Volume 1: FEMAC Report on Energy Savings Performance Contracts · REPORT ON ENERGY SAVINGS...

REPORT ON ENERGY SAVINGS PERFORMANCE CONTRACTS — VOLUME ONE2

3REPORT ON ENERGY SAVINGS PERFORMANCE CONTRACTS — VOLUME ONE

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Preface ....................................................................................................................................... 5

FEMAC Members ....................................................................................................................... 6

Abbreviations, Acronyms, and Initialisms ................................................................................... 7

Executive Summary ................................................................................................................... 9

Introduction ............................................................................................................................... 11

Status of Federal ESPC Projects ............................................................................................. 11

Federal Energy Goals .............................................................................................................. 13

Water Conservation ................................................................................................................. 14

Rescind Requirement for Returning 50 Percent of Savings to U.S. Treasury .......................... 15

Non-Building Applications for ESPCs ....................................................................................... 15

Scoring ..................................................................................................................................... 17

Evolution of ESPC Authority ..................................................................................................... 17

Other Alternative Financing Mechanisms ................................................................................. 18

Conclusions and Recommendations ....................................................................................... 19

Appendix: Resolution 01-04…………………………………… ................................................. 21


PPPPPREFREFREFREFREFAAAAACECECECECE

The Federal Energy Management AdvisoryCommittee (FEMAC) was established byExecutive Order 13123, Greening the Govern-ment through Efficient Energy Management.The purpose of the committee is to providethe Department of Energy (DOE) with anindependent view on enhancing energy man-agement in the Federal sector. The orderdirects FEMAC to address a range of issues,including how to improve the use of EnergySavings Performance Contracts (ESPCs)and Utility Energy Service Contracts(UESCs), improve procurement of EnergyStar® and other energy efficient products,improve building design, reduce processenergy use, and enhance applications ofefficient and renewable energy technologies atFederal facilities.

Committee members are appointed by theSecretary of Energy and include representa-tives from Federal and state agencies; utilityand energy service companies; environmen-tal, energy, and consumer groups; and other

energy-related organizations. The DOE’sFederal Energy Management Program of theOffice of Energy Efficiency and RenewableEnergy coordinates FEMAC activities.

During FEMAC’s first public meeting, mem-bers identified ESPCs as a priority issue anda vital tool for achieving Federal energy man-agement goals. To address the financing ofFederal energy management projects andsupport implementation of the ESPC pro-gram, FEMAC established an ESPC WorkingGroup. During the last year, the group re-viewed the full range of issues and benefitsassociated with using ESPCs to financeFederal energy management projects. At itsJune 8, 2004 public meeting, FEMAC ap-proved Resolution 01-04 recommending theimmediate and permanent reauthorization ofthe ESPC program. This report, which wasapproved by the full committee on August 9,2004, includes FEMAC’s recommendationsfor the immediate and permanent reauthoriza-tion of ESPCs as a financing tool for Federalenergy management projects.


FEMAC MEMBERS

Brian Henderson, ChairNew York State Energy Research and Development Administration

Jared BlumPolyisocyanurate Insulation Manufacutrers Association

David DykesSouthern Company

Richard EarlPB Facilities, Inc., Parsons Brinkerhoff Company

Erbin KeithSempra Energy Solutions, LLC

Vivian LoftnessCarnegie Mellon University

Anne Marie McSheaNew Jersey Board of Public Utilities

Get MoyDepartment of Defense

Mary PalominoSalt River Project

James RispoliDepartment of Energy

Cynthia VallinaOffice of Management and Budget

INVITED PARTICIPANT

Terrel EmmonsOffice of the Architect of the Capitol


AAAAABBREVIABBREVIABBREVIABBREVIABBREVIATIONSTIONSTIONSTIONSTIONS,,,,,AAAAACRONYMSCRONYMSCRONYMSCRONYMSCRONYMS, , , , , ANDANDANDANDAND

