Welcome to the Energy Salon

Welcome to the Energy Salon

What is the Philadelphia Energy Authority?PEA is a municipal authority jointly created by Mayor Nutter & City Council toincrease energy expertise and focus to the City of Philadelphia by:

• Identifying, supporting and facilitating the most cost effective andenvironmentally sound opportunities for the City of Philadelphia to reduceenergy use and expense,

• Promoting and assisting the development of alternative sources of energy,benefitting the retention and development of a local workforce which is essentialfor the economic prosperity of the City; and

• Educating Philadelphia’s consumers (including residential, commercial and publicsector audiences) regarding choices available in the energy marketplace.

The Big Picture

What is the benefit of an authority?

“Public corporation engaged in the administration of civil government”

• Engages local expertise of the private sector through board appointments• Energy decisions benefit from objective expertise committed to long term

strategy• Institutionalizes an energy planning structure that minimizes

discretionary influences• Able to serve as financial agent for a capital project and legally able to hold

long term contracts on behalf of the city

Who is PEA?The Board of Directors consists of 5 appointed individuals:(serving 5 year overlapping terms)Chairperson - Christopher A. LewisVice-Chairperson - Emily SchapiraSecretary - E. Mitchell SwannTreasurer - Kenneth OgawaBarbara AdamsStaff:Executive Director – Jill KowalskiInterns: Paul Molta & Adebayo Adejare

What is PEA doing?

Work plan outlines 13 initiatives in 3 main areas:1. Reduce energy use & expense and enhance energy efficiency

• Municipal Energy Profile, A First Look: The General Fund• 3 Calls To Action: Capacity, Accountability, Total Cost of Owership

2. Alternative energy development advocacy & facilitation• Transition in process to assign long term energy contracts to PEA

3. Educate Philadelphia consumers• Energy Salons• www.philaenergy.org

Salon Outline2:30 Welcome & Introductions2:35 Program Overview: Bruce Stultz2:45 Panel Presentations3:15 Facilitated Discussion/ Q&A

Education & Program KnowledgeESCO & Client Requirements for Execution

3:45 Brief BreakFacilitated Discussion/ Q&A

ESCO & Client Requirements for Execution cont.The Finance Scapegoat

5:00 End of Program

City of PhiladelphiaEnergy Office

Energy Salon- Energy Efficiency Paralysis

March 4th 2015

• Strategic procurement and data tracking ofCity’s energy supply

• Promote energy conservation and energyefficiency in City facilities and within Cityprojects

• Develop and Implement energy projects andprograms that reduce the City’s costs andlessens the City’s environmental impact

Value of an Energy Office• Cost Avoidance

– Energy Efficiency and Renewable Energy Investments– Utility Bill Auditing– Energy Conservation Education– Peak Load Contribution Predictor Program– Measurement and Verification

• Budget Certainty– Strategic Procurement

• Rebates and Revenue– Demand Response Program– PECO Smart Ideas and PJM Energy Efficiency Program

City Government Energy Consumption:By the numbers

• 3.58 Trillion BTUs of energy– Equivalent of approximately 33,000 Pennsylvania homes 1

• Approximately $100 million spent in energy annually betweenGeneral, Water and Aviation Funds

• 507,000 metric tons of Greenhouse Gas emitted annually.– Roughly 2.3% of total Citywide emissions

1 Based on EIA Annual Energy Review Data:http://www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb0204

Quadplex GESA Project- Contractor: Partnership with Noresco to design and

build energy efficient systems bypassing thetraditional 4-part bidding and allowing Noresco toguarantee the project savings.

- Financing: Positive cash flow project. The City paysfor project with its savings over a 15 year term.Takes advantage of City’s allotment of QualifiedEnergy Conservation Bonds which offer competitivefinancing.

- Benefits: Enhances human comfort of the buildings,addresses immediate Capital needs of buildings,reduces General Fund energy use over 2%.

Project SnapshotTotal Cost $12,285,000Current Energy Costs in the FourBuildings (Annual, 4-year Average)

$5,221,000

First Year Energy Cost Savings $1,340,000First Year Bond Payment ($988,000)Net Cash Flow* (First Year)*Increases with increases in energy prices.

