"If Energy Performance Contracting Is So Good, Why Aren't More Agencies Using It?"
Jul 25 - Journal of Housing and Community Development
Finding ways to cut costs has become increasingly important to LHAs in an era when federal subsidy seems to dry up more and more each year. Energy performance contracting (EPC) is touted by many as a solution for housing authorities to use energy savings to generate additional HUD subsidy, thus freeing up their capital fund allocation for other needed agency improvements.
The savings can be significant. Estimates of energyrelated savings in the
public housing program alone range from $2.5 billion to $3 billion. Yet only
about 100 LHAs have utilized energy conservation incentives in EPC contracts
totaling about $250 million - less than 10 percent of the potential. The
question arises: if EPC is so good, why aren't more groups adopting it?
One of the biggest reasons is EPC's low profile. HUD has not vigorously
promoted EPC, and there has been no training on EPC for LHA or field office
staff for more than 10 years, even though a cooperative agreement with U.S.
Department of Energy (DOE) has been available to assist in these efforts.
Without strong involvement and guidance from HUD headquarters, new national
housing policy directions frequently lead to inconsistent interpretations at the
level of local HUD offices. This has been the case with EPC incentives and
regulations. The problem is compounded because public housing has so many
different types of energy delivery systems.
Other reasons for limited interest in EPC are that LHAs:
* Believe the EPC process is too difficult for in-house staff.
* Misunderstand what project work can be included in EPC.
* Lack a thorough understanding of the program's incentives and benefits.
* Have adopted the attitude, "We are reimbursed for utility costs by
HUD, so why bother?"
In addition, smaller LHAs have difficulty attracting interest from Energy
Service Companies (ESCOs) and HUD field offices have failed to provide adequate
technical assistance. ESCOs typically cite the lack of a consistent review and
approval process by local HUD offices as justification for why they don't
participate with LHAs in EPC.
A Complex Process
Many small and mid-sized LHAs lack the staff capacity or capability to
develop and issue an RFP and then negotiate a project. These LHAs frequently
turn for assistance to consultants, who often may have limited experience with
LHA energy issues. They may also be unfamiliar with the HUD regulatory process
or the project types that can be included under an ESA (Energy Services
Agreement.)
Virtually every type of improvement that reduces energy use and cost can be
included in an EPC, whether it can pay for itself over the life of the contract
or not. Improvements with short-term paybacks can be combined with improvements
that have longer paybacks. Contracts are currently limited by statute to 12
years. The fact is that everything from energy efficient elevator controls, to
lighting, water saving devices and super-efficient refrigerators can qualify.
LHAs should view EPC as a possible funding resource. Any energy- related
capital improvement that brings about a qualified reduction in energy cost or
consumption can be used to amortize the related non-federal loan used to finance
the energy improvement. Thus, more capital funds can be freed to make other
capital improvements.
Many agencies have lost out on considerable savings because they
misunderstood the incentives or overlooked opportunities. For example:
* A large LHA on the west coast failed to verify to the local water
department that it had replaced all of the toilets with low- volume flush type,
thus earning a significant reduction in water prices. We identified this
opportunity for the LHA management who then submitted the required documentation
and received a $240,000 refund on water costs that had already been paid.
* A county LHA in Pennsylvania was meeting requirements to be eligible for a
savings share under HUD's Wellhead incentive, but had never documented their
savings or requested the savings share. We were able to go back three years and
document their eligibility to receive one-half of the $50,000 in savings they
had achieved.
HUD Reimburses Energy Cost
The HUD reimbursement formula has been revised from the 50-50 split (LHA and
HUD share the savings) of past years to give more energy savings money back to
the LHA. Today the split is 75-25 when the LHA achieves energyrelated savings
when compared to the three- year rolling base (TYRB). Conversely, when an LHAs
annual consumption exceeds the TYRB, it must pay 75 percent of the excess cost.
