“CAGW members are an iconoclastic bunch skeptical about politicians' promises.” - National Journal

The ESPC Zone: Everyone Scores on Energy Efficiency

By William M. Christian

WasteWatcher, June 2013

To the untrained ear, subjects like “Green this” and “LEED-certified that” might be expected to turn off the typical Republican, according to those who buy into the stereotype that those whose politics are right-of-center are disinterested in anything considered “environmentally conscious.” On the flip side, that same untrained ear might expect doctrinaire Democrats to balk at any profit-motivated business solution to significant government problems.  But Reps. Cory Gardner (R-CO) and Peter Welch (D-Vt.) are managing to shred these paper tigers, without abandoning their respective ideological credentials.  With a little help from their friends, Rep. Gardner and 11 more House Republicans have joined with Rep. Welch and 15 of his Democratic colleagues in forming the House Energy Savings Performance Caucus.

The Gardner-Welch efforts focus on the promotion of energy savings performance contracts (ESPCs) in government buildings across the country, with the goal of providing guaranteed energy savings to American taxpayers.  Coincidentally, a key proponent of ESPCs (according to a December 2, 2011 White House memorandum) is none other than President Barack Obama.  At that time, the President directed his administration to enter into “a minimum of $2 billion in performance-based contracts in Federal building energy efficiency within 24 months from the date of this memorandum.”  This “$2 billion in two years” directive included the following observation by the President:  “Upgrading the energy performance of buildings is one of the fastest and most effective ways to reduce energy costs, cut pollution, and create jobs in the construction and energy sectors.”

In their December 5, 2012 joint statement announcing the caucus, Reps. Gardner and Welch echoed the President’s optimism regarding energy efficiency and cost savings, as well as job creation and pollution reduction, to be achieved through the increased implementation of ESPCs.

Through ESPCs, a private-sector energy service company (ESCO) agrees to retrofit a building with energy-saving devices and technology, at the ESCO’s expense and with no up-front capital costs borne by the client, which includes private-sector companies as well as local, state, and federal government entities, in exchange for a negotiated percentage of the money saved through lower energy bills.  If the guaranteed savings are not achieved, then the ESCO is liable for any amount over the cost that was projected had there been no such agreement.  According to the Federal Performance Contracting Coalition (FPCC), these contracts represent a “win-win because, in exchange for a pre-determined price, the chosen [ESCO] guarantees future savings, which are used to pay for the energy efficiency upgrades, with excess savings accruing to the Federal government.”

Once an ESPC is signed, the ESCO conducts a comprehensive energy audit for the facility and identifies improvements to save energy and reduce energy costs.  The ESCO consults with the contracting entity to design and construct a project that meets the end user’s needs and arranges the necessary financing for the project.  The ESCO guarantees that the improvements will generate sufficient energy cost savings to pay for the project over the term of the contract.  All cost savings after the contract expires accrue to the contracting authority.

In addition to the congressional efforts of Reps. Gardner and Welch, outside organizations have formed to promote the use of ESPCs.  These include the FPCC and the National Association of Energy Service Companies (NAESCO), located within a few blocks of each other in downtown Washington, D.C.  According to their website, NAESCO has been advocating for the energy efficiency industry for more than 25 years in the marketplace and the media, as well as at the state and federal levels of government.  At the same time, FPCC is a group of ESCOs pushing for increased use of ESPCs, with a focus on barrier removal and “more, faster, bigger and better” ESPC projects at the federal level.

While the President’s directive is targeted to the federal government, ESPCs are already being widely used by state and local governments, as well as in the private sector.  Johnson Controls, Inc. (JCI) is an FPCC member that currently manages ESPCs within 25 states across the country.  JCI lists 109 projects in eight states alone (Alabama, Florida, Georgia, Kansas, Kentucky, Oklahoma, Texas, and Virginia), with guaranteed energy savings totaling $650 million over the life of the contracts.  From JCI’s perspective, ESPCs are providing energy savings to the taxpayer, while “simultaneously creating more effectively managed buildings, higher occupancy rates, higher building asset values for private buildings, and an uptick in domestic job creation.  These ESPC effects are all mechanisms which streamline and reduce the costs required to run government owned/taxpayer funded buildings.”

Electric utilities offer a service analogous to ESPCs to achieve energy savings goals: utility energy service contracts (UESCs).  The Edison Electric Institute (EEI) points out that the federal government is the largest energy consumer in the country and electric utilities are in “a unique position to deliver cost-effective results.”  EEI notes that 1,700 UESC projects awarded since 1994 have saved more than 14 trillion Btu.  According to the U.S. Department of Energy’s Federal Energy Management Program, “the end benefits of UESCs are the ability to implement energy projects with no initial capital investments, minimal net costs, and time and resource savings.”

