OFFICE OF THE CITY MANAGER City Hall Holland, Michigan City Manager Report 12E6.2 REV To: Mayor DeBoer and Members of the Holland City Council Date: December 16, 2015 Subject: Approval of an Energy Performance Contract with Schneider Electric Buildings Americas, Inc. Strategy: I - Economic Development and Transportation; C2. Community Energy Plan as well as Strategy VI: Public Spaces, A3. Bouws Pool and Strategy - VII - Organization, A2. Conserve on economic and Environmental Resources Summary Background Consistent with the long-range Community Energy Plan and subsequent City Council strategies, a deep energy retrofit study for city facilities was recently concluded by Schneider Electric as an Energy Service Company (ESCO). The City Council considered the need to conduct deep energy retrofits via, an Energy Service Company (ESCO), on May 21, 2014, January 2015, August 12, 2015 and September 30, 2015. Schneider Electric was recommended as the Energy Service provider via earlier reports. After reviewing their Investment Grade Audit at the 60% level on August 12, 2015, the City Council's conclusion was to limit the engineering to only those energy saving changes that have a ten-year pay back with the exception of new City Hall windows and Bouws Pool mechanical systems, for a total approximate amount of $3.9 million, down from a potential $5.9 million in an earlier version. Inclusion of boilers that have unknown remaining life expectancy (Parks and Cemetery Building, for example) and all park lighting was added on September 30, 2015 for further investigation.
Third Party Objective Review While the final engineering to get from the 90% to 100% Investment Grade Audit was being completed, the City Council approved hiring a third-party to conduct an objective review of Schneider Electric's proposal. Synchronous Energy Solutions (David Birr) of Barrington, Illinois was subsequently engaged to conduct an analysis of Schneider Electric's recommendations for a cost of up to $10,000. David Birr is a seasoned energy service company evaluator who conducted similar reviews on dozens of projects over multiple decades and is well-published on the subject. Mr. Birr recently completed the City of Chicago s third party review after being one of 13 that responded to their Request For Proposal. Chicago has now gone to construction. Schneider Electric is one of the firms selected to do the construction. Mr. Birr formerly worked on similar projects in Philadelphia, Atlanta, Decatur, IL, and Fort Meyers, FL. He is currently completing four (4) projects for the State of Hawaii totaling $36 million. He has been doing similar work for 28 years and is now a nationally recognized expert on energy performance contracting. David Birr reviewed the Schneider Investment Grade Analysis (90%) and provided the following answers summarized in the parenthesis following each step: 1. Generating a set of questions (Done); 2. Providing these questions to Schneider Electric in writing (Done); 3. Reviewing their written response and formulas for savings (Done); 4. Explain and assess their responses in a conference call with the City (Done); 5. Request Schneider to follow up and/or finalize their report based on his assessment (Done); and 6. Providing a written conclusion to summarize his opinion and findings regarding implementation of an efficiency contract with Schneider Electric. (See attached.) We further asked Mr. Birr to comment on: 1. Whether Schneider s services provide better value (or at least reasonable comparable value) than a competitor (He signified they are highly experienced, that their training exceeds others and that they recently beat out the competition known to Holland in a Chicago request for qualifications process, yet they can be slower than some. A liquidated damages clause of $500 per day is included in their contract thereby); or
2. If the City should consider making the improvements ourselves (David Birr strongly recommends against the customary "spec and bid" approach due to lower energy measures, lower energy efficiencies, and poorer maintenance in the long term.) 3. Whether the Schneider recommended improvements are worth the cost in their opinion? (Yes. For the reasons mentioned above. The cost of the project includes engineering, construction bidding, oversight, and construction management, as well as a guarantee of predicted energy savings. There are no change orders when using an Energy Performance Contract process and you get higher quality equipment... not aluminum in boilers, for example, but stainless steel or copper instead and Building Automation Systems (BAS) that are highly sophisticated yet user-friendly). See the detailed notes attached as amended to reflect the Energy Team's discussions. Subsequent to this review, eighteen (18) additional questions were asked related to bidding, guarantees, warranties and implementation details. See attached. Written responses to these questions are included in the amended notes and included in the contract. Summary Results The most conservative estimate from Schneider Electric showed an approximate average energy savings of $137,000 per year over ten-years is expected, as well as greater staff efficiencies in the amount of $66,000 of less out-of-pocket operational/maintenance costs and more time spent on other needs. ($203,000/year total). This savings amount can be applied toward the anticipated debt service. Despite these savings, a net annual cost is expected that exceeds the savings. The reason is the cost of money (approximately 2.2%) and because of the windows ($700,000) and the pool ($500,000) portions of the project have a longer than ten-year payback. Cost of the financing will be provided by the Finance Director and $203,000 would come from reduced contributions to the Municipal Capital Improvement Fund net of the savings. The expected environmental impact was 1,160 metric tons of carbon annually which is equivalent to planting 560 trees per month for twenty years. Internal Energy Team's Recommendation and the City Manager's Recommendation The Energy Team met four (4) times on this matter. They requested input from Holland Board of Public Works energy staff, the City Attorney, and a third-party Investment Grade Audit expert. Their conclusion on December 7, 2015 was to go forward with an