IIIIINITIALISMSNITIALISMSNITIALISMSNITIALISMSNITIALISMS

FEMAC Federal Energy ManagementAdvisory Committee

FEMIA Federal Management ImprovementAct

FEMP Federal Energy ManagementProgram

GSA General Services Administration

IDIQ Indefinite-delivery, indefinite-quantity

JSC Johnson Space Flight Center

PV Photovoltaics

NASA National Aeronautic and SpaceAdministration

NECPA National Energy ConservationPolicy Act of 1978

OMB Office of Management and Budget

SES Shared energy savings

UESC Utility energy services contract

CBO Congressional Budget Office

COBRA Consolidated Omnibus BudgetReconciliation Bill (COBRA)

DOD U.S. Department of Defense

DOE U.S. Department of Energy

E.O. Executive Order

E.O. Executive Order (E.O.) 12902 -Energy Efficiency and WaterConservation at Federal Facilities

E.O. Executive Order 13123 – Greeningthe Government through EfficientEnergy Management

ECM Energy conservation measure

EPACT Energy Policy Act of 1992

ESCO Energy services company

ESPC Energy savings performancecontract(ing)

FAR Federal Acquisition Regulations


EXECUTIVEEXECUTIVEEXECUTIVEEXECUTIVEEXECUTIVESUMMARSUMMARSUMMARSUMMARSUMMARYYYYY

The Federal Energy Management AdvisoryCommittee (FEMAC) recommends that theSecretary of Energy take immediate action torestore authority for Energy Savings Perfor-mance Contracts (ESPCs) for all Federalagencies. Reauthorization will enable agen-cies to move forward in implementing energyand water saving projects in Federal buildingsand facilities nationwide. FEMAC membersalso support:

• Permanent reauthorization of ESPC for allFederal agencies

• Expansion of authority for water conserva-tion projects in civilian agencies

• Elimination of statutory language requiringnon-GSA civilian agencies to return 50percent of their energy cost savings to theU.S. Treasury

• Pilot testing the use of ESPCs for non-building applications

ESPCs are alternative financing tools thatFederal agencies use to reduce energy use,modernize aging equipment, reduce mainte-nance costs, and deploy energy efficiency andrenewable energy technologies. ESPCs playa vital role in helping the Federal Government

meet or exceed its buildings energy usereduction goals and make up more than halfof Federal building energy efficiency retrofitinvestment. ESPCs are an essential compo-nent to achieving energy, water and emis-sions-reduction and renewable energy goals.

An ESPC requires no up-front funding by thegovernment to create energy savings. Com-panies implement energy conservationprojects in Federal facilities and agencies payover time from their utility bill and maintenancecost savings achieved from the project invest-ments. Allowing ESPC authority to lapseforever will perpetuate Federal waste of largequantities of energy and water and requirelarger and larger budgets to accommodatethe increasing costs of these diminishingcommodities.

It is the Federal Government’s commitment tothe economical use of public dollars, protec-tion of the environment, and energy securitythat make ESPC authority a critical compo-nent of a balanced energy managementstrategy. FEMAC urges the Secretary ofEnergy to take every action necessary torestore ESPC authority for all Federal agencies.


IIIIINTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTION

STATUS OF FEDERALESPC PROJECTS – ESPCAUTHORITY EXPIRED ONOCTOBER 1, 2003 -

Initially, Federal energy management projectswere funded primarily through annual appro-priations and innovative financing techniquessuch as ESPCs and Utility Energy ServiceContracts (UESCs). However, the role ofESPCs and UESCs has become increasinglymore important to the Federal Government asindividual agencies struggle to maintain andimprove the energy and water efficiency oftheir facilities to meet energy reduction,environmental, and energy security goals.During the past four years, almost 80 percentof Federal energy management projects werefunded by alternative financing mechanisms.

Data reveals that the Federal Government’suse of ESPCs for energy conservation grewdramatically, while appropriated funding forenergy projects remained relatively constantor decreased. In the past five years, ESPCsaccounted for 51 percent of the total Federalinvestment in energy conservation, whileappropriations accounted for only 23 percent.

Since December 1987, Federal agenciesused the ESPC financing tool to meet man-dated energy, water, and emissions-reductiongoals. However, the government’s authority toenter into ESPCs expired on October 1, 2003,despite bipartisan Congressional and Admin-istration support for continuing the program.

