Phoenix Convention Center • Phoenix, Arizona

Using Private Financing to MaximizeEnergy and Cost Savings

Track 5:Project Financing

Session 7: Economics of Financed Projects

John ShonderUS Department of Energy

August 12, 2015

Energy Exchange: Federal Sustainability for the Next Decade2

Hidden Savings from ESPCs

Energy Exchange: Federal Sustainability for the Next Decade

Are the ESCO-reported savings the only ones associated with ESPC projects?

• ESPCs result in large annual guaranteed savings, but for the most part these are paid directly to the ESCO each year

• Thus many see ESPC as an energy saver, but not a cost saver

• This report was a systematic effort to compare ESPC costs with the alternative, i.e. keeping existing equipment in place with no retrofit project

Energy Exchange: Federal Sustainability for the Next Decade

Cost comparison of two cases

• New, more efficient equipment installed

• Reduced utility bills• Reduced O&M costs• Payments to ESCO over

term• All savings accrue to

government after term• Government begins

performing O&M through end of service life

• Old equipment remains in place

• Efficiency decreases with time, resulting in increasing energy costs

• O&M costs increase as equipment ages

Energy retrofit using ESPC

Do Nothing

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Conservative assumptions

• EER decreases by 1% per year• O&M costs increase by 1% per year• No catastrophic maintenance issues or

unscheduled replacement beyond the one-time payment from savings assumed in both the ESPC and baseline cases

Energy Exchange: Federal Sustainability for the Next Decade

Conclusion: The average ESPC project delivers 197% of guaranteed savings

• Four main sources of these additional savings– ESCO guarantees roughly 96% of savings– Savings accrues beyond the contract term– NIST energy escalation rates have been conservative,

so energy savings turn out to be worth more to the government than we pay to the ESCO

– Guaranteed savings calculation assumes baseline equipment continues to operate “as is” – with same efficiency and O&M costs over term of ESPC. Reality is that energy use and O&M costs would increase

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Relative magnitude of these four drivers

6%

41%

7%

46%

Source of additional savings

ESCO guaranteeing only 96%Savings accruing beyond termNIST underestimation of escalation ratesEfficiency decay of base-line equipment

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• If you have enough appropriations to do everything you want to do, congratulations!

• But if you plan to use performance-based contracting to meet sustainability goals, then use appropriations wisely– Don’t use them to fund short-payback ECMs– Use them instead to fund long-payback ECMs, or as one-time

payments in performance-based contracts• Performance-based contracts deliver more than just the

guaranteed savings– Significant savings accrue after the performance period ends– Significant savings accrues because M&V ensures efficient

performance of equipment

Conclusions

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Optimal Use of Appropriations

Energy Exchange: Federal Sustainability for the Next Decade

• Federal buildings consume about 2.2% of all building energy, and about 1% of all energy consumed in the US

• Federal agencies are required to meet numerous energy management goals

• Two main sources of funding are available to meet these goals– Congressional appropriations– Private financing via UESC and ESPC (and others)

• Agencies must use these two funding sources in the most effective manner to:– Maximize energy savings– Minimize life cycle cost

Motivation for study

Energy Exchange: Federal Sustainability for the Next Decade

• Some Agencies/program offices use their appropriations to direct fund short payback measures

• Appropriations could also be used to fund long payback measures – measures that don’t fit in to UESC/ESPC

• Appropriations could also be used as one time payments in privately financed UESC/ESPC projects

• This study developed a method to compare these options quantitatively

Different philosophies on use of appropriations

Energy Exchange: Federal Sustainability for the Next Decade

• Develop a representative project, i.e. a package of efficiency measures to study

• Develop a tool to allow us to select which measures to fund with appropriations and which to fund with private financing

• Then, for each strategy:– Construct “balance sheets” for privately financed

and directly funded portions– Calculate life cycle cost– Vary the amount of appropriations

Approach to the problem

Energy Exchange: Federal Sustainability for the Next Decade

• EISA required federal agencies to identify all “covered facilities” that constitute at least 75% of the agency's facility energy use

