Phoenix Convention Center Phoenix, Arizona Using Private Financing to Maximize Energy and Cost Savings Track 5: Project Financing Session 7: Economics of Financed Projects John Shonder US Department of Energy August 12, 2015

Energy Exchange : Federal Sustainability for the Next Decade Hidden Savings from ESPCs 2

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

Energy Exchange : Federal Sustainability for the Next Decade 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

Energy Exchange : Federal Sustainability for the Next Decade 7 Relative magnitude of these four drivers

Energy Exchange : Federal Sustainability for the Next Decade 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 8 Conclusions

Energy Exchange : Federal Sustainability for the Next Decade Optimal Use of Appropriations 9

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

Energy Exchange : Federal Sustainability for the Next Decade 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

Energy Exchange : Federal Sustainability for the Next Decade 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 25 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

Energy Exchange : Federal Sustainability for the Next Decade Mixing Appropriations and Private Financing to Meet Federal Energy Management Goals ( ations/ORNL%20TM%202012_235.pdf) ations/ORNL%20TM%202012_235.pdf Beyond Guaranteed Savings: Additional Cost Savings Associated With ESPC Projects ( ations/Publication% pdf) ations/Publication% pdf 27 Full reports on these two studies are available

Energy Exchange : Federal Sustainability for the Next Decade Questions? John Shonder 28