Under one incentive, the TYRB is frozen for projects that receive related
improvements during the term of the EPC. The LHA isolates changes in consumption
levels for those projects, for the term of the agreement. Under another
incentive, an LHA receives an "add-on" to its subsidy eligibility for
the term of the EPC, which must be at last equal to the guaranteed energy cost
savings. Under this incentive, the LHA continues to receive the normal HUD
rolling base incentives until the new reduced consumption levels are
incorporated into the TYRB.
Unfortunately, the energy expenses of most LHAs are so small that it doesn't
make financial sense for an ESCO to put the time and effort into responding to
an RFP. ESCOs must invest significant resources to determine existing
opportunities, which usually requires a technical audit, collecting utility
data, weather records and operational information, and discussions with various
staff at the LHA.
It is possible that even if an LHA proposes a project, the HUD staff
reviewing the project may have limited experience with the EPC process or be
untrained in its interpretation. These factors lead to delays and frustrations
for the LHA. This has caused some ESCOs to either forego the LHA market or to
selectively respond to LHA- issued RFPs.
Recommendations
A number of changes could help. Ideally, HUD should establish a central point
of information and technical support and review for all EPC initiatives. This
would include a highly trained staff to inform and assist LHAs, particularly the
smaller ones, in preparing an RFP that:
* Includes much of the utility data and site information;
* Identifies the range of opportunities that the LHA might consider
implementing;
* Requires only a sample technical audit for RFP response evaluation
purposes;
* Assists LHAs in also assessing ESCO respondent qualifications during the
RFP process.
Once an LHA receives and evaluates responses, HUD would promptly evaluate the
proposals selected to:
* Ensure that HUD regulatory requirements are met and, if waivers are needed,
be in a position to facilitate the waiver request process;
* Confirm that the proposals are reasonable compared to those that are in
place and working;
* Confirm that the financial proposal is adequate and reasonable;
* Confirm the performance guarantee is adequate and reasonable.
Getting Started and Structuring the RFP
HUD, working with NAHRO, other industry organizations and the National
Association of Energy Service Companies, should encourage ESCOs to participate
with smaller and mid-sized LHAs. And smaller and mid-sized LHAs need to take
greater initiative in generating savings through EPC.
To get started, an LHA should do a preliminary review of the potential EPC
projects in its housing stock. To do this, the agency must identify a
knowledgeable staff person or an experienced consultant who is familiar with HUD
EPC incentives and is capable of working with the LHA's executive director.
Next, the agency must complete five steps toward the final RFP:
* Prepare an energy RFQ/RFP document package that provides brief, clear
timeframes for the response, evaluation and selection process;
* Include accurate utility data for at least a three-year period for all
projects to be considered in the KFP scope of work;
* List, but do not limit, energy conservation measures (ECM) that the LHA is
prepared to consider;
* Provide physical descriptions and maps of the project(s) for which the LHA
is seeking ECM improvements;
* Adopt a regional approach. Contact other LHAs within the same state, county
or utility service area to determine their interest in joining your RFE This
will increase the potential work of scope within your geographic area, and will
make the contract more attractive to ESCOs.
Moving forward
EPC is a tremendous and underutilized resource for LHAs and IHAs that can
create long- term benefits for the agencies and people they serve. Nearly a
million housing units nationally can still benefit from the EPC incentive, with
more than $2.5 billion in energy- related savings at stake.
We encourage housing agencies of all sizes to look carefully at
recommendations in this article and to move forward today to begin generating
real energy savings and a more energy-friendly environment for all of their
residents. With a new HUD secretary who understands the importance of energy and
the bottom line potential of EPC, perhaps energy issues in public housing will
command a much higher position on HUD's agenda.
HOPE FOR SMALL A\GENCIES
The Hammond Indiana Housing Authority (HHA) is an excellent example of a
smaller agency that took the initiative to generate savings through energy
performance contracting (EPC). Knowing that it lacked in-house expertise, HHA
found a knowledgeable consultant to determine the potential of EPC for the
agency and work closely with its staff.
Hammond is located in Northern Indiana, just across the border from Chicago.
The HHA has 584 units of public housing, 384 of which are to be redeveloped into
a mixed income community with public housing, low-income rental and
home-ownership units.
