Deferred maintenance in schools is common due to the difficulty in finding funding to meet all their needs. The unfortunate consequence is that this will begin to challenge the quality of the learning environment for students and staff. One way to improve school buildings without putting additional demands on capital budgets is through a guaranteed energy savings performance contract (ESPC), also called a guaranteed energy cost savings contract. Even if you do not have significant deferred maintenance this type of program may be an additional tool to benefit your district.
A guaranteed energy savings performance contract provides a method to finance and implement capital improvements and services that save energy and operational dollars. The energy and operational cost savings produced by the project are typically sufficient to cover all project costs (including financing and any ongoing services) over the contract term. Contract terms are usually 15 years.
The guaranteed energy savings performance contract is a simple concept (see at left). An energy service company conducts a comprehensive audit of selected facilities to determine the potential for saving energy and operational costs through high-efficiency equipment replacement or upgrades. Based on the results, the energy service company makes recommendations that, when implemented, will generate enough energy and cost savings to pay for the cost of the project over the term of the contract—providing budget neutral facility upgrades. This is accomplished by redirecting existing utility and operational expenditures toward the funding of new systems and equipment.
Many states have enacted laws that govern how public sector entities may use energy savings performance contracts. Most of these laws require the energy service company to provide a savings guarantee, which reduces the potential risk to the school district. If the guaranteed energy reductions do not materialize, the energy service company is contractually liable to pay for any shortfall. This reconciliation is traditionally conducted annually. These laws also provide for the procurement process and a financial mechanism for the transfer of operational savings in the General Fund to make project payments out of the Capital Project Fund.
How Schools Benefit
Many schools are facing some difficult choices. High community expectations, new educational standards, increasing expenditures, aging facilities and limited school funding are some of the issues forcing tough decisions. Changing times often require new and more complex community interaction, instructional programs, financial solutions, and long-term facility plans for schools.
All too often schools are in the news for the wrong reasons. If done correctly, this type of program can help you generate a positive image and publicity by educating the community on your commitment to being fiscally responsible by promoting the savings that improved facilities generate. In fact, many schools completing these programs are being nationally recognized by organizations like ENERGY STAR® and the U.S. Green Buildings Council’s LEED program, while being applauded by local news organizations and their own communities. There are many reasons to utilize a guaranteed energy cost savings contract. Some of the reasons are as follows:
- Life Cycle Cost Decision Process. Decisions for school facilities are often made on initial up-front construction costs. This has often put districts in situations where they are paying large sums of money year after year that far outweigh those costs saved up front. This program evaluates decisions on a life cycle cost basis. This takes into consideration the on-going operating costs of the systems as well as the up-front costs. This is how real value is determined.
- Negotiate for Contractors and Products vs. Low Bid. Through this program you can negotiate or conduct a select-bid process with contractors and vendors for services without using the low bid process. The low bid process may sometimes allow unqualified providers into your process. This approach allows maintenance staff to have options for consistency in products and obtain the expertise needed for exceptional results
- Design Build Construction. This method of construction allows select contractors to be involved in the design process. It has been shown that contractors and vendors can provide designers insight that will improve solutions and reduce costs in the implementation of facility improvements.
- Specialized Energy and Renovation Partners. Energy service companies are a specialized type of organization. The expertise of understanding client’s needs, building problems, energy efficiency, conducting construction in existing buildings and monitoring results are their focus. Because of this there is an inherent knowledge feedback look to identify the types of improvements and strategies that perform and those that do not. This level of expertise is not found in the traditional design or construction industry.
- Better Facilities. By updating or replacing equipment that is old and obsolete with newer, more efficient technologies, you will have lower energy use, higher-quality systems, fewer breakdowns, and reduced maintenance. When building occupants experience improved lighting, better air quality and more comfortable room temperatures, they are likely to be happier and more productive.
- Accountability. This program provides the simplicity of having a single source provider. It provides single point accountability for performance, rather than the conflicting project requirements resulting from multiple contracts with multiple vendors. The program guarantees the results in terms of both savings and acceptable indoor environmental comfort parameters (light levels, air temperature, ventilation rates, etc.).
- Productivity of Learning Environment. Providing a healthy learning environment paid for with operational cost savings makes economic sense. The financial benefits will easily justify the investment in this program. The health and learning benefits for students make this an even better investment.
- Be A Good Steward of Public Funds Using A Valuable Financial Tool. This program allows schools to divert funds that would be spent on energy bills and operational costs into investments in school facilities or educational programs. This means limited budgets can stretch further, putting taxpayers’ money where it really counts. More modern, efficient energy systems can show your commitment to your taxpayers that you have their best interests in mind and are being good stewards of their money. Often patrons are willing to give more money to administrations they believe are good financial stewards of their district funds.
- Positive Cash Flow. Operational cost savings in excess of project costs can be used for educational programs or additional capital projects. Financial solutions can be structured for annual positive cash flow in operating budgets or capital budgets.
- Guaranteed Savings. Monitoring of project performance and contractual financial guarantees provide a strong incentive to the energy service company to achieve and maintain predicted savings over the term of the contract. Program goals are to minimize life cycle costs and maximize net benefits. Proper measurement and verification of savings provides the data to verify savings are achieved and adapt equipment operations to best meet occupant’s needs.
- Supplement Bond Issue Funds. By using this program to fund efficient equipment that will save you money in budgets long term, you may be able to eliminate short bond issue budgets and the “value engineering” process altogether. This could help you keep those things you value in your project or increase your available funding.
- Improvements Without Financial Sacrifice. This program allows you to tackle energy efficiency projects now even if no funds are available. This means you can still afford improvements when faced with budget cuts or competing priorities. And, you can take a comprehensive approach that will optimize your benefits for budgets and facilities.
About the author – Paul Harrell is a business development manager with Navitas. His background as a Certified Public Accountant and 33 years of experience in the education sector help him bring a practical approach to developing strategies for school districts wanting guidance in how to manage their overall budget and utility costs. He can be reached at pharrell@navitas.us.com or 913-344-0049