Energy Ideas

ENERGY IDEAS · SPRING 1997 / WINTER 1996 · VOL. 4, NUMBER 3

HOW TO GREEN
YOUR SCHOOL
WITHOUT GOING
IN THE RED

Below is an excerpt from the U.S.Department of Energy's 1996 Rebuild America's Community Partnership Handbook on financing suggestions.

Even at the early stages of implementing an energy management program, a school should evaluate and address the cost and financing issues, performing a cost/benefit analysis on each potential energy-saving measure to identify those with the best investment potential and most attractive financing options.

Following is an introduction to cost/benefit analysis methods and several financial strategies schools can follow to secure funding for even the most capital-intensive energy conservation or renewable energy projects.


COST / BENEFIT ANALYSIS

A cost/benefit analysis can help determine when, and if, an improvement will pay for itself through energy savings and how to prioritize among project options. Two methods exist to calculate costs and benefits: a simple payback analysis or a total life-cycle cost analysis.

Payback analysis is a simple and streamlined type of cost/benefit analysis. It yields the number of years required for the improvement to pay for itself. In this method, the total first cost of the improvement is divided by the first-year energy cost savings produced by the improvement. While this analysis is an easy way to examine the overall costs and savings potentials for a variety of project options, it does not consider more unpredictable factors, such as operation and maintenance expenses, that can have a significant impact on cost savings. A life-cycle cost (LCC) analysis will evaluate these other factors.


LIFE-CYCLE COST ANALYSIS

Life-cycle costing is a comprehensive evaluation of the total cost of a system, building, facility or other capital equipment over its anticipated useful life. Factors included are initial capital cost, operating and maintenance costs, finance charges, the expected useful life of equipment and its future salvage value.

The first step in performing a LCC analysis is to establish the general study parameters for the project, including the base date (the date to which all future costs are discounted), the service date (the date when the new system will be put into service), the study period (the life of the project or the number of years over which the investor has a financial interest in the project) and the discount rate. When two or more design alternatives are compared (including an existing design), these variables must be the same for each for the comparison to be valid.


SELECTING THE BEST ALTERNATIVE

Generally, project alternatives should be screened initally using a simple payback analysis. A more detailed and expensive LCC analysis should be reserved for large capital-intensive projects. Both analyses enable you to set priorities based on measures that offer the greatest return on investment. In addition, these analyses can help facility managers choose appropriate financing options, as recommended by the U.S. Department of Energy's Rebuild America program:

  • Energy-efficiency measures with a short payback period, one to two years, should be considered for implementation using operating reserves or other readily available internal funds.

  • Energy-efficiency measures with a payback period from three to five years may be considered for funding from available internal capital investment monies, or may be attractive candidates for third-party financing through energy service companies or equipment leasing arrangements.

  • Frequently, short payback measures can be combined with longer payback measures (10 years or more) in order to increase the number of cost-effective measures that can be included in a project. Projects that combine short- and long-term paybacks are recommended to avoid "cream-skimming" (implementing only those measures that are highly cost-effective and have quick paybacks) at the expense of other worthwhile measures. A selected group of options with a combination of payback periods are usually financed through third party sources such as banks, state energy offices or financial institutions.


    SOCIETAL BENEFITS

    It is important for schools to consider the ancillary benefits of improved energy management. Some utilities assign appropriate monetary values to societal benefits, but many do not. Neither of the above cost/benefit analyses typically includes the external societal benefits from improved efficiency (e.g. improved indoor air quality and increased occupancy comfort, productivity and well-being.)


    FINANCING MEASURES

    Numerous sources, including the U.S.Department of Energy's 1996 Rebuild America's Community Partnership Handbook, agree there are at least five general mechanisms for financing energy conservation and renewable energy projects.


    ROLLING FINANCING

    This financing option is simple. First, schools invest in projects that have a short payback period - such as hiring an energy conservation manager to change behaviors and implement other low-tech solutions that cut energy use immediately. Then, a portion or all of the money saved through avoided energy costs is used for other, more capital-intensive projects. Schools that choose rolling financing should put savings into a separate fund so they do not get lost in general revenues.


