The Peculiar Economics of Federal Energy Management

Michael E. CanesUSAEE Annual Conference

October 26, 2015

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Annual Federal Spending on Energy

• $23 billion total in FY14

• $16 billion on vehicle fuels

• $7 billion on buildings

• $6 billion of $7 billion on “covered” buildings– Buildings covered by statutory or Executive Order goals

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Energy is Treated as Highly Important by Federal Leaders

• Project Independence (President Nixon) • Series of Energy Acts, beginning under President

Carter (National Energy Program) • Several Executive Orders• Strategic Petroleum Reserve • CAFÉ Requirements• Ethanol mandates

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Legislative/Executive Actions

• National Energy Conservation Policy Act of 1978• Energy Policy Act of 1992• Energy Policy Act of 2005 • Energy Independence and Security Act of 2007

• Executive Order 13423 of January 2007• Executive Order 13514 of October 2009• Executive Order 13693 of March 2015

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The Various Acts and EO’s Have Imposed Constraints Upon Federal Building Managers

Fiscal Year Percent Reduction Required

2006 2

2007 4

2008 9

2009 12

2010 15

2011 18

2012 21

2013 24

2014 27

2015 30

Example: Federal Agency Building Energy Reduction Goals in terms of BTUs/sq ft – (% reduction relative to FY2003)

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Do These Goals Matter to Building Managers?

• Annual OMB Energy Management “Scorecard” – For each goal:

• Green circle on scorecard means on target towards a specific energy goal

• Yellow circle means making progress • Red circle means not getting there

– Agency heads must defend scorecard in public forums

– If heads care, then it is likely that managers care

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Financing Attainment of Federal Energy Goals

• Congress has provided agencies various tools beyond appropriations to finance energy efficiency and renewable energy investments

– Energy Service Performance Contracts– Utility Energy Service Contracts– Power Purchase Agreements

• These tools enable agencies to fund such energy projects outside of their regular annual budgets

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Implications

• Federal building energy managers implicitly face different relative prices than private such managers– Energy more expensive relative to other things

• This drives a different step by step calculus:– Examine options to meet mandated energy goals– Identify least cost way to do so– Decide to what extent to meet goals– Allocate budget and choose outside financing

arrangements

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What does this mean in reality? – an example

– 2011 GSA survey of 22 high (energy) performance buildings in its portfolio• 16 met LEED-NC standards• Utilized 25% less energy than comparable buildings• Investment program achieved 38% reduction in energy usage

– But the financial outcome was questionable• Cost of $172 million• Achieved $10.8 million in 1st year savings• At this rate, payback is about 16 years, but that doesn’t consider

operating costs and whether the investments will last 16 years• By normal standards, this is a low return for this kind of investment

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A Second Example

Payback Period Number of Projects

0-5 years 2

5-10 years 5

10-15 years 3

More than 15 years 2

Payback periods on 12 FEMP-described Federal solar and wind projects

A little more than half the projects have good to excellent paybacks, but the others do not

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Overall Social Cost of Managing Federal Building Energy Use via Goals and Timetables

• $6 billion annually in ESPC and UESC Financing, uncertain how much is financed via PPAs

• $9 billion annually in Agency energy investment using appropriated funds

• If returns are no more than 1% below those of comparable private sector investments, total social costs from these alone are $150 million/year

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Financing Costs

• In addition, there are financing costs

– ESPC, UESC and PPA suppliers borrow monies to finance Federal energy investments

• Even large energy service firms pay at least a 1% higher rate on borrowing than the US Treasury

• This difference, applied to at least $6 billion in Federal borrowing for purposes of energy investment, implies yet another $60 million in social cost

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There May be a Means to Reduce the Social Costs

– Establishment of a Federal borrowing authority, set up strictly to borrow money for Federal agency building energy investments, could reduce the social cost of agency borrowing

– Similar to the Resolution Trust Corporation, set up in the ‘80s to borrow for purposes of bailing out bankrupt S&Ls

– Creates a new Federal bureaucracy, but people now employed by ESPCs to borrow in capital markets could move to Federal sector, reducing costs

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Conclusions

• Not clear that the Federal government should treat energy differently than other commodities

• But it does, and Federal building managers are constrained by various laws and EO’s to invest more in energy efficiency and renewables than otherwise

• By usual economic standards, some efficiency and renewables projects are cost effective while others are not

• The government could save around $60 million/year by establishing an entity to finance Federal investments in such projects

• Whether it makes sense for the Federal government to invest more in energy programs than is economically efficient is an open question