When it comes to implementing leading-edge energy efficiency programs, certain US states and cities are known as innovators. These sustainability-savvy hot beds are prominent on the West Coast and in the Northeast, but a new trend is emerging in an area of the county where progress in energy efficiency is often unexpected—the southern US.
Southern states have been ranked historically low by key industry watchdog groups in terms of energy efficiency, compared to their counterparts. According to the American Council for an Energy-Efficient Economy’s 2014 State Energy Efficiency Scorecard, nearly all southern states stretching from the eastern seaboard to Texas ranked in the bottom half of US, with many falling somewhere in the 40s or high 30s range.
So why is an area of the country with some of the lowest energy efficiency rankings suddenly proactively addressing energy efficiency challenges? The answer is twofold: Increased sustainability pressures coupled with the daunting reality of maintaining aging infrastructure with little-to-no budget. But, more importantly, how are government entities with limited operating budgets and a long list of priorities able to implement new projects to improve their facilities? An innovative financing model is helping Southern communities complete energy savings projects without the upfront capital costs and special appropriations that oftentimes prevent critical infrastructure renovations from getting off the ground—and it’s making a significant impact on the region, both from a sustainability and economic development perspective.
Enter the ESPC
The key mechanism driving the increase in energy efficiency projects throughout the South is the energy savings performance contract (ESPC). These contracts allow government entities including federal agencies, states, cities, and K–12 and higher education institutions to pay for capital improvements over time using guaranteed savings from the project without increasing local taxes or their debt load.
Under an ESPC, no upfront capital is needed, as the energy services company (ESCO) provides the upfront funding by securing third-party financing. Under this scenario, project costs are offset by the energy savings, resulting in a budget-neutral approach. ESPCs afford communities the access to infrastructure and sustainability programs, which otherwise might remain unfunded or not initiated. In essence, the beneficiary simply reallocates money it would have spent on energy costs over the life of the contract to capital improvements. If the efficiency solutions do not generate enough energy savings to cover the project’s costs, the ESCO is required to cover the difference. This creates significant motivation for both the beneficiary, as well as the ESCO, to ensure that the energy-saving technologies implemented under the contract reach (or exceed) their expected payout.
According to Navigant Research, the US energy service company market for energy performance contracting and energy efficiency retrofits will grow to $8.3 billion by 2020 from $4.9 billion in 2013, with a compound annual growth rate of 7.7%. This is a strong indicator of the increasing popularity of the ESPC financing model for facility modernization and upgrades.
ESPCs can be used to fund energy efficiency retrofits including lighting upgrades, HVAC equipment, building automation systems, water conservation, electrical upgrades, metering, air handling units, chillers, boilers, and more—oftentimes at no cost to the state, city, or school.
The Results Speak for Themselves
Over time, communities can save millions of dollars in energy costs while reducing their carbon footprint and driving significant economic development results. For example, just 24 energy projects in five southern states will have a total economic impact of more than $600 million over the next 20 years, including the creation of 2,125 new jobs, $300 million in business sales and nearly $12 million in additional state and local taxes. These projects also help protect our environment. The impact would be the same as reducing carbon output by nearly 1.6 million tons, taking more than 300,000 cars off the road or planting nearly 1.2 million acres of trees. Communities are finding that improvements around sustainability, technology and local services also help to increase tourism and interest from corporations to set up local operations.
ESPCs Gain Ground in Southern States
The current political, social, and economic environment in the South is positioning these states to take full advantage of ESPCs and other energy-related funding streams. A number of states have passed legislation that enables more opportunities for energy efficiency projects on a state and local level. For example, Mississippi introduced new rules in 2013 requiring utilities to implement quick-start efficiency programs and other efficiency-minded state policies. The North Carolina Department of Environment and Natural Resources recently secured a three-year US Department of Energy grant that will facilitate performance contracts for small public buildings and establish best practices for energy efficiency.
In addition, President Obama is pushing ESPCs on a national level by issuing a challenge for federal agencies to enter into $4 billion in ESPCs by the end of 2016, citing the advantages of funding projects without using appropriated money in times of limited budgets. This presents further opportunities for federal facilities to take advantage of ESPC funding to meet their energy and budgetary goals, as well as tackle backlogs of maintenance issues.
While achieving efficiency goals is a key benefit for municipalities and schools, many remain keenly focused on the financial opportunities that ESPCs provide to develop strategic infrastructure management plans. With interest rates at record lows throughout the nation and a continuance of strained budgets as the economy rebounds, many local governments and school districts are leveraging their energy savings to reinvest in community improvements.
Beyond Energy Efficiency: Driving Economic Development and Community Improvements
Navigant Research has also found that communities are increasingly interested in using energy performance contracts to finance other high-priority projects. In many cases, ESPC projects extend beyond the traditional energy efficiency scope to also encompass information technology, security and building envelope improvements. A school district or local government may choose to install Voice over IP (VoIP) technology, which provides a number of benefits compared to traditional phone systems, including cost savings, service mobility, and integration and collaboration with other applications. These types of projects contribute to overall improved operations for the municipality or school district with long-lasting positive impacts.
Another benefit to these partnerships is that they enable communities to achieve their unique visions for community development. Energy savings can be reinvested in things like classroom improvements, new technology for emergency services or enhanced stadium lighting. For many communities, it helps them deliver valued services needed to support growing populations or to attract new citizens and businesses. Savvy communities are using these partnerships to enable their broader mission, connecting sustainability efforts with economic development. Energy partnerships also help promote public awareness of a community’s fiscal responsibility, environmental initiative, and overall service to the community. Leaders are taking note of the powerful results from these partnerships . . . results that generate positive news and strong public image.
Thinking Outside the Box: Southern States As Sustainability Role Models
ESPCs are changing the way large and small communities across the nation are tackling the challenges of maintaining aging infrastructure, improving their efficiency and sustainability performance and ensuring safe, comfortable environments for community members, students, and employees.
As more communities throughout the southern US start to think about energy efficiency programs, they should look at the work being done by their regional neighbors as examples of innovative and responsible ways to fund long-term infrastructure maintenance by leveraging energy savings as a strategic resource. This ability to think outside the box will allow additional Southern communities to make lasting improvements that will benefit their citizens for generations to come.