$352,000

Air Quality Benefits Equivalent of removing2,156 cars from the road

M/W/DS Business Enterpriseparticipation

22%

Financing• Financing

– Project is being financed through the PhiladelphiaMunicipal Authority

– Revenue Bonds– Qualified Energy Conservation Bonds

• Municipal Services Building and One Parkway Building qualify forBonds due to the project savings

• Uses $6.25 Million of $15 million City allotment• Provides an interest rate subsidy of 70%

• Savings from the project fully pay off debt– Flat Payments– City savings escalated as utility rates increase

Core Criteria and Approach

• This was the City’s first exposure to the GESA. The project mustbe a success if we plan to use the model in the future.

• Group of stakeholders from Mayor’s Office of Sustainability,Mayor’s Office of Transportation and Utilities, Department ofPublic Property, Finance and Law met throughout the process toguide the project and select the ECMs.

• Core Criteria:– Energy Savings Project first and foremost– Must have net positive cash flow– General project size restrictions– Facilities should be easier to operate– Should have opportunities for M/W/DS Business Enterprises

Project DevelopmentProcess

• Why these buildings were chosen

• Investment Grade Audit back out fee

• Utility Escalation Rates

• Technical Consulting on Project– Measurement and Verification Plan– IGA technical review (Calculations, Materials, etc)– Ongoing Monitoring?

• Project has reserved PECO Smart Idea rebates– Approximately $570,000 in rebates already received– Approximately $200,000-$400,000 still expected.– ECM payback is not dependent on these incentives

Questions

Adam [email protected]

PEA Energy SalonMarch 4, 2015

Breaking Down the BarriersAn ESCO Perspective

Overview of Presentation

● Overview of the ESCO Market– Size and growth from LBNL/NAESCO study– ESCO market drivers

● Barriers– More work and more risk

● Solution– Use the GESA system

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INDUSTRY SIZE: CURRENT AND PROJECTED

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• The ESCO industry continued to growat a steady pace--despite the onset ofa major recession--reportingrevenues of approximately $5.3billion in 2011.

• We project that the ESCOindustry will more than double insize from ~$6 billion (2013) to$11-$15 billion (2020).

ESCO Projects – Cumulative Results

● $50 billion in projects paid from savings● $55 billion in savings – guaranteed and verified● 450,000 person-years of direct employment● $33 billion of improvements in public facilities● 450 million tons of CO2 savings at no additional cost

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2008 & 2011 REVENUE SHARES

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• ~70% of 2011 revenuefrom performance-based contracts; 15%from design/build.

• ~85%revenuefrom“MUSH”+Federalmarket

2008 & 2011 REVENUE SHARES (CONT.)

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• Onsite generation and renewable energy sharedecreased from 2008-2011

• EE-related activity accounted for ~75% of revenue

REMAINING MARKET POTENTIAL

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• Remaining investmentpotential in facilitiestypically addressed bythis industry rangesfrom ~$71 to $133billion.

• Questions remain aboutthe economic potentialof these markets andthe accuracy of thisestimate…

ESPC Market Drivers

● Federal government– EE mandates– President’s Performance Contracting Challenge– Need for capital improvements (GSA budgets)

● MUSH Market– EE mandates– Need for capital improvements– Convert wasted $$ to payment stream

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Barrier: ESPC = Work + Risk

● Performance contracting means more workand more risk for facilities and financemanagers– Project Development– Project Pricing– Lack of Expert Staff

● Suspect that savings are not real

Project Development

● ESPC not a priority

● Counter to government procurement norms● Demanding process

– Partner with ESCO to develop scope rather thanbeat up A/E firms

– IGA iterations require participation and expertise– Breeds suspicion of ESCOs

Project Pricing

● Unfamiliar technologies

● Can’t determine a reasonable price● Can’t use familiar controls (low bid)

● Sticker shock at financed project cost

Lack of Expert Staff

● Staff already stretched thin– Not experts in efficiency technologies

● Reluctant to cede authority to FEMP orconsultants

● Burden of long-term project management

● Second-guessing always a threat

Are the Savings Real?

● Oak Ridge National Laboratory

● 2010 report – 128 projects– 105% of guaranteed costs savings were reported.– 102% of estimated cost savings were reported.– ESCOs guaranteed ~98% of estimated cost

savings

Source: Oak Ridge National Laboratory13


14 Source: Oak Ridge National Laboratory


“A general perception among many in government isthat because most of the guaranteed cost savings in anenergy savings performance contracts (ESPC) is paidto an energy services company (ESCO), such contractsdo not result in cost savings to the government.A new report by Oak Ridge National Laboratory(ORNL) shows that actual cost savings to thegovernment in ESPC are 174% to 197% of theguaranteed savings.”