Energy Performance Contract with Schneider Electric with amendments desired by Council and use financing to be recommended by the Finance Director for Energy Performance Contracting for City buildings. As City Manager, I independently conducted research and concur for the reasons explained below. Energy Performance Contracts are useful to: 1. Catch up with deferred maintenance; 2. Unify facility energy management given there is no joint facility manager; 3. Anticipate facility reinvestment needs coming up; 4. Provide greater employee comfort via window replacement and sealing of building envelopes; 5. Further the Community Energy Plan's goals; and because 6. Cash flow the energy capital expenditures over ten (10) years from the energy savings and operation/maintenance savings. My concurrence comes with a number of caveats listed below: 1. Reduce financing needs and interest costs associated with the Bouws pool investments by using accrued capital funding from recent fiscal years and thereby reduce the potential total borrowing cost by using available fund balance ($700,000 total recommended by the Finance Director, - - $285,000 accrued from end of FY2015, for example); and 2. Reduce the potential total cost by eliminating low energy savings projects (approx. $300,000). The following items were cut due to lower relative energy savings. (See below and Section 4, pages 3-14 of the Investment Grade Report for more detail): A. Downtown public restroom; B. Water fixtures and flow control; C. Kollen Park Fire Station; and D. City Parks Annex Building (Building 2). Total New Investment Recommended: $3.7 million The new estimated energy savings are thereby $129,000 a total of $177,000 of guaranteed average annual savings and likely operation and maintenance savings. 3. Ensure no impact on the General Fund operating millage rate will occur by using a portion of the existing Municipal Capital Improvement Fund (MCIF) tax rate to cover the remaining cost -- approximately $3,000,000 will be the net amount that will be financed for about 0.15 mills total. (This is calculated by taking a potential annual debt service cost of approximate $335,000 and subtracting out $177,000 of energy/operation savings equal roughly $140,000 $1 as the net annual amount of remaining debt service each year. This is roughly equivalent to 0.15 mills);
4. Seek financing cost at less than 3% (bids came in at 2.19%); 5. Establish a contingency reserve of 5% ($185,000); 6. Require open book and City staff advance approval of the bids received; 7. Use the rebates to cover the first two years of interest expenses ($99,000); and 8. Establish contract terms that are cancelable if bids prove unfavorable for some reason to the City of Holland (the attached contract includes). The combined internal rate of return is 3.88%. This rate of return exceeds what the City could earn by other uses of funds. The combined Net Present Value shows a $236,028 improvement in the City's funded position at the end of 15 years should you proceed. Life expectancy of the equipment is 15 years or more. The pay back period increased to 10.9 years in the Investment Grade Audit attached. Given the above caveats, the reduction in scope noted above provides room for contingencies. City Hall window costs were researched and found to be reasonable as designed and would be worth the total investment. Conclusion and Next Steps The suggestions recommended above are therefore the overall most advantageous ways to have Smart buildings and: 1. Achieve deep energy savings; 2. Use the City's funds wisely; 3. Catch up with deferred maintenance; 4. Avoid future maintenance funding needs; 5. Achieve greater occupant comfort; and 6. Save on life-cycle costs. A Technical Committee is scheduled to meet with the Schneider Project Manager on Wednesday, December 16th. This is the final step to ensure staff compatibility and comfort moving forward. With Council review and approval, work would begin in January 2016. This time frame is important in order to restore the swimming pool to working order by summertime. For the reasons mentioned above, proceeding with an Energy Performance Contract represents good stewardship of the City's resources, facilities and working conditions. Recommendation
Approve an Energy Performance Contract (EPC) for eleven municipal buildings and assorted parks for $3.7 Million in energy and deferred maintenance improvements, authorize a 5% project contingency, and authorize the Mayor and Deputy City Clerk to execute the Energy Services Contract when approved as to form by the City Attorney. Respectfully submitted, Ryan Cotton Attachments: Energy Services Contract; Investment Grade Audit (100%) December 14, 2015 - City Buildings and Infrastructure; Best Energy Team IGA Questions and Answers Meeting 11.12.15 for 12.08.15; Synchronous Review & Evaluation of Proposed Schneider IGA Report; ESCO Savings Presentation 08.23.14; and Energy Savings Performance Contracting; Table Average Lifespan of HVAC Components; ESCO Cash Flow; Chemical Bank Debt Service. Report prepared by: Ryan Cotton, City Manager