is all about the green, Southern City, August 2008
-Fayetteville PWC breaks ground on LEED customer service building , City of Fayetteville, July 23, 2008
- Newton removes mandatory water restrictions , City of Newton, July 17, 2008
- Newton cracks down on fuel use , Hickory Daily Record, July 7, 2008
- Newton citizens urged to conserve water , City of Newton, June 30, 2008
- Rising fuel prices force cities and towns to get creative, Southern City, June 2008
- City gets federal funding for first hybrid bus , Greensboro News & Record, June 16, 2008
- Energy costs affecting all government, Hendersonville Times-News, May 29, 2008
-Cities build with an eye toward sustainability, Southern City, April 2008
- Saving water the low-tech way , Greensboro News & Record, April 2, 2008
- Cities and towns find ways to go green, Southern City, February 2008
-Raleigh inspectors to check for low-flow devices , WRAL.com, March 4, 2008
- Gov. Easley announces plans for plug-in hybrid plant in N.C., NBC 17, February 13, 2008
- Port City planning to make roads safer for walkers, bikers , Wilmington Star-News , February 6, 2008
- Fayetteville city council approves recycling rollouts , Fayetteville Observer, January 29, 2008
- Group's goal is to put less in landfills , Winston-Salem Journal, January 22, 2008
- Auditing energy use to find ways to save money and resources , Southern City , January 2008
- Slow but steady gains in Raleigh's 'green' goals, Raleigh News & Observer, January 22, 2008
- Basnight has bright idea, Raleigh News & Observer, January 7, 2008
- For fuel, N.C. looks homeward, Charlotte Observer, December 27, 2007
- Chapel Hill greens its fleets, Town of Chapel Hill, October 25, 2007
- Cities save some 'green' while being green, Southern City, December 2007
-Don't flush those toilets, council woman says, Raleigh News & Observer, December 17, 2007
-Port City adds hybrids, Wilmington Star-News, November 28, 2007
 |