    UTILITY INCENTIVES: BEYOND REBATES

    Until recently, utility-sponsored energy conservation - or demand-side management (DSM) - programs have been a great boon for schools. However, the impending restructuring of the utility industry threatens to curtail much of this efficiency funding as utilities seek to cut short-term costs in order to better position themselves in a more competitive marketplace.

    Nonetheless, many utilities continue to offer schools technical assistance, loans, shared-savings contracts, equipment leases and other financial services. Utilities are also sponsoring many solar projects. Some are even getting involved in designing and implementing energy-efficiency curricula for schools in an effort to foster a conservation ethic among children and their parents.

    For More Information: Contact your local electric, gas and water utility for information on DSM programs.


    ENERGY SERVICE COMPANY CONTRACTS

    In this era of privatization and declining budgets, many schools are opting to team up with energy service companies (ESCOs) which typically offer a package that includes the financing, installation and maintenance of energy-saving capital improvements. This is often in the form of a performance contract, in which the company agrees to perform a variety of tasks to reduce energy expenses and share the savings with the school.

    There are certain precautions, however, schools should take in dealing with ESCOs, and we have detailed many of the important ones on p. 31. DOE has a list of qualified ESCOs on the Web at http://www.eren.doe.gov/femp/financng.html.

    For More Information:Tanya Sadler, Federal Energy Management Program, U.S. DOE, EE-90, Washington, DC 20585-0121; (202) 586-7755; Fax: (202) 586-3000.

    EQUIPMENT LEASE-PURCHASE FINANCING

    A special lease-purchase financing arrangement for public schools is available from certain financing companies, banks and lease brokers. In lease-purchase financing agreements, schools lease energy-efficient equipment directly from financing companies and are then responsible for installing and maintaining the equipment, unless they have entered into an arrangement with an ESCO to provide those services.

    In some lease-purchase arrangements, the interest earned on the lease is exempt from federal income tax (Section 265(b)(3) of the Internal Revenue Code). Thus, the school can be charged a lower interest rate than would be typical in a taxable transaction.

    For More Information: David Terry, National Association of State Energy Officials, 1615 M St., NW, Washington, DC 20036; (202) 546-2200; Fax: (202) 546-1799.


    GOVERNMENT GRANTS AND LOANS

    Another financing option for energy-efficiency projects in schools is grants and loans. Some state energy offices are financing energy conservation programs using oil overcharge monies given to the states from federal court settlements of alleged violations of price controls of oil and petroleum products between 1973 and 1981. Most of these Petroleum Violation Escrows (PVEs) are running low, but some states still receive large allotments. Other state energy offices offer revolving loan funds which schools replenish as they accrue savings.

    For More Information: Call your state energy office to find out whether it offers any loans or grants to schools for efficiency measures.


    CASE STUDY:
    TEXAS LOANSTAR PROGRAM

    Texas has received the third largest oil overcharge allotment nationally. The Texas State Energy Conservation Office uses these funds for a variety of energy conservation programs in public agencies. Among them is the LoanSTAR Program, which finances energy-efficient retrofits at a current interest rate of 4.04 percent APR. Loan repayments are scheduled to coincide with the annual energy cost savings realized from the projects. The estimated annual savings from the loan measures taken are $10.7 million.

    For More Information: Mel Roberts, Texas LoanSTAR Program, State Energy Conservation Office, PO Box 13047, Austin, TX 78711-3047; (512) 463-1757; Fax: (512) 463-7806; Web: http://www.gsc.state.tx.us/energy/energy.html.


    CASE STUDY:
    IOWA ENERGY BANK

    The Iowa Department of Natural Resources administers an Energy Bank Program which provides financial and technical support for school and local government facility improvements. The Energy Bank has a complete financial management team in place while an investment bank provides loans for improvements with a payback of six years or less. Loans for energy upgrades are repaid with savings from utility bills.

    An example of a project financed through the program was a lighting retrofit, the installation of insulation and a conversion from electric heat to natural gas at the Dexfield Community School District. The project cost $140,000 and has projected annual savings of $25,000 - allowing for a five-and-a-half-year payback.

    For More Information: Mary Leite, Iowa Department of Natural Resources, Energy Bank Program, Wallace State Office Building, Des Moines, IA 50319; (515) 281-8416; Fax: (515) 281-6794.


