Saving Energy and Tax Dollars: A New Report from the CBO Wrestles with Accounting for Both

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At FDA’s White Oak campus in suburban Maryland, Honeywell has been awarded Energy Savings Performance Contracts totaling $195 million. Improvements designed and implemented by Honeywell over the past several years include heating, ventilation and lighting upgrades and a more efficient central utility plant to power the 1.2 million-square-foot expansion of the Center for Biologics Evaluation and Research.

In 2012, Reps. Peter Welch (D-VT) and Cory Gardner (R-CO), bridging the partisan divide in Congress, created the House Energy Savings Performance Caucus, a group within the House that advocates for federal service contracts that emphasize energy savings.

Gardner moved to the Senate in January, his place at the head of the HESPC taken by Adam Kinziger (R-IL). Noting that the federal government is the single largest user of energy in the country, Kinziger immediately announced redoubled efforts to push an ESPC program, even as President Obama has outlined a goal of $4 billion in energy-cost savings by the end of 2016, when he leaves office.

Under the terms of the present Energy Savings Performance Contract (ESPC) system, to quote the Department of Energy (DOE), “a private party agrees to pay to design, acquire, install, and, in some cases, operate and maintain energy-conservation equipment—such as new windows, lighting, or heating, ventilation, and air conditioning (HVAC) systems—in a federal facility. In return, the federal agency agrees to pay for those services and equipment over time, as well as for the vendor’s financing costs, on the basis of anticipated and realized reductions in the agency’s energy costs.”

Put another way, an energy service company (ESCO) would pay for a new energy-saving installation—say, retrofitting an existing office complex with a geothermal heating and cooling system—and then would be repaid with most of the energy savings thus realized. The DOE assures vendors that “if the installed equipment is effective and is used at anticipated levels, and if energy prices remain close to projections, the value of the energy saved over the life of the equipment will more than cover the costs of the contract.”

The DOE is finalizing IDIQ (indefinite delivery/indefinite quantity) contract standards incorporating ESPC guidelines. It notes that since the contractors are providing funding, the program allows some relief from the limits of annual appropriations. Financing costs would naturally be higher under the ESPC system, since the contractor is assuming the risk and burden and may not be able to attain the most favorable borrowing rates, as the government would.

The savings may well be realized long after the typical cost estimate framework has expired. Whereas the Congressional Budget Office (CBO) measures costs on a ten-year horizon, the savings in an energy-efficient system may not come until several years later, after the system has been paid for. Measuring costs and savings is further complicated by the fact that they are split into two categories, mandatory and discretionary spending, that are governed by two sets of rules. A new report from the CBO notes that for the time being, “projected savings in energy costs and related costs are shown as potential future reductions in agencies’ discretionary appropriations.”

The ESPC concept is not new. In the 1980s, working under the rubric of shared energy savings (SES), the US Postal Service awarded a contract to the Co-Energy Group to retrofit the lighting at the 1.7-million-square-foot General Mail Facility in San Diego, California. San Diego Gas & Electric, the local ESCO, provided energy rebates to reduce the installation cost, while the contractor invested $164,714. Over seven years, the facility saved nearly $600,000 in lighting costs alone, a good return on investment that led the Post Office to develop other SES projects of several kinds.

Recently, the Food and Drug Administration White Oak Campus, near Silver Spring, Maryland, the General Services Administration (GSA) partnered with Honeywell under an ESPC to construct a heat and power plant that will cost some $71 million—but will also save $5.8 million a year in energy costs and $6.5 million in operating and maintenance costs. Similarly, reports the DOE, Camp Pendleton, the huge Marine Corps base in southern California, reduced its energy consumption by 44 percent even as it added 2 million square feet in facility spaces.

Camp Pendleton achieved this with a program of ESPCs, as well as a range of energy-savings measures including retrofitting light fixtures and adding roof-mounted solar energy systems to the mix. At another military base, the large naval station at Guantanamo Bay, Cuba, a contractor built a $12 million wind turbine project under the terms of an ESPC. The direct annualized savings are $1.2 million, meaning that payback will take ten years, just at the end of the CBO horizon. But, notes the Navy, other cost savings come into play as well, not least by removing more than 40 tons of pollutants from the atmosphere each year.

The savings from ESPCs are very real. Measuring and accounting for them remain matters of discussion.

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