Intangible Benefits of ESPCs

Energy Savings Performance Contracts, which offer an attractive alternative for financing energy upgrades because they require no upfront appropriated funds, also deliver numerous intangible benefits to military installations.

 

 By Michael Norton, M.SAME

 


Energy managers, public works directors and installation engineers must compete for finite funding to finance infrastructure upgrades and energy efficiency projects that support mandated energy-reduction goals.

Energy Savings Performance Contracts (ESPCs) are a partnership between a government agency and an Energy Service Company (ESCO). The ESCO works with the agency customer to implement energy reduction measures. ESPCs offer a tool that allows for critical upgrades to take place with zero up-front capital cost. After upgrades are installed, the capital investment is paid back over a period of up to 25 years, normally from the garrison utility account.

While the installation benefits from equipment upgrades that save energy, there also are many benefits of an ESPC that are not captured in the project financials—and some of these benefits begin to pay back from day one. These savings are above and beyond what goes to pay back the initial investment yet they are seldom considered when contemplating an ESPC.

These intangible savings include reduc­tions in trouble calls, reduced preventive-maintenance costs, a quicker path to achieve success than traditional contract­ing processes, and a more comfortable and productive work environment.

ESPC project

U.S. Army Engineering & Support Center, Huntsville awarded a $12 million Energy Savings Performance Contract for energy system upgrades at the U.S. Navy’s Space and Warfare Systems Command Systems Center in San Diego. PHOTO COURTESY U.S. ARMY ENGINEERING & SUPPORT CENTER, HUNTSVILLE


  

DELIVERING VALUE BEYOND COST SAVINGS

ESPCs are effective in delivering infrastructure upgrades, leading to energy savings, without requiring up-front investment from the government customer. ESPCs also can positively impact installations beyond what is written in the contract.

Space and Naval Warfare Systems Command System Center, Pacific, San Diego, has enjoyed many intangible benefits with ESPC projects. “We used to shut down the lab’s programs when equipment went down,” says Randy Peacock, Head of Facilities Operations and Energy Manager, “but with the new equipment installed by the ESPC projects, we have significantly reduced lost lab work hours.”

The number of trouble calls after normal work hours has been reduced, reducing operations and maintenance costs. And staff are able to control space temperature, which provides a more comfortable work environment while saving money.

At Fort Bliss, Texas, ESPC projects have allowed staff to gain extensive knowl­edge about complex systems that they may not have been able to gain if not for the ESPC effort. According to Gene Curtiss, Building Operation Control Center Manager, ESPC contracts often improve the efficiency of identified needs based upon economics. This allows for smarter use of limited funding and allows the government to leverage scarce dollars to the greatest extent possible.

Garrison Department of Public Works customers are often the end-users of the systems touched by an ESPC project. At Aberdeen Proving Ground, Md., since the ESPC was implemented, trouble calls have been reduced, lowering technician hours. These savings are not typically captured in ESPC cash flow models. These are savings that stay with the customer from day one. The ESPC warranty handled by the ESCO also has reduced the workload of public works staff, and the service order desk has a new routing system directly to the ESCO, resulting in quicker response times.

 

LEVERAGING AVAILABLE FUNDS

When deciding how to finance an ESPC project, it is important to understand there are two alternatives using Sustainment, Restoration and Modernization (SRM) funds that potentially can be used to pay down project costs and reduce the financing costs of the upgrades paid for by third-party financing. The first alternative is to apply a one-time cost avoidance payment as part of a task order award. The second is to apply a one-time cost avoidance payment during the task order performance period.

These approaches, in effect, provide a “down payment,” that will pay the project off early and increase savings in future years.

 

OPTION 1: UPON PROJECT AWARD

Using a one-time cost avoidance payment as part of a task order award applies avail­able funds to the project at inception, thereby effectively reducing the financed amount of capital. This is analogous to providing a down payment for the purchase of a house. The larger the down payment, the greater the positive impact on the total cost of the project.

For an ESPC at the U.S. Military Academy at West Point, N.Y., the garrison invested SRM funds as a one-time cost avoidance payment. This reduced the project cost by approximately 10 percent and increased projected savings by about 70 percent. This approach is consistent with Headquarters, Department of the Army and Office of Management & Budget guidance as well as a recent Oak Ridge National Laboratory study on combining appropriated funds with alternative financing.

