Your town's tax base has been declining, you're caring for century-old buildings with mostly original fixtures, you don't want staff cuts, and your council is determined to recast the community as an arts center irresistible to young professionals with families and all the accoutrements that local retailers provide.
You suspect you're about to be promoted, and you can see the writing on the wall. You need savings that dovetail with elected officials' goals. And you need something that convinces them to go into debt.
You remember something somebody said at some meeting, maybe the local municipal league, about decade-old state statutes that eliminate the lowest-cost requirement on contracts that guarantee energy-related savings over 10, 15, maybe 20 years. What really got your attention, though, was something about the vendor eating the difference if the savings don't materialize.
Looking back, says Tom Logan, director of public improvements/city engineer for Covington, Ky., “it looked too good to be true. It took two years to educate ourselves and city officials on the program's technical and financial components. Officials had a difficult time understanding how a contractor could guarantee savings in the millions of dollars.”
Ultimately, Logan and Covington Finance Director Bob Due convinced city leaders to borrow $2.25 million at 4% interest through the Kentucky League of Cities and sign a deal promising to save $1.9 million — or $95,000 annually — on gas and electricity bills. Logan expects an additional $85,000 savings each year through lower or eliminated repair costs, and by eliminating $70,000 in annual maintenance contracts for police and fire facilities. And the city's on track to receive $22,000 in one-time rebates and incentives from its local electric and gas provider.
Even assuming a 3% annual increase in energy prices, the loan could be paid off well before the 20-year contract expires. While Logan expects the project will have saved $2.25 million in 12½ years based on annual savings of $180,000, he believes that ongoing improvements like installing daylight sensors and timers for parking garage lights will contribute even more.
“Performance contracts are a very important procurement procedure for institutional clients — universities, hospitals, governments — that want savings,” says Stephen Roosa, an account executive for Energy Systems Group of Evansville, Ind., Covington's partner. After auditing operations, the 15-year-old consulting firm upgraded building and traffic lighting; installed vending machine controllers, occupancy sensors, energy-management and CO2-monitoring controls; installed water-efficient appliances; and improved HVAC systems. “They're particularly suited for such entities because energy service companies know such organizations will be around for the duration of a long-term contract.”
Now it's up to Energy Systems Group to make good on its promises while making a profit. The company monitors utility bills monthly and, if savings are slipping or not being achieved, dispatches to investigate. Logan and Bresser will review the savings annually.
“The concept is more than 100 years old and growing at about 20% per year,” says Shirley Hansen, an internationally known expert in the field and author of Performance Contracting: Expanding Horizons. “It started in France with guaranteed energy efficiency in district heating. According to the Energy Department's Federal Energy Management Program, municipalities, universities, schools, and hospitals made up about $2.6 billion of the $3.6 billion public-sector market in 2006.”
While public works departments are ripe for savings, energy service companies (known as ESCOs) have been slow to realize the industry's full potential.