Sources of Additional Savings


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What is the Solution?

● Use the GESA System– In the public domain– Proven results– Efficient project development process– Model documents– Scope and pricing experts on the customer side

at an affordable cost

Questions?

Donald GilliganNAESCO

[email protected]

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Pennsylvania Energy Authority Salon

Energy Efficiency Paralysis –How to Avoid the Audit “Pause” and GetProjects to the Finish Line

Legal Considerations

C. Baird BrownDrinker Biddle & Reath, LLPMarch 4, 2015

Guaranteed Savings Agreement is atransparent construction contract with astrong guarantee and spells out a monitoringand verification (M&V) plan in detail

Standardized documentation that facilitatespooled financing – which lowers costs forall Participants

Guarantee is based on energy and watersavings alone – operational savings,deferred maintenance are a bonus

Prequalification of local and national energyservice companies (ESCOs) through an RFQprocess

FREE’s legal, financial and technical teamassists throughout negotiations

KeyProgramFeatures

Visit PennSEF at:freefutures.org/pennsef

Preliminary audit provided at no cost

Investment grade audit must offer self-financing measures based on participantpriorities providing at least 90% of the savingsquoted in the pre-contract audit

No cross collateralization or risk associatedwith involvement of other participants

Significant Pennsylvania job creation

Customized and serialized financing optimization

All program costs are paid within the bond issue

Program

Benefits


The government unit selects one ESCO toprepare a preliminary audit.

The government unit issues an RFP that permitsselection on the basis of multiple criteria to meetits needs. Criteria can include being a qualifiedESCO under the program.

If satisfied with the preliminary audit, thegovernment unit makes a final selection of theESCO and signs a Guaranteed SavingsAgreement.

Pennsylvania government units can procureusing a flexible process under the GuaranteedEnergy Savings Act.

If not satisfied the government unit can exit theprogram at no cost or engage another ESCO.

ProcurementProcess


Purpose-Agreement between ESCO and Participant toundertake implementation of one or moreconservation measures at the host’s facility.

Mechanism-ESCO agrees to design, construct and installconservation measures selected by Participant

-ESCO guarantees that the amount of savings(after payment of operation and maintenancecosts) will exceed the payments due under theLease.

-The Participant assumes operatingresponsibility, starting at the project’s time ofcompletion.

GuaranteedEnergySavingsAgreement


Only energy/water savings are counted,not operational and maintenancesavings

Dollar savings are guaranteed astechnical performance timesescalated energy/water rates

Fixed escalation of energy and waterrates determined by the Program

Internationally recognized Monitoring andVerification (M&V) protocols are used

Measurement& VerificationBaselineCalculation,IncludedSavings


One Logan SquarePhiladelphia PA 19103

C. Baird [email protected]

(215) 988-3338

Questions?

Energy Salon on Energy Efficiency ParalysisMarch 4, 2015

▪Financing Building Energy Efficiency:▪The Reinvestment Fund’s Experience

Roger E. [email protected] 574 5814

How Philadelphia Once Financed Energy Projects

1914 Newspaper Advertisement

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The Reinvestment Fund (TRF)

▪ Private, nonprofit communitydevelopment financial institution (CDFI)

▪ Mission: To build wealth andopportunity for low-wealth people andplaces through the promotion of sociallyand environmentally responsibledevelopment.

▪ Founded in 1985 - energy lending since1993

▪ $1.3 billion in 2,875 cumulativeinvestments and loans throughout themid-Atlantic

▪ 850 investors

Real EstateDevelopment

Business Lines

Lending andInvesting

This image cannot currently be displayed.

Policy &InformationServices

PolicyMap

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TRF’s Building Energy Loan Funds

▪ Nonprofits Energy Savings Investment ProgramFinancing energy conservation by nonprofit organizations.

▪ TRF Sustainable Development FundFor clean energy (EE and RE) projects throughout PA.

▪ EnergyWorks Loan FundFor building energy conservation projects in Bucks, Chester,Delaware and Montgomery counties and the City of Philadelphia

▪ Pennsylvania Green Energy Loan FundFor building energy conservation projects throughout PA.