The Federal Energy Management AdvisoryCommittee (FEMAC) examined the FederalGovernment’s use of ESPCs to financeenergy management projects in Federalfacilities. This report summarizes FEMAC’sview of existing Federal authorities affectingenergy management in the Federal sector,focusing on 1) mandated energy reductiongoals, 2) the benefits of using ESPCs, and 3)the need for reauthorizing ESPC authority.

An Energy Savings Performance Contract(ESPC) is a contract between the FederalGovernment and an energy servicecompany (ESCO). The ESCO designsand implements an energy savings projectand guarantees those savings to thegovernment. The Federal agency agreesto reimburse the ESCO over time from theguaranteed savings generated by theproject. If the energy conservation mea-sures installed by the ESCO do not deliverthe guaranteed energy savings, theagency is under no obligation to makepayments to the ESCO in excess of thesavings delivered. An ESPC is an alterna-tive financing tool used by Federal, state,and local governments and the privatesector to reduce energy use, modernizeaging equipment, reduce maintenancecosts, and deploy energy efficiency andrenewable energy technologies.


$288.3

$179.2 $200.4$261.3

$205.2

$121.1 $131.3 $121.1 $140.0

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$190.8$238.5

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$254.1

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$40.9

$6.6

$0

$100

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$800

1995 1996 1997 1998 1999 2000 2001 2002 2003preliminary

Fiscal Year

Mill

ions

of A

s-Sp

ent D

olla

rs

Appropriations UESC DOD/Other Agency ESPC DOE Super ESPC

$403.9

$649.6

$598.9

$667.7

$523.6

$710.3

$291.9

$227.3

$336.9

Figure 1. Federal spending by funding source to meet energy conservation goals, 1999-2003. (Source: Annualdata submissions to FEMP by all federal agencies for its Annual Report to Congress on Federal GovernmentEnergy Management.)

Comprehensive energy legislation, drafted bythe 106th, 107th, and 108th Congresses,included provisions to permanently authorizeESPCs; but, because of unrelated provisions,no comprehensive energy legislation or ESPCauthorization has been enacted into law.

Since 1998, when the program was stream-lined by DOE’s umbrella ESPC contracts,more than $1.5 billion in Federal energymanagement projects were awarded. Thisinvestment represents building improvementsthat otherwise could not have been accom-plished through annual appropriations. SinceESPC authority expired in October 2003,industry estimates that nearly $500 millionworth of Federal energy management projectsare stalled.

Historical data reveals that ESPCs played asignificant role in helping the governmentmeet Federal building energy efficiency goalsin 1995 and 2000, and are essential to meet-ing 2005 and 2010 energy reduction goals.The Department of Defense (DOD) attributesmore than 50 percent of its energy savings toinvestments using the ESPC alternativefinancing tool.

Guaranteed savings attributable to FederalESPCs are equal to about 14.5 trillion site Btuannually, which is equivalent to more thanthree percent of the government’s energy usein standard buildings. This savings is alsoequivalent to the amount of energy consumedannually by 141,100 households or a city ofabout half a million, almost the size of Wash-ington, DC. ESPCs make up more than half


of the government’s investment in the energyefficiency of Federal buildings. FEMAC isconcerned that without the immediate andretroactive reauthorization of ESPCs forall Federal agencies, it is unlikely that thegovernment will achieve its 2005 or 2010goals. Retroactive reauthorization is neededso that DOE’s and DOD’s existing indefinitedelivery indefinite quantity (IDIQ) contractscan continue to be used for new ESPCdelivery orders. This is essential if anotherone-year authorization is enacted, so thatagencies can immediately sign new taskorders for the projects that lay dormant sincelast year.

FEMAC is also concerned that a one-yearreauthorization is insufficient because eventhough agencies have significantly reduced

the time it takes to develop and implementnew ESPC projects, the current cycle time formost is still longer than a year. Also, thecurrent lapse in authority is jeopardizing corepublic and private sector expertise that tooksix years and $1.5 billion of investments tocreate.

FEDERAL ENERGY GOALS

The Federal Government is the nation’s singlelargest consumer of energy, owning andoperating a wide range of facilities and opera-tions, including residential, commercial,industrial, institutional, and agriculture facili-ties. Recognizing the size and impact theFederal Government has on domestic energyconsumption, President George W. Bushdirected Federal agencies to “lead by ex-ample” and improve the energy efficiency of

Figure 2. Federal Progress toward Standard Building Energy Reduction Goal. (Source: annual datasubmissions to FEMP by all federal agencies for its Annual Report to Congress on Federal Government EnergyManagement.)