By adding SRM-type funding to the proj­ect, savings are freed up to execute more energy conservation measures through the ESPC. Similarly, if no extra work was desired, the funds could be used to shorten the contract term—thereby reducing the total amount of interest paid by the Army.

ESPCs have always allowed the use of some SRM funds if it can be shown that by awarding the contract there is a one-time avoided cost of something. The capital expenditure is avoided and the work is related to the energy projects. Therefore, a project qualifies as a viable, legal project.

Ultimately, by applying a “pay down” amount to the project, the principal is reduced. This lowers interest expenses and shortens the term of the task order. That, by extension, enables the government to real­ize savings more quickly. It also allows for additional savings to be applied to energy conservation measures. Moreover, by reducing the length of the contract term, the time in which mainte­nance will be performed by the ESCO is reduced as well.

 


By adding SRM-type funding to the project, savings are freed up to execute more energy conservation measures through the ESPC.


 

OPTION 2: DURING PERFORMANCE

Applying a one-time cost avoidance payment during the task order performance period applies available funds to the proj­ect while the work is being executed. This reduces the principal balance required to be paid for the financed project. This is some­what analogous to making an additional payment on a financed amount. The larger the additional pay down amount, the greater the impact on the total cost of the project.

Buying out, which is Termination for Convenience (T4C) of existing ESPC/Utility Energy Services Contracts (UESCs), may be cost effective in the short term but would have potentially long-term negative implications for the Army.

Large-scale T4C could lead to higher interest rates. If the lending community sees that ESPC investments, which are currently seen as secure and long-term investments, are being terminated earlier than was originally agreed upon, they will probably raise the basis points over the treasury rate because of an increased risk profile.

The same can be said about refinancing for the sake of refinancing. Although almost anyone with a house can refinance “just because,” ESPCs do not operate that way. The consensus between the Department of Energy Federal Energy Management Program and the U.S. Army Engineering & Support Center, Huntsville, is that lenders will increase interest rates on future projects because of the added risk to investors, if the government refinances just to get a lower rate. The best option is to look for an increase or decrease in scope. This provides a “project” basis to look at financing. Huntsville Center has successfully used this approach with ESPCs at both Fort Richardson, Alaska, and Fort Bragg, N.C.

In effect, through reducing the prin­cipal amount, the term of the task order is reduced and the government realizes a share of the savings more quickly. However, any Make-Whole clause may impact the termination premium, effectively offset­ting any advantage of pay down. Current processes do not allow for pay down unless there is sufficient legal justification.

 

MAKING AN IMPACT

When carrying out ESPCs, there are a number of recommended suggestions to extract the most value out of the deal. 

  • Apply any available pay down to new task orders at the time of award to avoid a termination premium and reduce long-term interest costs.
  • Apply any available pay down to newer task orders with high interest rates to reduce interest costs only if second- or third-order effects are acceptable impacts to the government.
  • Do not apply pay down to older projects because a majority of the payment is being applied to principal, which limits ability to save interest costs.
  • Apply additional funds for long payback items such as building envelopes, chillers, solar water heating, photovoltaic, or LED lighting that would complement ESPCs and UESCs. Using additional funding to assist with energy conservation measures that have longer paybacks and leveraging the buying power of the ESPC/UESC financing period could allow for much deeper renovations.
  • On a case-by-case basis, evaluate refi­nancing ESPC projects through some change in the scope—either an increase or decrease.

It is important to note that T4C is not considered a pay down because T4C is required by the government to adjust the task order as required to meet legal require­ments of third-party financed projects.

Public works and garrison leadership often do not realize these ancillary savings exist until later on, so they do not claim credit in the project financials. Once customers realize how much more they can get than just what is on paper, the decision to use an ESPC becomes that much easier—and that much more rewarding.

  


 

Michael Norton, M.SAME, is Chief of the Energy Implementation Branch, Energy Division, U.S. Army Engineering & Support Center, Huntsville; 256-895-8232, or This email address is being protected from spambots. You need JavaScript enabled to view it..