Obama issued a presidential memorandum in December 2011 on the Better Buildings Initiative.

Obama issued a presidential memorandum in December 2011 on the Better Buildings Initiative. Carolyn Kaster/AP

Analysis: Time for a Power Boost

Energy performance contracts can rack up savings without upfront costs.

More than half a year has passed since President Obama announced the Better Buildings Initiative, a $4 billion public-private commitment to energy efficiency at government and commercial facilities, but federal agencies have been slow to join the effort.

Obama issued a presidential memorandum in December 2011, calling on agencies to invest a total of $2 billion in upgrades to their buildings under an arrangement that uses long-term energy savings to cover the upfront costs of improvements.

The directive encourages the use of energy savings performance contracts to boost efficiency and create jobs through these projects. Improvements are paid for over time with the money saved on utility bills, and contractors are required to guarantee the performance of their energy upgrades. If the upgrades underperform, then contractors must pay the difference between actual and promised savings.

These investments, which could save billions of dollars, have the potential to promote the nation’s energy independence, deliver substantial environmental payoffs and create jobs in a challenging economy.

In 2011, commercial and institutional buildings consumed roughly 20 percent of all the energy used in America. Under the Better Buildings Initiative, CEOs, university presidents, labor leaders and others will invest nearly $2 billion -- matching the government’s commitment -- in private funds nationwide in energy-efficiency projects across 1.6 billion square feet of office, industrial, municipal, hospital, university, community college and school buildings. These changes are projected to improve efficiency in these structures by at least 20 percent by 2020.

Various governmentwide contracting vehicles are available to federal agencies, including the Defense Department’s and the Energy Department’s energy savings performance contracts. And a stable of preapproved energy vendors stands ready to do the work. Yet some government facility managers are hesitant to participate. In all likelihood, their caution stems from misperceptions about the nature of performance contracting.

Energy services companies do the legwork and manage the entire process, from preliminary surveys, engineering and construction, financing, long-term operations and maintenance, and finally, verification that ensures project savings and operational performance goals are met.

Here are a few facts debunking the common performance contracting myths.

Myth #1: Performance contracting involves upfront capital investments from agencies.

False: Agencies generally pay no initial costs associated with these projects, unless they hire a vendor to conduct an energy audit and then choose not to proceed with the program. These costs are financed by a third party such as a bank or investment firm and paid for from the savings the upgrades provide.

Myth #2: Facility managers must wade through lots of complicated contract documents to secure financing for projects.

False: Energy services companies and other approved providers manage the financing process from start to finish. They do all the heavy lifting, such as identifying potential lenders, managing a competitive bid to select the lender and executing the financial agreement.

Since savings are guaranteed by the contractor, performance contracting in essence gives government access to capital. And there is no better time than now with interest rates near historic lows.

Myth #3: Performance contracts are a risky investment.

False: The contractor is responsible for conducting the studies, measurements and analyses to determine which improvements make the most sense. The company assumes the design and construction risks, and takes on responsibility for delivering a level of efficiency that will generate enough savings to pay for the upgrades. Providers have a powerful incentive to achieve their goals because they must cover any shortfall.

Once improvements are made, the contractor can provide ongoing, long-term operations, maintenance, and measurement and verification services to ensure that anticipated savings are realized while adhering to an agency’s operating guidelines and requirements.

Myth #4: Facility managers in buildings that have had prior energy efficiency upgrades do not need to make additional improvements or take advantage of federal funds available for these projects.

False: Buildings that received upgrades a number of years ago could benefit from new technologies and should undergo an energy audit to determine whether additional improvements would reap more savings.

Facility managers should learn about the value and benefits of energy savings performance contracts. By understanding these contracts, how they work and how they can translate into bottom-line savings, more agencies likely would participate in the president’s initiative.

The payoffs can’t be ignored. Not only would participation reduce energy use and costs, it would go a long way toward preserving the environment and promoting energy independence and national security.

Peter Kearney is director of finance at New York-based energy services firm ConEdison Solutions.

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