Sustainability Through Performance Contracting

Eliminate existing barriers to on-site renewable energy systems with this third-party financing mechanism.

By Mark Reinbold
From the December 2017 Issue

There are many technologies, solutions, and infrastructure improvements that can help facility executives meet, and even exceed, organizational goals to reduce energy use, improve operational efficiency, and create an overall better environment. However, determining how to get started—secure funding, align stakeholders, and prioritize the list of improvements and deferred maintenance—is a daunting challenge. Innovative approaches to funding and contracting are available to help make improved energy and operational efficiency a reality. Through performance contracts, companies can help organizations invest in the technology and infrastructure upgrades needed, while transferring the burden of both finance and risk away from the customer.

performance contracting
Johnson Controls will continue a 20-year relationship with Colorado State University-Pueblo (CSU-Pueblo) through a recent contract that enhances sustainability efforts through an improved infrastructure and a reduction in energy demands across the 278-acre campus, without capital expenditures. (Photo: Johnson Controls)

Performance contracting is a model that allows organizations to reach their goals of energy efficiency through facility updates while staying within their financial means. Through this model, energy and operational savings over a fixed period are used to fund infrastructure and technology improvements—such as renewable energy installations, lighting retrofits, and water efficiency upgrades—through a financial arrangement provided by third-party financing. The improvements are designed so that the annual savings are greater than or equal to the required payments over the term of the contract, leaving the facility with a net neutral budget. There are many benefits a performance contract can offer facility management, including:

  • Costs offset by savings. Facility and infrastructure retrofit costs are offset by utility and operational savings.
  • Reduced risk. Under a performance contract, facility improvements are paid for up front by a third party and guaranteed to generate enough savings to pay for themselves over time. If the savings fall short, the third party typically assumes financial liability. Additionally, through a Design-Build-Finance-Maintain (DBFM) model, the private sector is responsible for managing risk and is often more equipped than the owner to do so.
  • Audits. As part of a performance contract, a full facility audit is usually executed, helping to identify opportunities to improve the efficiency of building envelope, lighting, HVAC, water, and other systems.
  • Everything is addressed at the beginning. Performance contracting specifies the scope of improvements, associated costs, estimated energy and other savings, grants available for project funding, and estimated resulting cost savings.

Another benefit is the “domino effect”. As more facilities announce renewable energy and other conservation efforts, successes may encourage others to pursue improvements. Second is job creation since efficiency projects typically are labor-intensive and require local skilled workers.

Colorado State University-Pueblo (CSU-Pueblo) is an example of a university using the performance contracting method to accomplish its goals of sustainability and infrastructure modernization. Because of the limited amount of state funding it receives, CSU-Pueblo recently engaged in a performance contract to enhance sustainability efforts across its 278-acre campus without capital expenditures. The agreement made it possible for the university to reduce energy consumption and invest in necessary infrastructure while not diverting financial resources away from other university needs.

Major elements included in the project centered around HVAC improvements, peak-shaving generators with distributed energy storage (battery storage), lighting and water savings improvements, and utility rate change and reduction. The contract estimates the annual utility and operational savings from these upgrades will be approximately $650,000 and are guaranteed to cover the costs of the work. The improvements being made to 20 buildings across campus (a total of 1,099,594 square feet) are expected to be complete in February 2018.

One of the innovative solutions implemented by CSU-Pueblo was the design of a distributed energy storage system that works in parallel with two new natural gas peak-shaving generators. This solution helps shed campus peak demand throughout the year. The generators will include noise mitigation strategies—especially helpful for learning environments, and the system can be isolated from an existing solar photovoltaic field, owned by a third-party via a public-private partnership. Johnson Controls, administering the performance contract, will work with the university and the electrical provider to integrate three separately metered residence halls into the campus primary electrical meter, helping to reduce peak demand and leverage a lower electrical rate tariff.

Overall, a decrease in utility consumption is anticipated, including a 21.8% decrease in electrical consumption, 27.2% for electrical demand, 5.6% for natural gas, and 5.5% for water.

Meanwhile, the recent Johnson Controls 2017 Energy Efficiency Indicator (EEI) survey indicated that 70% of organizations surveyed are paying more attention to energy efficiency than they were last year, and 58% are expecting to increase investments in 2018. When asked about planned investments in 2018, on-site renewable energy took the lead with 57% of organizations planning to invest. Energy storage wasn’t far behind, with nearly half of organizations planning to make investments in the coming year. Increased investment in both of these areas may be driven by the growing interest in net zero energy buildings and facility resilience. The majority of organizations say they are planning to achieve net zero in the next 10 years. This, coupled with their plans to enable facilities to operate off the grid and maintain critical operations during extended power outages, is shaping the future of infrastructure investments.

Schools and universities aren’t the only organizations that can reap the benefits of performance contracting and the technology and infrastructure updates that are possible through this method. Hospitals, commercial buildings and even cities can work towards reaching their sustainability goals by engaging the right partners and entering into a performance contract that mitigates risk. Facility executives are sure to have questions before deciding if a performance contract is right for them, but once they see how obtainable their goals are, the only question left should be, “why not?”

performance contractingAs vice president and general manager of performance infrastructure at Johnson Controls, Reinbold leads the contracting, connected lighting Solutions, and public-private partnerships (P3) businesses in North America. He holds a MBA in Management, Information Technology and a Bachelor’s Degree in Management, Marketing from Maryville University of Saint Louis.

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  1. Good article. The only thing I might change is “Performance contracting is a model that allows organizations to reach their goals of energy efficiency through facility updates while staying within their financial means”, to: Performance contracting is a model that allows organizations to reach their facility upgrade goals by using energy efficiency savings to stay within their financial means.

    The market benefit to energy performance contracting has been the intersection of societal sustainability concerns and the monetization of energy savings cash flows. Energy performance contracting is a financial vehicle funding a specific infrastructure contracting process that also achieves societal benefits. An energy trifecta, if you will.

    And, as with so many Good Things, they can at times appear to be “Too Good to be True.” A Third-Party consultant, representing the end-user but also intimately familiar with the performance contracting model, can be helpful guiding the process to a mutually beneficial end game. On the customer side the consultant can provide not only process knowledge, but also political cover with an executive team, governing board, and community. On the contractor side, the consultant can help overcome the analysis inertia that so often stalls these projects.

    When well-designed and balanced, the energy performance contracting model can be a Very Good Thing. Thanks again for the article.

  2. Excellent article. So many risk management professionals could become company heros for making this change. Thank you, Mr. Reinbold, for the suggestion!

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