1. Efficiency Performance Contracting Reducing Wastes and Costs through Innovative Supply Contracts Energy Management Seminar November 13, 2008 Thomas J. Bierma, MBA, Ph.D., Environmental Health Program Environmental Health Program Illinois State University Illinois State University iSU

2. Research since 1995 Change incentives for suppliers to pay for performance and savings rather than “stuff.” Does it work? Funded by the Illinois Sustainable Technology Center and the U.S. Environmental Protection Agency iSU

3. Typical Spend in Key Non-Core Areas Total spend: $0.5 – $2 million/yr Manufacturing SME Energy spend: $0.2 – $.9 million/yr

4. Question… iSU How much could these costs be reduced by implementing projects with a payback period of…. 1 year? 2 years? 3 years? 4 years?

5. Question… iSU Yet these opportunities go untapped year after year… Why?

6. A Major Cause… iSU Core Competence “The key skills or knowledge needed to build and maintain a competitive edge.” (Quinn 1994). These technologies lie outside the core competence of the business, so time and money go elsewhere.

7. Question… iSU Since suppliers have this core competence… can we create incentives so suppliers apply that competence to increase customer efficiency rather than only sell them “stuff?”

8. Answer… iSU For chemicals – Absolutely! Chemical Management Services (CMS)

9. Answer… iSU For tooling – Absolutely! Tooling Management Contracts

10. Answer… iSU For energy in the M.U.S.H market – Absolutely! ESCOs Energy savings performance contracts

11. Question… iSU Can we learn from these examples to create a market in energy savings outside the M.U.S.H. market? (for the rest of us?)

12. What the customer (energy user) wants iSU 1.Savings and performance – not “stuff” 2.Work with one, trusted supplier 3.Pay for it out of savings – if possible

13. What is the lowest- hanging fruit? iSU Lighting Waste heat recovery Compressed air Cooling What else?

14. One supplier? iSU Can one supplier handle all these? Would it require an alliance of suppliers? Who would lead the alliance?

15. Financial Incentives iSU Two models Pay-for-performance / Shared savings Sole supplier with targets

16. Capital Financing? iSU Delta Institute, Chicago non-profit, member of CCX Will there be additional Federal incentives?

17. Discussion iSU We have not found working examples of this yet in our research. Are there ideas about how to create it, or how to improve it?

18. Contacts Tom Bierma, Illinois State University tbierma@ilstu.edu 309/438-7121 Dan Marsch, Illinois STC dmarsch@wmrc.uiuc.edu 309/671-3196 ext. 202 iSU

19. Hitachi Metals and DCT

20. Engine production, coolant usage, and coolant waste haulage, Navistar, 1989-1996. Plus 93% reduction in engine head and block rework

21. Coolant Usage, GM-EMD, 1994-1998