85,000

90,000

95,000

100,000

105,000

110,000

115,000

120,000

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145,000

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

FISCAL YEAR

Btu

per

Gro

ss S

quar

e Fo

ot

10% Goal - 1995 (NECPA)

20% Goal - 2000 (EPACT)

30% Goal - 2005 (EO 12902)

35% Goal - 2010 (EO 13123)

25% Reduction, 2003 (Preliminary Data)

Trend Required to Meet 30% Reduction Goal

Actual Energy Use

Without ESPC(22% reduction)


government facilities. In the last 15 years, theFederal Government achieved ambitiousenergy conservation goals. The FederalEnergy Management Improvement Act(FEMIA) of 1988, re-established statutoryrequirements for Federal energy efficiencyimprovements, amending the National EnergyConservation Policy Act (NECPA) of 1978 torequire a 10 percent reduction in Federalbuilding energy intensity (Btu per square foot)by 1995 (relative to 1985 building energy use).Subsequent requirements were establishedby legislation and executive orders, includingthe Energy Policy Act (EPACT) of 1992,requiring government agencies to reducebuilding energy intensity 20 percent by 2000,relative to 1985, and implement all energyconservation projects with a 10-year paybackor less.

In 1994, Executive Order (E.O.) 12902 -Energy Efficiency and Water Conservation atFederal Facilities, required Federal agenciesto reduce building energy intensity by 30percent by 2005, relative to 1985. In 1994,Executive Order 12902 - Energy Efficiency

and Water Conservation at Federal Facilities,required Federal agencies to reduce buildingenergy intensity by 30 percent by 2005,relative to 1985. Finally, in June 1999, E.O.13123 - Greening the Government throughEfficient Energy Management, replaced E.O.12902 and required Federal agencies toreduce building energy intensity 35 percent by2010, relative to 1985. As shown in the chartabove, ESPCs play an important role inhelping the Federal Government meet itsenergy efficiency goals. In 2004, ESPCscould not be used. Although energy reductiondata is not yet available for FY 2004, weanticipate that progress will have slowed. Inorder to attain the 30 percent reduction goal in2005 as required by E.O. 13123, all Federalagencies will need to make significant invest-ments in energy savings projects using everyoption available—appropriated dollars,UESCs, and ESPCs.

WATER CONSERVATION

Both EPACT and E.O. 13123 require agen-cies to conserve water. Civilian agencyESPC projects involving water efficiency have

concentrated on the energy efficiency ofthose measures; because it is unclearwhether water conservation savings canconstitute the majority of savings in anESPC. DOD is the exception because itwas granted explicit authority to imple-ment water conservation projects usingESPCs. Utilities are also authorized toinclude water conservation measures inUESC projects. Pending legislation,supported by the Administration to reau-thorize ESPCs includes provisions toeliminate this inconsistency and expandthe definition of energy to allow all Federalagencies to use ESPCs for their waterconservation projects.

This provision is extremely important andtimely, because many areas of the coun-

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NASA used an ESPC to finance energy and water efficiency measures at Johnson Space Flight Center (JSC) in Houston, Texas. The project included the installation of energy-efficient lighting and compressed air systems; implementation of water conservation measures; and improving air conditioning and lighting control systems at JSC, the Sonny Carter Training Facility, and Ellington Field. The project will save about $2 million per year, from an original investment of $20 million.

ESPC Increases Energy and Water Efficiency and Reduces Costs


try are experiencing water shortages andhave expressed interest in implementingalternatively financed projects for waterconservation. In addition to water short-ages, rates are increasing. Conservativeestimates for savings opportunities inwater efficiency measures indicate thatthe Federal Government uses 300 milliongallons of water per day at a cost of $229- $500 million per year (this representsabout 3.5 percent of total U.S. waterusage). Federal energy consumptionassociated with water use (mostly heat-ing) is 59,200 million Btu per day, or 2.8million barrels of oil per year. A conserva-tive estimate of water efficiency potentialin the Federal sector is 40 percent, or 121million gallons per day and 24,810 MMBtu,which is nearly $240 million in annualsavings.