These units were built in the early 1940s and some will be demolished to
accommodate the redevelopment plan. There are 200 units built in the early 1970s
that are not part of the redevelopment plan but which also need energy and water
system improvements because their systems are approaching the end of their
normal service life. Given the capital demands confronting it, HHA decided to
look into HUD energy incentives, the only means by which additional HUD subsidy
dollars could be provided.
Enter EPC. The 200 units considered by HHA for EPC consist of a four-story
senior building containing 120 units, and 80 units of family townhouses located
on a neighboring site. The EPC consultant assisted them in identifying the
opportunities available under the HUD incentive programs.
The HHA EPC team determined that it would be necessary to simplify the
process and requirements typically found in performance contract RFPs issued by
housing authorities. A combined RFQ/RFP package was developed in order to
determine the qualifications of potential respondents and quickly move through
the preliminary stages. To simplify the qualifications process and provide
uniform evaluation of respondents, HHA required the respondents to be certified
by the National Association of Energy Service Companies (NAESCO), an independent
energy services industry organization that applies strict performance standards
toward ESCO certification. It was also necessary to complete the entire process,
including HUD approval of the resulting EPC agreement, in time to permit the
improvements to be completed before the next heating season.
In its RFP package, HHA included: spreadsheets detailing its actual energy
and water usage and cost for the past three years for the developments selected
for EPC; narrative descriptions of each of the property types and their energy-
and water-using systems; lists of which residents paid utility bills directly;
and outlines of the improvements that HHA wanted to consider, including a new
common area and in-unit lighting, low-volume toilets, low-flow water fixtures,
energy efficient refrigerators and new heating controls. The ESCOs were not
confined to these needs and were encouraged to identify other energy
conservation measures (ECM) for HHA to consider.
HHA mailed out 17 solicitations to the NAESCO-certified ESCOs. Three ESCOs
attended the pre-bid meeting and two, provided competitive, comprehensive
responses. Vendor selection will be completed by May 20, 2004 (prior to
publication but too late to include in this article).
Once implemented, EPC's impact will last for years. "We are excited at
the prospect of long term benefits to the Authority," said HHA Executive
Director Maria Becerra.
Energy Performance Contracting Resources
EPC Training
Eugene Goldfarb
Midwest Environmental Officer
USDHUD
http://www.hud.gov/local/il/ working/environtrain.cfm
Written Material
"Energy Performance Contracting for Public and Indian Housing"
A Guide for Participants
Available from HUD and DOE
Information about ESCOs
National Association of Energy Service Companies
(NAESCO)
Washington, DC
202-822-0950
ENERGYGUIDE
Many agencies have lost out on considerable savings because they
misunderstood the incentives or overlooked opportunities.
Michael Nail is the Chief Executive Officer of Enlightened Energy Consultants
(EEC) with offices in the Washington DC area and Chicago. Nail is the former
Deputy Executive Director at NAHRO and served as the CEO for NAHRO, Inc. While
at NAHRO, Nail was the point person for Rebuild America, HUD and DOE on energy
issues.
David Anderson is the President of Enlightened Energy Consultants (EEC). He
has extensive experience in successful public sector operations. He served the
Chicago Housing Authority as its Manager of Technical Services, overseeing all
aspects of its $30 million performance contract and energy purchase contracts.
Prior to joining the CHA, Anderson was a Chief Operating Engineer for the
Chicago Public Schools, where he also developed and managed their energy
conservation and cost reduction programs.
John Cornerford retired from HUD in 1995 from his position as the Director of
the Office of Public Housing Management. Comerford was the individual at HUD
most intimately involved in the development of the legislative framework of the
energy conservation incentives enacted in Section 118 of the Housing and
Community Development Act of 1987 and the implementing regulations at 24CFR 990.
Since his retirement, Comerford has continued to be active in public housing
energy conservation by providing assistance to both LHAs and ESCOs.
Copyright National Association of Housing and Redevelopment
Officials Jul/Aug 2004