Energy Saving Performance Contracts

04/19/2012 | By Chris Curtis

Recent high-profile bankruptcies in clean tech have caused many in Washington and around the country to dismiss the idea of federal investment in alternative sources of energy and green technology as too big a risk for taxpayers. However, casting all programs in this light would deal a tremendous blow to much-needed U.S. job growth and stagnate our nation’s progress toward a sustainable future.


In late 2011, President Obama announced the second piece of the Better Buildings Challenge, which provides the framework to implement $4 billion in energy upgrades to federal and commercial buildings and spur the creation of 50,000 U.S. jobs – using zero tax dollars and without the approval of a divided Congress. Adding to this momentum, in his January State of the Union address the President also declared energy efficiency as a priority in the U.S. and promised energy savings of $100 billion over the next decade– if Congress can enact the right legislation. In the speech, President Obama called on Congress to bring him a bill that will specifically help manufacturers eliminate energy waste and pollution, while providing businesses incentives to upgrade their buildings.


As lawmakers begin to consider legislation to make this energy savings a reality, I would strongly encourage them to consider a lesser known but proven, successful financial vehicle known as Energy Savings Performance Contracts (ESPCs).


Currently being used at the cornerstone of the Better Buildings program, ESPCs leverage the flexibility and resources of the private sector to pay for energy saving capital upgrades using the future energy savings. The initial capital investment required to do the work is provided by the private financial community and the actual services, such as energy equipment retrofits, are delivered by Energy Services Companies (ESCOs). The financier is paid out of the accrued energy savings, with the ESCO guaranteeing a certain level of savings or performance. If the performance standards are not met, the ESCO is responsible for paying back the loan. ESPCs typically bundle a variety of capital upgrades into one project, creating a significant guaranteed annuity that is financed over a 10 to 20 year period.


With the risk falling squarely on the ESCO, ESPCs allow cash starved building owners in government, education and other public sector entities such as municipalities to invest in capital upgrades with no financial outlay required from the entities– or already financially strapped taxpayers. This "risk" is managed everyday via very transparent performance and verification standards, and thousands of customers in the U.S. are already getting what they expect.


It’s a widely known fact that the commercial building sector is our nation’s biggest consumer of energy, but what’s sometimes obscured is the nearly $40 billion opportunity within energy savings for these buildings. Energy retrofits can easily achieve up to 30% energy savings and generate operational and environmental savings, while reducing carbon emissions and pollution. In addition to this, the practice of implementing ESPCs creates thousands of local jobs in trades that have taken a hit in recent years. It’s estimated that a typical $10 million ESPC creates about 100 of these jobs, getting Americans back to work.


In other words, this is an easy win. I have seen performance contracting deliver year after year.  Organizations as diverse as the city of Houston and the U.S. Coast Guard have all used performance contracting to save millions of dollars in energy spend, reduce carbon and greenhouse gas emissions and create jobs.


Specifically, the city of Houston has implemented a 15 year contract that will produce annual savings of $1.8 million. Additionally, the U.S. Coast Guard recently implemented a landmark $50 million energy savings performance contract to upgrade 960,000 square feet of facilities in Puerto Rico. Using a combination of both renewable energy solutions and energy efficiency upgrades, it’s estimated the facility will reduce its energy usage by 40 percent. As much of a good start upgrading the more than three million square feet of federal facilities will be, this is still an initiative that needs more wide-spread adoption to work on a large scale.


While participating in a roundtable discussion with Presidents Obama and Clinton and other industry leaders, we discussed additional ways to accelerate energy efficiency in the U.S. We found that while the Better Buildings Challenge is the foundation that was needed to kick-start a focus on energy efficiency, we need to continue discussions with our nation’s leaders to establish a myriad of other standards and measurement methods. With strong engagement from the federal government we can not only mitigate some of the perceived risk involved with performance contracting but also achieve the maximum savings possible.


To date, the partnership between the public and private community is one of the most important results of the Better Buildings Challenge. Open and continuing dialog among the groups allows each to make the most of its role in working towards the country’s energy efficiency goals now and in the future. We as business and government leaders cannot be neutral or indecisive when it comes to energy efficiency, development of green technologies and job creation. The time to act is now. With no cost to taxpayers, we have a huge opportunity to create jobs, save energy and create a more sustainable future for tomorrow.

Chris Curtis is President and CEO, Schneider Electric in North America

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