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Proposed Stimulus Plan Would Incentivize Energy Upgrades to Public Buildings

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When you think of public infrastructure the first things that probably come to mind are roads, bridges, and railways. Fair enough. These are big, noticeably improvements to our cities and towns. You probably don’t think about buildings. But you should. Most of us interact with public buildings every day. The office spaces, courthouses, laboratories, post offices, and data processing centers in the U.S make up 6,543 football fields of square feet managed by the federal government’s facilities arm, the General Services Administration, alone. Add on the K-12 schools, universities, and countless other buildings and it accounts for a large majority of the infrastructure we interact with. Our children spend a significant amount of time in these buildings, our mail gets sorted and delivered through these buildings, our water gets treated and our waste gets disposed of. Yet these tax-funded buildings are in an alarming state of deterioration. 

The U.S. Government Accountability Office, a government agency that provides auditing and evaluation services for the United States Congress released a report on June 4th of 2020. Contained in the report is information about various school districts that have frequently identified building systems that need repair or replacement across the United States. 

An estimated 54 percent of public school districts need to update or replace multiple building systems or features in their schools, according to the report. Also, an estimated 41 percent of districts need to update or replace heating, ventilation, and air conditioning (HVAC) systems in at least half of their schools, representing about 36,000 schools nationwide that need HVAC updates. In about half of the 55 schools that the GAO visited in six states, officials described HVAC-related problems, such as older leaking systems that are causing water damage in the flooring and ceiling tiles. These issues if left without being fixed can quickly lead to indoor air quality problems and mold. 

One of the schools visited in Michigan was still using one of the original boilers from the 1920s to heat the building. According to district officials, “older boilers are labor-intensive to maintain because city code requires an engineer to be on-site when each boiler is operating; without constant monitoring when in operation, the boilers could build up too much pressure and explode.”  Boiler explosions are rare and generally only occur during abnormal conditions. The cause of these explosions are almost always explained due to poor maintenance and not following the procedures outlined in the operating manuals. Even so, if you’d like to see what a boiler explosion looks like check it out in this thirty-second clip.

Poor maintenance brings me to my next point. “Operations and maintenance is often the last funded item. It’s not the investment that organizations typically want to make. And if it’s a public building, lawmakers are certainly not excited about telling their constituents they’re funding building maintenance. They want to fund something exciting to get some votes.” says Dr. Timothy Unruh, director of NAESCO, the National Association of Energy Service Companies. 

We had the opportunity to speak with Dr. Unruh about his organization. Unruh gave us a rundown of a method being used to update public infrastructure at virtually no additional cost to the taxpayers. The process is called Performance-based contracting or often referred to as “the original P3.”

Performance contracting has its roots back to the mid 80’s. The 1973 oil crisis caused a surge in demand for energy-efficient lighting solutions. Engineers from Sylvania in 1974 started researching a way to miniaturize the ballast of a fluorescent light to be stuffed inside lamps. They ended up with a patented design but were unable to feasibly produce the bulb. Two years later in 1976 along came Edward Hammer from General Electric. Hammer had figured out a way to bend the fluorescent tube into a spiral creating the first compact fluorescent light. Like Sylvania, the idea didn’t pan out because the machinery was too expensive to realistically create these newly designed compact fluorescent lights (CFL’s). It was a rocky start for CFL’s in the early ’80s when they first hit the shelves for a staggering $25-$35. The high cost made them prohibitively expensive for property owners to purchase in bulk even though they could amount to massive savings as many, the average fluorescent uses up to 75 percent less energy than an incandescent over a 10-year lifespan. 

To help jump this initial investment hurdle utility companies began offering incentives to purchase the bulbs. So, governments devised a way to pay the contractors that would make maintaining the upgrades a part of the energy savings. This both eliminates the need for large initial capital expenditures and aligns the performance of the building to the companies that manage them. This arrangement is called performance contracting. Public buildings are a perfect fit for this type of long term contract because schools, courthouses, town halls, and hospitals all tend to be used for the same function until they are demolished. 

There are a variety of ways public facilities can go about getting funding. For K-12 schools they often rely on bond financing. Municipalities will often use a credit line through a private financial institution they may already have. Universities can find ways to borrow from their endowment. The federal government relies on the energy service company doing the work to provide the money, which then the company will go to the private market to source those funds. 

Performance contracting sounds great but you may be thinking who’s to say that public facilities don’t get some exaggerated estimate showing possible energy savings and then just blow through a large budget without ever seeing the estimated energy savings? Dr. Unruh said that to ensure that energy savings occur, the energy service company providing the retrofit has to guarantee their estimated savings stream through a measurement and verification process that occurs every year. This process validates that savings equal to or greater than the payment of the note truly do happen. If the savings do not wind up to be equal to or greater, the energy service company has to make up the difference, protecting the taxpayer from the additional burden.

When a public facility decides to pursue a performance contract they go about it differently than a typical privately-owned building manager would in terms of building renovations. There are a variety of private companies that perform these retrofits like Johnson Controls, Siemens, Honeywell, Trane, and some smaller companies like Navitas, Performance services, Energy Solutions Professionals, and Perfection Group. Each company provides a unique solution, skill set, and team that can provide the work needed. The building manager will ask multiple vendors to perform preliminary assessments, providing a snapshot of what can be done in the building to save on energy expenses. The final vendor selection might commonly be based on examples like who brought the most creative package or who has the best team that would mesh well with the building management team. It doesn’t necessarily have to be based on the cost of the renovation because the company creating the package knows that they have to guarantee that the energy savings will cover the cost of their work so there’s some flexibility in regards to expense.  Dr. Unruh said it best, “As time has gone on people have learned that there is an ability to have creativity in the structure of the deal and the ownership of the asset and how you include renewable power.”

In the current environment, where municipal buildings have been left empty and tax revenue has been slashed, many agencies are hesitant to move forward with upgrades, even with these financing options. 

On June 2nd, Dr. Unruh and his team presented a proposal to Congress outlining a plan to help fulfill that trillion-dollar stimulus that was promised by the current administration. “If we looked at applying the savings from performance contracts we could leverage the public dollar significantly so that we might get a trillion dollars of infrastructure improvements but it would cost us much less. By giving businesses the confidence they need to invest and hire, particularly in the energy efficiency sector, which has seen more than 413,000 jobs lost since the pandemic began. It would also deliver a fleet of updated public facilities such as hospitals, schools, military campuses, airports, and municipal buildings that have sharply reduced operating costs and are far better prepared to handle disasters in the future.”

The specific proposal is for federal appropriations of $22 billion over five years to retrofit facilities. The federal funding, along with energy cost savings from efficiency improvements, would leverage an estimated private investment of $88 billion to deliver a total of $110 billion in economic activity.

Performance contracting and performance-based service contracts can leverage $4 of private spending for every $1 in public funding. The premise of the proposal is based on the idea that if the government will give that initial dollar amount it may be that push to get people using performance contracting to build back better and more efficiently. “The COVID-19 crisis has demonstrated why modernized facilities are so badly needed to better manage public health crises and other disasters,” Unruh added.

A lot is coming down the pipeline for the public infrastructure and we may see a bill passed quickly if it’s something that federal politicians can actually agree on. As for the private side, it may be nice to see other states offering incentives similar to that of NYSERDA, the New York State Energy Research and Development Authority. Making our buildings more sophisticated and more efficient, whether they be public or private, is one of the most important advancements we can take as a country. The economic trouble the country is in right now might put an end to our progress in this field but, if we create the right incentives, it might also create an opportunity to spur job growth and save billions of dollars in wasted energy.

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