FEMAC recommends expanding ESPCauthority to permit all Federal agencies tosave water and to further enhance thegovernment’s ability to meet EPACT andE.O. 13123 water conservation goals.

RESCIND REQUIREMENT TORETURN 50 PERCENT OFSAVINGS TO U.S.TREASURY

Current ESPC authority requires civilianagencies, except GSA, to return 50 percent ofretained guaranteed savings to the U.S.Treasury. GSA has special authority thatpermits the agency to deposit all of its re-tained guaranteed ESPC savings into the GSAFederal Buildings Fund for subsequent usewithin the agency. The FY 2004 DefenseAuthorization Act eliminated the requirementfor DOD to return retained ESPC savings tothe U. S. Treasury. To comply with the spirit ofthe statute and minimize ESPC financingcosts, most agencies negotiate their projectterms to retain negligible guaranteed savings

in order to shorten the duration of the deliveryorder rather than return savings to the U.S.Treasury. FEMAC believes strict compli-ance would require agencies to developburdensome accounting systems to imple-ment the requirement and unfairly penal-ize agencies other than GSA or DOD. Andit is a disincentive to agencies trying to dothe right thing.

The statutory requirement treats civilianagencies differently from DOD and GSA. Itcreates a disincentive for non-GSA civilianagencies to use ESPCs, because those thatdo can be penalized with reduced future yearbudgets while agencies that take no actionand continue to waste energy, receive thesame or higher future year budgets for theirgrowing utility expenses. ESPCs are de-signed to leverage an unchanged baselineutility budget to reduce energy use and de-ferred maintenance, achieve needed capitalimprovements, and thereby improve propertymanagement. They also help solve a problemof inadequate appropriations for improvingFederal facility infrastructure. FEMAC be-lieves the requirement to send half of

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The Marine Air Ground Force Training Command at Twentynine Palms, California, used an ESPC to finance the installation of a cogeneration (combined heat and power) system. The system, which will pay for itself in less than four years, was bundled with other ECMs, including a 1.2-MW PV system and three chiller plants, which may have been difficult to finance otherwise. The cogeneration system will provide a reliable power supply, energy security through off-grid generation, and cool indoor environment in a climate where temperatures can exceed 120 degrees. The $16 million cogeneration system will reduce the base's need to purchase electricity from the local utility, saving about $5.8 million per year.

ESPCs Address Energy Security Concerns


guaranteed retained savings to the U.S.Treasury diminishes the benefits (e.g.,capital improvements and reduced de-ferred maintenance) that ESPCs achieve.The remaining civilian agencies should beafforded the same option as DOD and GSAhave for using energy savings to implementadditional energy efficiency projects.

NON-BUILDINGAPPLICATIONS FOR ESPCS

Currently, there is a considerable base ofexperience within the Federal Governmentusing ESPCs for improving building efficiency,but many feel this base should be expanded.ESPCs could be used to reduce fuel usageand logistical tail of mobile assets such asAbrams Tanks, bombers, and aircraft carriers;or to improve efficiency or retrofit and return toservice non-building stationary assets suchas Federally owned hydropower facilities.Extending energy efficiency goals and ESPCauthority to non-building applications couldlead to significant savings to the government,increased private-sector business opportuni-ties, and multiple other benefits, such astransfer and deployment of new technologies.Non-building energy consumption continues toincrease. In FY 2003, the Federal Govern-ment spent $4.9 billion on energy for transpor-tation compared to $3.7 billion for buildings.Applying the ESPC business model to non-buildings would provide the means to reduceenergy use and costs where most needed.FEMAC recommends that as the ESPCsprogram becomes permanent, authorityshould be expanded to test non-buildingapplications through pilot projects ortemporary authority.