    CASE STUDY:
    NEW YORK ENERGY SERVICES PROGRAM

    The Energy Services Program of the New York State Energy and Research Development Authority (NYSERDA) helps schools implement cost-effective energy-saving measures by offering technical assistance, financial packaging (including performance contract drafting), indoor air quality analysis, alternative-fuel vehicle fleet assistance and energy-efficiency workshops.

    For More Information: Craig E. Kneeland, Associate Project Manager, Energy Services, NYSERDA, Corporate Plaza West, 286 Washington Ave., Extension, Albany, NY 12203-6399; (518) 862-1090, ext. 3311; Fax: (518) 862-1091; E-mail: cek@nyserda.org; Web: http://www.nyserda.org/.


    CASE STUDY:
    CALIFORNIA'S BRIGHT SCHOOLS
    PARTNERSHIP PROGRAM

    The California Energy Commission's Bright Schools Partnership Program loans money to small-to-mid-sized school districts to help them improve their energy efficiency. The Partnership Program recently received a Certificate of Recognition from the U.S. DOE "for its outstanding contributions in promoting an environmentally sustainable future." In 1996, the Commission loaned over $1.26 million to school districts; as a result, California schools have saved over $227,000 a year on their energy bills.

    Stephen Rhoads, Executive Director of the Energy Commission, says the Partnership Program helps "taxpayers save money and schools reduce waste, freeing up much needed funds for other, more pressing needs." Further, "While reducing energy waste, the program contributes to California's economic growth and improving environmental quality. As many as 100 new jobs can be attributed to Bright Schools energy-efficiency projects."

    For More Information: Claudia Chandler, Public Communications Office, California Energy Commission, 1516 Ninth St., Sacramento, CA 95814; (916) 654-4989; Fax: (916) 654-4420; Web: http://www.energy.ca.gov/.



    The formula for calculating the present LCC is:

    Life-Cycle Cost = Initital Investment + Operation & Maintenance Costs + Energy Costs - Salvage Value (or + Disposal Costs). For more on performing a LCC analysis, see "Life-Cycle Costing," Energy Ideas, Vol. 3, No. 4, Winter 1994; Web: http://www.essential.org/orgs/GPP/GPP.html.


    GUIDELINES
    FOR A SUCCESSFUL
    ESCO PROJECT

    1. Don't just look for the low bidder. Select an energy service company (ESCO) with a good track record who can provide other necessary services, such as project design, installation and maintenance. Get references.

    2. Negotiate a contract that reasonably limits ESCO profit-making and establishes a win-win arrangement. Carefully weigh the pros and cons of shared savings versus fees for services and other contractual arrangements.

    3. Require the ESCO to take a "comprehensive approach" to energy conservation -- bundling measures with a rapid payback with those with a longer payback time -- rather than a "cream-skimming approach" (the practice of doing only easy, quick payback measures).

    4. Make sure the agreement does not allow the ESCO to sacrifice quality for energy savings.

    5. Ask your ESCO to incorporate extended product warranties and personnel training into your bid specifications.

    6. Once a contract is signed, organize an in-house project team to work with the ESCO to choose appropriate energy measures, prepare bid specs, prequalify prospective bidders, etc.

    7. Work with the ESCO to test new technologies in order to determine their performance and applicability

    8. Design the project and coordinate construction in a way that minimizes disruption of the school's functions.

    9. Document both energy and non-energy benefits of your project and publicize its success to the community.

    Reprinted from "Recharging Campus Energy Conservation: ESCOs and Demand Side Management," Facilities Manager, Winter 1994, Walter Simpson.


    FEDS STANDARDIZE
    PAYBACK EQUATIONS

    Schools can take advantage of recently issued federal measurement and verification guidelines that will standardize procedures for quantifying energy savings from energy-efficiency projects. Called the Federal Measurement and Verification Guideline and the North American Energy Measurement and Verification Protocol, these guidelines reduce risk and standardize paperwork. They also enable loans to be bundled together and sold on a secondary market, like mortgages.

    For More Information: Brad Gustafson, Federal Energy Management Program, U.S. DOE, EE-90, Washington DC 20585-0121; (202) 586-2204; E-mail: Brad.Gustafson@hq.doe.gov. To download the protocol: http://www.eren.doe.gov/femp/.