May 7, 2014 Presentation to the School Board of Palm Beach County THE ESCO PROGRAM
ESCO DEFINED An Energy Service COmpany (ESCO) is a commercial or for profit business providing a broad range of energy solutions including: design and implementation of energy savings projects, retrofitting, energy conservation, energy infrastructure outsourcing and power generation and energy supply. A newer breed of ESCO now focuses more on innovative financing methods. More to come
ESCO SIMPLY STATED A financial mechanism to pay for today s facility upgrades with tomorrow s energy savings. RECOVERY.GOV U.S. Department of Energy
ESCO OVERVIEW A consultancy group engages in a performance based contract with a client firm to implement measures which reduce energy consumption and costs in a technically and financially viable manner. In Practice The ESCO starts by performing an analysis/audit of the property, designs an energy efficient solution, installs the required elements, and maintains the system to ensure energy savings during the pre determined payback period. [1] The savings in energy costs are often used to pay back the capital investment of the project (5 20 years or beyond). [2] If the project does not provide returns on the investment, the ESCO may be responsible to pay the difference (Contract driven). Major Steps in a Typical ESCO Project
ESCO CONSIDERATIONS Specific to Energy Cost Savings; there are three basic types of ESCO Projects: 1. Lighting System Retrofits 2. Mechanical Upgrades 3. Building Envelope Upgrades The cost saving potential for these different types of conservation can range dramatically. Each have their advantages and disadvantages! Note: The (3) items listed above are generally bundled to create one comprehensive project
ESCO LIGHTING SYSTEM RETROFITS This type of ESCO produces the most cost savings because these systems are very energy intensive and tend to be far less expensive than other conservation measures. Note: [1] The savings from lighting related conservation measures are generally reliable because the operating schedule is the primary, contributing factor. [2] Savings can be calculated without using a computerbased simulation; however, there are still challenges.
ESCO MECHANICAL UPGRADES This type of ESCO is specific to heating, ventilation and air conditioning (HVAC) systems which are very energy intensive, but they are difficult to fit into the ESCO model due to high initial costs. Note: [1] The payback period for HVAC systems may be lengthy depending on the scope of work. [2] HVAC measures can turn a five year lighting contract into a 20 year contract, if bundled.
ESCO BUILDING ENVELOPE MAINTENANCE PROGRAM (BEMP) This type of ESCO is specific to door, window replacement and reflective roofs. Note: [1] These measures are also difficult to fit into the ESCO model due to high initial costs. [2] BEMP measures are usually long term year contracts.
ESCO FINANCE ESCOs were traditionally focused on performing energy audits and then implementing the recommended projects. Financing was added to the program when it became evident that businesses and governments did not have the capital resources to fund the capital improvement projects. The concept of paid from future savings means financing. Just as Certificates of Participation are used to pay for the construction of a school from future tax revenues, the ESCO will leverage future energy savings to fund the project.
ESCO FINANCE The District has many options to pay for projects. Internal financing options include: Pay as you go use funds in the budget to pay for the project. The District is developing the FY15 budget and could prioritize needed energy projects. Short term financing just as the District financed the purchase of school buses, the District could choose to do short term financing to pay for projects. The principal and interest payments would need to be included in the capital budget and five year capital plan. The transaction could be structured for five years or could be a one year note that is extended annually for up to five years. The interest rate would depend on current market conditions and the term of the loan. At this time, those rates would be between 1 and 3%.
ESCO FINANCE External financing options: Traditional ESCO financing The District purchases the equipment from the ESCO. The ESCO will partner with a financial institution to provide financing. Principal and interest payments would be made from savings (Operating Budget). The transaction could also be structured so the principal and interest are paid from the capital budget, allowing the savings to be used to fund programs in the operating budget. Hybrid ESCO financing We have heard that some companies offer the option to provide the improvements through an operating lease. In theory, the District would grant a lease for the portion of the building where the improvements would take place. The vendor would own, operate and maintain the equipment. The District would pay annually for the cooled air, lighting, etc. Interest rates for external financing can be difficult to verify, but are expected in the 8 12% range.
ESCO FINANCE External financing options are very complex. Significant time would be involved in the review of the contracts. All options, with the exception of pay as you go, involve financing. The District has never obligated future operating dollars, limiting all borrowing to the capital budget. Such transactions should be carefully considered. The Finance Committee will be engaged once the results of the RFP are available. The District s Financial Advisor and Bond Counsel will also be engaged as needed to review contracts and financial proposals.
ESCO STAFF RESEARCH The Advantages and Disadvantages listed in the next two slides are from a combination of Industry Sources Therefore, staff will be utilizing a RFP to gather the pertinent information necessary to make the best possible recommendation regarding our facilities.
ESCO RESEARCH SUMMARY An ESCO constitutes a partnership between a facility owner and an energy service company and is considered a time and cost effective method for completing comprehensive energy upgrades. Advantages: 1. Guaranteed Performance 2. Participation 3. Responsibility 4. Verification 5. Accountability 6. Financing 7. Cost Certainty 8. Avoided Capital Costs
ESCO RESEARCH SUMMARY Continued Although ESCO s sound inviting on the surface, there are some inherent risks. The devil is in the details. Risks (Disadvantages) to Consider: 1. Savings Shortfalls 2. Long Term Liability 3. Potential Conflict of Interest 4. Changes/Limits to Facility Function 5. Transparency 6. Implications to Capital Asset Planning 7. Heavy Lease Load 8. Project Size and Scope
ESCO FURTHER CONSIDERATION Staff will engage the Construction Oversight Review Committee (CORC) and the District s Finance Committee for input.
ESCO CONSIDERATIONS FOR OUR SCHOOL DISTRICT A) Federal guidelines may change regarding fluorescent lights. We are now replacing T12 bulbs with T8 and may be required to go to T5 bulbs or LED fixtures. B) Responsible asset management may require that the District close, sell off or lease out facilities to reduce its financial burden, in consideration of declining enrollment. An ESCO will encumber the property. Shorter payback periods can reduce that risk. C) Important ESCO performance contract features that need to be considered: Ongoing maintenance of the lights and HVAC components that are constructed. HVAC maintenance must have a fast response time. Embrace the School Board's M/WBE Policy. Enforce the Jessica Lunsford Act for all ESCO personnel and subcontractors. Keeping the payback period short provides advantages to the District. Independent verification of the Energy Audit. Open competition is desirable. Most current ESCO models are noncompete.
ESCO CONSIDERATIONS FOR OUR SCHOOL DISTRICT (cont d) D) In some cases, replacing like for like in terms of lighting and HVAC may not resolve outstanding Building Code Issues. Resolving code issues may not reduce energy costs. E) Leased use of our Facilities seems likely to interfere with clear auditability for energy savings. ESCOs may incur additional costs for new leases. F) Avoiding Capital Cost is not avoiding all cost the burden will be shifted to the Operating Budget instead. G) There is a potential for Conflict of Interest if the ESCO controls and chooses all design and cost comparisons to be used in the Energy Audit. A hybrid could include design by the Owner s engineer, with financing / construction by the ESCO. H) We need trained staff to run this program, who can evaluate the fairness of the contract and monitor compliance.
ESCO It s all about the Financing
ESCO QUESTIONS?