SCORING

In July 1998, the Director of the Office ofManagement and Budget (OMB) issued apolicy memorandum on the use of ESPCs,

which included guidance on the budgetarytreatment or scoring of projects. OMB di-rected that ESPC obligations, budget author-ity, and outlays be recognized on an annualbasis. OMB also requires that there besufficient discretionary resources to completethe first fiscal year’s contractual costs. Forsubsequent years, discretionary budgetauthority and outlays are recognized annuallyto the extent that contract payments aremade. OMB recognizes that energy costs arereduced to reflect the savings generated bythe ESPCs.

A major barrier to ESPC reauthorizationduring the 108th Congress was the change inthe Congressional Budget Office’s (CBO)scoring of the cost of authorizing legislationfor extending ESPCs. Previously, CBO didnot score agencies’ use of ESPC authority. In2003, CBO decided to score the permanentreauthorization of ESPCs at $3.015 billion.ESPC permanent reauthorization was part ofthe comprehensive energy bill H.R 6 – EnergyPolicy Act of 2004. CBO’s estimated costforced the Senate to drop ESPC permanentreauthorization from its energy bill. The $3.015billion CBO price tag also limited options foradding even temporary ESPC reauthorizationto other legislative vehicles.

CBO’s current scoring of ESPCs is an out-growth of scrutiny of all forms of more costlyFederal alternative financing mechanisms.CBO staff explained changes in scoring byreferring to its February 2003 report, “TheBudgetary Treatment of Leases and Public/Private Ventures.” Although the report makesno mention of ESPCs, CBO staff assert thatESPCs are similar to the authorities studiedand, like them, attempt to circumvent thebudget process.

In theory, CBO’s consistent application ofstrict and transparent rules to score the costof legislation helps Congress make decisions


on legislation’s full costs, how it fits into theoverall Federal budget plan, and determineswhether funding ceilings have been breached.Unfortunately for the ESPC program, distinc-tions between different types of new budgetauthority are not available to CBO for thepurposes of bill scoring. The rules only allowcategorizing an authorization as either discre-tionary or mandatory, and all construction (andother capital goods purchases such asvehicles, computers, etc.) is, by definition,mandatory. Therefore, according to the strictrules of bill scoring, CBO must classifyESPCs as mandatory spending and thuscategorizes this alternative financing toolalong with capital asset purchases. In addi-tion, CBO has no mechanism for scoringsubsequent savings generated from ESPCcontracts.

According to CBO rules, ESPCs are a form ofmandatory direct spending that should bereflected in the budget (as budget authority)when such contracts are entered into and anew government obligation is made. Foroutlays, CBO treats ESPCs similarly to lease-purchases, with outlays recorded whenservices or equipment are provided (in thecase of ESPCs, within two years of contractaward).

FEMAC believes that CBO’s score veilsthe true nature of ESPCs, where thegovernment pays nothing up front andgenerally all payments in the out years areobtained from guaranteed savings to anagency’s energy bill, which would absorbdiscretionary resources (such as fundsfrom utility accounts), and would havebeen spent, with or without the ESPCs.With proper implementation and enforcementof the guarantee, ESPCs paid off over term asoriginally scheduled will never need additionalappropriations. In fact, actual net cost sav-ings to the government may be larger than the

guarantees even suggest since ESCOs tendto guarantee less than 100 percent of thesavings they estimate and the service lifeequipment may exceed the contract term.

ESPCs do contain “termination for conve-nience” clauses like any other Federal con-tract. It is theoretically possible that anagency could terminate an ESPC, be unableto pay the settlement (sometimes called thecontingent liability) with existing funds, andrequire appropriations to do so. However, thiscircumstance has never occurred with anESPC to date and rarely occurs in any gov-ernment contract; therefore, ESPCs arestatistically unlikely to pay termination costs.In general, ESPCs will net to a zero cost tothe taxpayer, or more likely create significantnet cost savings.

CBO’s score for ESPCs, while technicallycorrect by CBO rules, represents a worst-case scenario that could only come true if allgovernment facilities using ESPCs were toclose the year after an ESPC was imple-mented.

EVOLUTION OF ESPCAUTHORITY

In 1986, the Consolidated Omnibus BudgetReconciliation Bill (COBRA) amendedNECPA to authorize “shared-energy-savings”(SES) contracts, a precursor to ESPCs.Under these contracts, the ESCO providesup-front funding for the installation of energyconservation measures (ECMs) and in return,shares in the cost savings the agency reapsfrom the ECMs. SES contracts were furtherdefined by EPACT in 1992 and the EnergyConservation Reauthorization Act of 1998,each of which amended sections 801-804 ofNECPA (42 U.S.C. 8287). EPACT renamedSES contracts as Energy Savings Perfor-mance Contracts.