• Facility managers were then responsible for completing comprehensive energy and water evaluations of 25% of covered facilities each year

• Results of audits – including estimated implementation costs and estimated savings – are tracked by FEMP in a a database

• This database allowed us to develop a mix of efficiency measures to represent an entire federal agency

Representative package of efficiency measures

Energy Exchange: Federal Sustainability for the Next Decade

EISA 432 Compliance Tracking System Database

• $8.9 billion in investment

• $818 million in savings

• >5,000 covered facilities

• Represents 72 Federal Agencies and sub-agencies

Energy Exchange: Federal Sustainability for the Next Decade

Some other things to notice about the data

• 10% of investment delivers 35% of savings

• 30% of investment delivers 66% of savings

• 50% of investment delivers 85% of savings

• Aggregate SPB = 11

Energy Exchange: Federal Sustainability for the Next Decade

• Given the aggregate SPB of 11, all of the measures in the database could be packaged up into a single $9 billion ESPC project that would have a term of 18 years

• Situation is different for individual agencies however; aggregate SPB ranges from 2 to well over 25

• Usual experience at the site level is that not all needed efficiency measures can be implemented

• We chose to analyze the case of a SPB of 17 which is half way between mean and median

Assumptions about aggregate simple payback

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Strategy 1: Appropriations fund short payback measures, do rest with private financing

Energy Exchange: Federal Sustainability for the Next Decade

Strategy 2: Fund with private financing, use appropriations on long payback measures

Energy Exchange: Federal Sustainability for the Next Decade

Strategy 3: Fund with private financing, use appropriations as “buydowns”

Energy Exchange: Federal Sustainability for the Next Decade

• $100 million in total investment, aggregate SPB of 17• Privately financed project uses annual-in-advance payments• Inflation rate of 2% for energy and labor• Discount rate 3.5% per OMB Circular A-94• First year O&M/M&V costs are 1.5% (privately financed) and 1.2%

(directly funded) of investment value, increasing annually thereafter by inflation rate

• Site picks up O&M on ESCO-installed equipment at end of term for privately financed projects

• Finance procurement price equal to two years interest on financed amount

• Two year construction period• 25 year study period• No salvage value at end of study

Main Assumptions for Study

Results

Energy Exchange: Federal Sustainability for the Next Decade

Using appropriations to fund short payback measures limits investment

Energy Exchange: Federal Sustainability for the Next Decade

Using appropriations to fund short payback measures costs more

Energy Exchange: Federal Sustainability for the Next Decade

• Analysis did not include costs of mobilization, providing site access, etc.

• Cost of performing studies to justify appropriation funding may be higher than the 5% assumed

• Appropriations funding can involve lengthy delays, further increasing costs

• Ultimately there may not be a large difference in life cycle cost between strategies 2 and 3

But implementing two projects vs. one may have other costs

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• Using appropriations to fund short-payback ECMs has detrimental effects– Reduces energy savings– Reduces amount of investment– Increases life cycle costs

• Best strategy is either to use appropriations to fund long-payback ECMs

What the results show

Energy Exchange: Federal Sustainability for the Next Decade

• Results depend on several factors– Interest rate premium of 108 basis points over

Treasuries– Discount rate of 3.5%– Aggregate simple payback of 17 years– Shape of savings-investment curve

• Changing these factors did not affect any of the main conclusions– Some changes in life cycle cost– No relative changes between the three strategies

Sensitivity Analysis

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• Mixing Appropriations and Private Financing to Meet Federal Energy Management Goals (http://web.ornl.gov/sci/ees/etsd/btric/publications/ORNL%20TM%202012_235.pdf)

• Beyond Guaranteed Savings: Additional Cost Savings Associated With ESPC Projects(http://web.ornl.gov/sci/ees/etsd/btric/publications/Publication%2041816.pdf)

Full reports on these two studies are available

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Questions?

John Shonderjohn.shonder@hq.doe.gov