The United States Chamber of Commerce has not stayed on the sidelines, either.  In his September 5, 2011 open letter to Congress and the President, Chamber President Thomas Donohue encouraged leaders to move quickly on the ESPC program through “full and faster implementation [which] could create 35,000 jobs a year, save energy, and reduce government waste.”  Earlier, in his April 13, 2011 testimony before the House Science Committee Subcommittee on Investigations and Oversight, Chamber Senior Vice President for Environment, Technology, and Regulatory Affairs William L. Kovacs had voiced frustrations with the slow pace of implementation ahead of President Obama’s directive.  He testified that, “it is puzzling that the nation’s largest energy user – the Federal government – cannot find ways to use this program more effectively.  At a time when there is a critical need for reduced government spending, ensuring the availability of mechanisms to save energy in Federal buildings at no upfront cost to the government is good policy.”

Unfortunately, broader adoption of ESPCs faces additional obstacles.  A key selling point of this contracting mechanism is the fact that the contractor bears all of the cost of implementation, without requiring any congressional appropriation.  On the surface, this would seem to be a boon to a cash-strapped, deficit-ridden federal government in need of savings wherever they might be found.  But the budget gurus on Capitol Hill do not recognize the savings – at least not in the 5- to 10-year windows that limit their long-term vision.  Instead, as if with blinders on, they see only the fiscal obligation of the contract itself, especially if the ESPC fails to achieve the guaranteed savings (notwithstanding the fact that the company would be on the hook for any cost overruns).

On May 3, 2011, shortly after assuming the chairmanship of the House Energy and Commerce Committee, Rep. Fred Upton (R-Mich.) wrote to the Congressional Budget Office (CBO) about their scoring policies vis-à-vis ESPCs.  In his letter, he questioned CBO’s policies that seemed to ignore the substantial savings promised by ESPCs and proven in the private sector, while focusing instead on costs of a concept that, ironically, touts no up-front costs to the government.  Chairman Upton pointed out that, “by law, the contractor must agree, measure and verify the savings to the government.  In addition, the government never pays more than they would have paid for utilities if it had not entered into the ESPC.”

In their July 1, 2011 response, CBO insisted that the bulk of savings occur in the out years, beyond the 5-year estimates for discretionary appropriations or even the 10-year scores for mandatory spending.  Because the federal government’s utility bills are paid through such discretionary appropriations, the savings envisioned by use of the ESPCs cannot be guaranteed over the life of the contract.

CBO’s prohibitively conservative assessment of ESPC savings was refuted by the Oak Ridge National Laboratory (ORNL) in a March 2013 report entitled “Beyond Guaranteed Savings:  Additional Cost Savings Associated with ESPC Projects.”  The report used a dynamic analysis and concluded that significant cost savings do accrue to the government, largely due to four key factors.

First, the ESCO does not guarantee all of the savings it estimates: “...to reduce their risk, ESCOs routinely guarantee only about 96 percent of the estimated cost savings from an ESPC project.”  Second, the useful life of the equipment extends beyond the contract’s performance period.  Guaranteed cost savings accrue only during the project’s performance period, which is an average of 17 years; however, equipment that has been well-maintained is likely to have a longer useful service life of up to 25 years.  Third, government projections for energy price escalation have been very conservative, compared to observed price increases.  Since 1998, energy prices have increased faster than the projections assumed, so the avoided cost of energy and energy-related maintenance is higher than the guaranteed savings.  Finally, ESPC savings are underestimated when compared to the “do nothing” case – leaving the previous equipment in place, absent an ESPC – in which maintenance costs are also underestimated.  In the representative project studied by ORNL, the total cost savings to the government was 1.96 times (almost twice) the guaranteed cost savings.

On top of budget scoring problems, federal agencies have moved slowly in response to the December 2, 2011 White House memorandum.  Citing potential savings of $20 billion or more, Rep. Gardner and 22 of his Republican colleagues wrote to President Obama on February 17, 2012:  “However… ESPCs have been underutilized due to overly burdensome red tape and project delays arising from within federal agencies… The average time from the announcement to the contract award for federal ESPC projects is currently 30 months – 25 percent longer than the 24 month goal established in your directive.”  Reps. Gardner and Welch are hopeful that the formation of the Energy Savings Performance Caucus can serve as a bipartisan impetus to move the process further and faster by getting the executive branch to follow the President’s mandate to evaluate their facilities and identify savings through ESPCs, UESCs, and other performance contracting mechanisms that have already proven themselves at other levels of government and in the private sector.

Despite these targeted caucus efforts, interested parties, ranging from Republicans and Democrats to business and industry groups, are concerned that the administration’s ESPC momentum will expire this December, along with the two-year presidential directive.  To forestall that possibility and essentially “double-down” on the potential of this innovative concept, CAGW urges President Obama to issue a new directive, building on the increased visibility achieved through his first effort.

A worthy objective would be to require federal agencies to pursue an additional $5 billion in energy upgrades over the next five years, using long-term energy savings rather than appropriations to pay for needed energy infrastructure upgrades.  “$5 billion in five years” would represent a bipartisan legacy of achievement, and that is the zone that ESPC supporters should be trying to reach.