The current Administration expressed strongsupport for reducing energy consumption inFederal facilities. E.O. 13123 encouragesagencies to “maximize their use of alternativefinancing contracting mechanisms, includingEnergy Savings Performance Contracts … toreduce energy use and cost in their facilitiesand operations.” The Administration endorsedimplementation of E.O. 13123 and in 2001,issued an additional order on energy effi-ciency, E.O. 13221 - Energy-Efficient StandbyPower Devices. This order directs Federalagencies to purchase commercially available,off-the-shelf products that use standby powerdevices or contain an internal standby powerfunction using no more than one watt while inthe standby power consuming mode. Duringthe recent debate over comprehensiveenergy legislation, the Administrationreiterated its support for the use ofESPCs to meet energy conservation goalsby recommending the immediate restora-tion of ESPC authority for all Federalagencies. The Administration’s position onESPCs was expressed by Secretary of

Energy Abraham in an April 8, 2004 letterto Congress and in the Statement ofAdministration Policy on the FY 2005Defense Authorization Act.

Despite strong support by the Administra-tion, the lapse in authority has lasted foralmost one year. Every day withoutreauthorization costs taxpayers money,puts Federally mandated energy goalsfurther out of reach, and raises the cost torevitalize the ESPC program when itreturns. With increasing competition forFederal resources to support nationalsecurity and other government priorities,decision makers will also need to accom-modate the increasing cost of energy toensure continued and efficient operationof Federal facilities.

OTHER ALTERNATIVEFINANCING MECHANISMS

Although the emphasis in this report is onESPCs, there are other types of alternativefinancing mechanisms, such as UESCs.EPACT authorized and encouraged agenciesto participate in energy efficiency programsand to accept financial incentives, goods, orservices offered by utilities. DOD authority(10 UESC 2865 and 2866) further authorizedDOD facilities to enter into procurements fromgas or electric utilities to design and imple-ment cost-effective demand-managementand conservation services. The use ofUESCs is addressed in the Federal Acquisi-tion Regulations (FAR) Part 41.

UESCs are a vehicle for developing, financing,and implementing comprehensive energyconservation projects for Federal facilities.Utilities provide up-front project funding andagencies pay for the services over time ontheir utility bills. Utilities may provide audits,feasibility studies, design, financing, construc-tion, and commissioning. UESCs can take

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TSESPC for a National Landmark

The Statue of Liberty National Monument site used an ESPC to reduce energy costs at Ellis and Liberty Islands. Because the Statue of Liberty is a national symbol and well-recognized landmark, the National Park Service decided not to make any modifications to the light projecting out from the statue. Instead, the contract focused on making improvements to other buildings at the site, including the installation of energy efficient lighting, variable-speed drives, and energy management control systems. The project resulted in an energy savings of four billion Btu per year. The Park Service uses this site to educate the public about its energy efficiency activities.


the form of a GSA Area-wide contract, acontract between GSA and a specific utility, ora site-specific (stand-alone) contract betweenthe agency and the utility, or a basic orderingagreement. UESCs are widely used byFederal agencies and are especially helpfulfor small Federal sites in remote locations.UESC authority has not lapsed and the pro-gram is proceeding.

While UESCs are a helpful tool, they do notreplace the need for ESPC authority. Bystatute, ESPCs can have delivery order termsof up to 25 years, allowing for larger, morecomprehensive projects, while UESCs arelimited to a 10-year term. UESCs do not haveto contain contractual performance guaran-tees and there are no umbrella-type UESCcontracts available for broad government useacross individual utility service territories.Also, UESCs are only available in areaswhere the local utility company offers UESCsor demand-side-management services;therefore, UESCs are not available for allFederal projects.

