Monday, January 16, 2012

Financing School Energy Infrastructure Improvements with the Energy Savings Improvement Program (ESIP)

With rising energy costs straining limited educational resources, a number of New Jersey school districts are implementing energy efficiency measures to stretch their tax dollars. These districts are, and will become, models for the many other districts throughout the state, placing pressure on school board administrators to follow suit and make energy infrastructure improvements with an ultimate goal of saving money. Finding the funds among escalating operating expenses and tight budget caps has become a significant challenge. Funding is often unavailable to front the capital costs of improvement projects, and in these tough economic times, bond referendums may be unattractive. In 2009 the state legislature introduced a new solution to this old problem with the Energy Savings Improvement Program (ESIP). The ESIP law provides districts and other government agencies in New Jersey with a flexible tool to improve and reduce energy usage with minimal expenditure of new financial resources.

The ESIP solution
Fifteen years in the making, the Energy Savings Improvement Program is based on similar programs in other states and allows government entities to contract with Energy Services Companies (ESCOs) in lease-purchase agreements for energy infrastructure improvement projects. Before passage of the ESIP legislation, government agencies were prohibited from making contractual arrangements for energy projects if the contract had a term of longer than five years. Since many of the energy projects under consideration required more than five years to recover their investment, traditional ESCO financing offered for years by reputable companies like Honeywell, Johnson Controls, Siemens, Noresco, Ameresco, Constellation and others, was generally unavailable to them. Compounding this problem for school districts was the significant failure rate of bond referendums. These hurdles prevented many districts from moving forward on projects resulting in continued use of old infrastructure, excessive maintenance requirements and high energy costs.

The ESIP provides a clearer, more defined process to finance these projects. Now, through an ESIP, initial project funding comes from the energy companies using Energy Savings Obligations (ESOs), and the debt is repaid through the savings from the reduced energy operations over a period of time. Replacing the rigid contractual time limits of the previous ESCO financing program, the ESIP payback period now allows fifteen years on most improvements, and twenty on those for combined heat and power. And with no need for a bond referendum specific to improvements under this program, districts now have a much more viable way to finally address the energy needs of their schools.

Another benefit of the ESIP legislation is the safeguards, which were written into it to protect the government entities making the improvements. The Department of Community Affairs governs the utilization of an ESIP using Board of Public Utilities guidelines. Additionally, the entire ESIP process can be streamlined with the various elements of design, installation, finance, and maintenance combined into a comprehensive agreement with the ESCO. However, the use of third-party consultants for different components of the process provides a system of checks and balances that protects the interests of the district.

Frankford Township School District implemented ESIP 

To cite an example, in 2010 the Frankford Township School District hired Honeywell to develop an Energy Savings Plan. The necessary, first step audit, was performed by Steven Winter Associates, Inc., and another firm, Birdsall Services Group, performed the Third Party Verification of the energy savings calculations as indicated by both Honeywell’s Energy Savings Plan and the original Steven Winters energy audit. Birdsall’s verification was performed subject to specific New Jersey Board of Public Utility protocols.

Developing and Implementing an ESIP
There are three options to developing and implementing an ESIP: the Traditional Model, the Do-it-Yourself Model, and the Hybrid Model. The Traditional Model uses an ESCO to manage the various functions that make up an ESIP, while the Do-it-Yourself Model is usually utilized when a school district already has the funds to finance the improvements either from their own capital budgets, an Improvement Authority or some other source. In the Do-it-Yourself model, many of the responsibilities an ESCO would normally perform are given to the school district’s own staff, an engineer, or other specialist. As the name suggests, the Hybrid Model can be a combination of the two, an ESCO being hired for some purposes, while other components may be left to the discretion of the district on how to manage them.

The Energy Audit The ESIP process begins with an Energy Audit, which can be conducted through the BPU's Local Energy Audit Program (which is 100% reimbursed by the Office of Clean Energy) or by a contracted firm qualified to perform the audit. The use of an independent third party to conduct the audit is essential in order to provide the district with an unbiased assessment of the range of potential Energy Conservation Measures. This also ensures that vendors, who will be subsequently competing to develop the Energy Savings Plan, have an independent document on which to base their proposals. When completed, the Energy Audit will provide the district with a comprehensive analysis of current energy usage of the facilities in their current state and will identify the possible energy improvements that can be implemented to
produce energy savings and maximize energy efficiencies.

The Energy Savings Plan
Once the audit is completed, an Energy Savings Plan (ESP) is developed. The ESP is a critical document in the ESIP process as it describes in detail the Energy Conservation Measures that will be implemented and the cost calculations that support how the plan will pay for itself through the energy cost savings. The ESP must contain a number of elements, including the results of the Energy Audit, a description of the Energy Conservation Measures that will comprise the program, an estimate of Green House Gas emission reductions resulting from the energy savings, identification of all design and compliance issues, an assessment of risks involved in the successful implementation of the plan, schedules showing calculation of all costs of implementing the proposed measures, and the projected energy savings. The ESP will also indicate maintenance requirements for the measures that must be taken which are necessary to ensure continued energy savings. Moreover, if the ESP is developed by an ESCO, they must provide an option for an Energy Savings Guarantee, with the cost, or premium, for this guarantee.

Implementing the ESIP After third party verification of the ESP, financing is secured in order to implement the plan and begin improvements. Many energy infrastructure improvements are eligible under the ESIP, such as boiler and chiller improvements and retrofits, Building Automation Systems (BAS) upgrades and installations, HVAC improvements, lighting improvements, renewable energy systems, energy related process improvements, recycling programs, and any number of other improvements that provide energy cost reduction and conservation. Finally, post-installation Measurement and Verification (M&V) of the improvements must be conducted by a firm independent of the one that prepared the ESP.

As a financing mechanism for energy improvement projects, the Energy Savings Improvement Program is beneficial to school districts that want to reduce the size of a public referendum for overall school improvements, and cannot otherwise afford to begin making energy infrastructure improvements. Since its implementation, the Energy Savings Improvement Program has encouraged many districts to begin moving forward with the measures that can make their schools more efficient, as defined in audits already performed through the BPU’s Local Government Energy Audit Program.

ESIP legislation undoubtedly benefits the school district in terms of energy conservation and economical investment in improving the performance of its buildings. Even after meeting the debt service on the financing, there are net savings to the district which can be turned into additional resources for student education or taxpayer savings.

By Fred Fastiggi
Senior Vice President - Energy Services

Fred has over two decades of experience integrating the specialized and interdependent areas of auditing energy usage, quantifying project economics, design and engineering of energy solutions, project development, securing project finance, construction management and maintenance of energy infrastructure.  Fred has extensive experience in the development of Combined Heat and Power and District Energy projects, and his consulting experience inlcudes extensive work for both Fortune 100 industrials and several public utilities.

1 comment:

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