▪ Bank of America Energy Efficiency Finance ProgramFor building energy conservation projects in Baltimore, MD

▪ Baltimore Energy Initiative Loan ProgramFor building energy conservation projects in Baltimore, MD

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TRF’s Energy Loans and Investments

TRF’s Financial Support to Date for Clean Energy▪ $46.4MM in loans and equity investments - 55 energy projects▪ $20MM in grants - 375 energy projects

Key Accomplishments▪ Applied TRF’s model of public/private lending to energy▪ Supported 7 of the first 8 utility-scale wind farms in PA▪ Started the solar PV market in southeast PA with 230 solar PV

installations (almost 1 MW) – model for PA Sunshine Program▪ Demonstrated the soundness of PA energy policy initiatives such as

Alternative Energy Portfolio Standards Act, Alternative EnergyInvestment Act and Act 129 (utility conservation programs)

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Examples of TRF’s Energy Work

▪ Ambler Boiler House – a gut rehab of a pollutedindustrial building into 42,000 s.f. of prime office spacenext to the Ambler train station, with energy use 44%lower than average office building

▪ Thomas Jefferson University – four loans for TJU’s 10year program of energy retrofits to its facilities –partnering with a leading ESCO and offering leasefinancing

▪ Latin American Bilingual Montessori Charter School(LAMB) – new energy systems in an historic buildingand a new high-performance building addition –energy and charter school lending

▪ Wind park Bear Creek – supported a 24 MW wind farmwith a production incentive grant and a loan to funddeveloper’s equity investment in project

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TRF’s Typical Energy Loan

Project Types Equipment and systems that impact building’s energyuse in (a) single measure projects; (b) whole-buildingenergy retrofit; (c) gut rehab; and (d) new construction

Eligible Borrowers Commercial, nonprofit, institutional, government,industrial, multifamily residential

Energy Goal 25% reduction from energy baseline – baseline differswith project type

Loan Amount $100,000 - $2,500,000Term 7 years; 10 years with bump in interest rate in Years 8-

10Interest Rate As low as 3.5% fixed

Loan to Value ≈ 85%Debt Coverage ≈ 1.25

Collateral Second mortgage lien, interest in receivables, guarantee,etc.

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Financing Projects with ESAs and PPAs

▪ Traditional energy lending is to the building owner, with thereal estate as collateral to secure the loan.

▪ Increasingly we are seeing projects where the borrower isnot the building owner, but an energy services companywhich owns and operates the new equipment/systems andprovides the services to the building owner through anEnergy Services Agreement (for efficiency) or a PowerPurchase Agreement (for generation)

Financing Projects with ESAs and PPAs (cont.)

Some of the underwriting issues this new model raises are:

• What is the collateral, or what other credit enhancementis appropriate?

• How do we evaluate the ESA/PPA?

• What should our relationship be with the building owner?Do we ask for the owner’s financials as well as ourborrower’s?

• How do we stress the project’s proforma?

Energy Lending Lesson #1

There are many barriers to energy efficiency andfinance is not the most significant.

Most customers have four basic questions:1. Why should I care about energy?2. What are the specific opportunities in my

building?3. Who are the knowledgeable contractors I can

trust with my project?4. How do I pay for the work?

The answer to these four questions may vary foryour customer’s CEO, CFO, facility manager, etc.

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Energy Lending Lesson #1 (cont.)

Customers need a cafeteria of services:• education• energy audits• contractor referral lists• generic documents – specs, RFBs, etc.• contracting assistance – bid review,

etc.• financing• post-project M&E

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To be responsive to your customers,finance a variety of energy project types:

• single measures

• whole-building retrofits

• gut rehab

• new construction

Finance other project costs as well asenergy measures.

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Have a strong energy savings goal to encourage projects to be moreenergy efficient than they would otherwise be. Encourage clients togo beyond the low-hanging fruit.

Make the energy savings goal meaningful:

• Set a real goal for energy savings

• Have a rigorous methodology to estimate energy savings

• Have independent expert review of energy analysis

• Be the trusted, neutral referee for your client

Important to reduce barriers to entry by subsidizing a part of theenergy analysis in some cases.

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Loan term is more critical thaninterest rate. Look for patient capital.

Low interest rate is important as amarketing tool, but often lessimportant in the viability of a project.

Federal, state and city regulatoryprovisions often limit financing tolarger projects with public dollarsalready in the mix.

Underwrite the borrower, not theenergy project.

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Closing Thoughts

However your clients finance their building energy project, pleaseencourage them to:

1. Select an architect and design team who understand high-performance buildings;

2. In their design process, fully explore a range of cost-effectiveenergy conservation and efficiency measures; and,

3. Make their design decisions – as much as possible - on thelife-cycle costs of operating their building and not simply firstcosts.

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Documents

Welcome to the Energy Salon