CONCLUSIONS ANDRECOMMENDATIONS

FEMAC reviewed the history and implementa-tion of the ESPC program and is troubled bythe Federal agencies’ lack of authority to usethis alternative financing tool to fund muchneeded efficient energy managementprojects. The committee is in unanimousagreement that without the immediate and

retroactive reauthorization of ESPCs forall Federal agencies, it is unlikely that theFederal Government will reach mandated2005 and 2010 energy reduction goals.We are encouraged by the Administration’ssupport for reauthorization as expressedearlier this year by Secretary SpencerAbraham and the White House’s Statement ofAdministration Policy. The Administration’ssupport should be enough to secure newauthority to continue this successful approachto financing Federal energy managementprojects and reducing the FederalGovernment’s energy use. However, FEMACbelieves greater, stronger support is neededto obtain permanent authorization, resolveretention of savings issues, and expandauthorities. FEMAC recommends that theAdministration pursue the following measuresto strengthen the ESPC program and assistall Federal agencies in their pursuit of efficientenergy management.

• Strongly support permanent reauthorizationof ESPC authority for all agencies.

• Expand ESPC authority to investments inwater conservation projects for all Federalagencies.

• Rescind the requirement for non-GSAcivilian agencies to return 50 percent ofretained guaranteed savings to the U.S.Treasury.

• Pilot test expansion of ESPC authority tonon-building applications.


ENERGY SAVINGS PERFORMANCE WORKING GROUP

David DykesSouthern Company

Shelley FidlerVan Ness Feldman

Brian HendersonNew York State Energy Research and Development Authority

Patrick HughesOak Ridge National Laboratory

Erbin KeithSempra Energy Solutions, LLC

Linda MesarosMesaros Associates, Inc.

Dr. Get MoyDepartment of Defense

Tatiana StrajnicDepartment of Energy

Mark WagnerJohnson Controls

Cynthia VallinaOffice of Management and Budget


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RECOMMENDATION

Members of the Federal Energy ManagementAdvisory Committee (FEMAC) recommendthe immediate and permanent reauthorizationof Energy Savings Performance Contracts(ESPCs) to implement energy and watersaving projects in Federal facilities.

In addition, FEMAC members strongly sup-port:

• Expanded authority for stand-alone waterconservation projects

• Elimination of the statutory requirement tosend 50 percent of the savings to theTreasury

• Pilot testing use of ESPCs for non-buildingapplications

• Further enhancements to improve ESPCprogram effectiveness

ISSUE

As a result of the October 1, 2003, sunset ofthe ESPC program, both public and privateinfrastructure for ESPC is in jeopardy. Recentestimates indicate that there are more than$300 million worth of projects stalled due tothe lapse in authority. Each day withoutESPC authority puts the Federally mandatedenergy goals further out of reach, in addition tolost energy savings.

BACKGROUND

ESPCs and Utility Energy Service Contracts(UESCs) are alternative financing tools thatFederal agencies use to reduce energy use,modernize aging equipment, reduce mainte-nance costs, and deploy renewable energy.ESPCs and UESCs make up more than halfof the Federal building energy efficiencyinvestment and are essential to thegovernment’s ability to achieve the 2005 and2010 goals.

BENEFITS

ESPCs and UESCs played a vital role inhelping the Federal Government meet orexceed energy efficiency goals between 1995and 2000. The Department of Defenseattributes more than 70 percent of its energysavings to the use of ESPCs and UESCs.

• ESPCs help agencies achieve healthier,safer, and more productive working condi-tions and make progress in meeting Fed-eral energy, water, and emissions-reduc-tion goals.

• ESPCs help the Federal governmentleverage private sector investment foruntapped life cycle cost savings.

•· ESPCs increase energy and water effi-ciency and reduce costs.

• ESPCs address energy security concerns.


• ESPCs help improve employee productivityand health.

• ESPCs help deploy renewables and inno-vative technologies.

It is the Federal Government’s commitment tothe economical use of public dollars, protec-tion of the environment, and energy security,making ESPC authority a critical componentto a balanced energy management strategyfor improved energy efficiency and conserva-tion at Federal facilities.

Volume 1: FEMAC Report on Energy Savings Performance Contracts · REPORT ON ENERGY SAVINGS...

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Transcript of Volume 1: FEMAC Report on Energy Savings Performance Contracts · REPORT ON ENERGY SAVINGS...