Energy Savings Performance Contracting in Kentucky’s Local Governments

by Lee Colten, Assistant Director, Efficiency and Conservation, Kentucky Department for Energy Development and Independence

For well over a decade, Kentucky has promoted energy savings performance contracting (ESPC) as a mechanism to achieve environmental and economic benefits. The Kentucky chapter of the Energy Services Coalition (ESC) estimates that by the end of 2013, more than $750 million in projects were completed statewide since the enabling legislation was passed in 1996. Traditionally, ESPC has been utilized in Kentucky’s state government buildings (including state universities) and in larger municipalities such as Louisville. ESPC is also a contributor to energy efficiency initiatives in Kentucky’s public schools, with 58 projects totaling $120 million implemented between 2008 and 2014.

Now Kentucky’s local governments—representing 120 counties and 419 cities (excluding school districts and special taxing districts)—have become a new target for ESPC, with an estimated project potential of $250 million. Despite this untapped market, smaller governments have not considered ESPC as a resource to address deferred maintenance, infrastructure improvements, and lower energy costs. What are the barriers to ESPC adoption by local governments?

ESPC is a simple concept, but a complex process: guaranteed savings from the maintenance and operations budget (utilities) are used as capital to make needed upgrades and modernizations to facilities, and are paid back over a specified period. Local officials are less likely to borrow money for these types of expenditures, especially during times when budgets are strained. And without a clear understanding of the process, local governments lack the confidence to move forward, even with the guidance of individuals from an energy services company. Decision makers need reliable, trustworthy advice on how to navigate the ESPC process, and they most often want to hear from sources they are familiar with—their peers.

Kentucky’s Department for Energy Development and Independence (DEDI) and the Kentucky Department for Local Government (DLG) have been working together to help local officials with an initiative called the Local Government Energy Retrofit Program (LGERP). Funding for LGERP is provided from a $715,000 competitive grant awarded to DEDI by the U.S. Department of Energy. The goal of this initiative is to develop strategies to facilitate energy efficiency in smaller municipalities through ESPC. The program addresses the barriers that have previously prevented ESPC use in smaller municipalities.

LGERP was launched in early 2013 with a series of workshops delivered by DLG, with assistance from the Kentucky chapter of the ESC. Through its expanded network of public–private partnerships, LGERP is uniquely positioned to educate local officials on the value of energy efficiency, the cost in delaying retrofits, as well as the value and services provided by performance contracting.

To further develop confidence in ESPC, LGERP expanded its network of experts to include agencies with which municipalities and county governments already had established relationships, especially those which advise local governments on legislative and fiscal matters. These agencies include the Kentucky League of Cities, the Kentucky Association of Counties, the area development districts, and the Kentucky Infrastructure Authority.

“For LGERP to successfully implement energy efficiency projects through an energy savings performance contract, we knew program delivery by people and agencies already familiar to local governments was as important as the information delivered,” said Harry Carver of DLG.

However, making the transition from educating officials about the benefits of an ESPC to actually executing a project isn’t always easy. Local governments have a lot of moving parts, such as city councils, trustees, and magistrates, that all play key roles in the decision-making process. Although Kentucky has enjoyed some of the lowest electricity costs in the nation, costs have risen at a rate of approximately 5% a year. Because this trend is expected to continue, energy waste becomes harder to justify and energy efficiency grows more attractive.

In many small towns across Kentucky, government offices are housed in older structures, which also suffer from deferred maintenance and antiquated infrastructure. In addition, local government’s energy bills cover not only public buildings’ energy use, but also services such as water distribution and treatment, street lights, and traffic signals. With constrained budgets, replacing the ancient boiler in the basement is often considered before a comprehensive energy efficiency upgrade.

“The mission of this program focuses on a systems approach to energy retrofits and upgrades,” said John Boyd, co-chair of the Kentucky chapter of the ESC. “Instead of installing a mechanical system and window replacement independent of each other, they learn ESPC identifies what those energy savings will be and allows them to pay for those improvements over time without front-end expenditures.”

Interim analysis of a six-county building project completed in Jessamine County revealed the energy conservation measures were achieving greater energy savings than what had been projected.

“Part of the project’s positive cash flow savings can be used for additional energy savings improvements or other county projects, allowing us to continue to reap benefits indefinitely,” said Jessamine County Judge Executive William Cassity.

In addition to building confidence and fostering education, LGERP is streamlining the ESPC process with standardized contract templates to guide cities and counties through the statutorily defined procurement process, contract review, and assistance with the contractor selection. LGERP further increases credibility of an ESPC by providing engineering support. This includes third-party verification as well as assistance with the measurement and verification process.

One challenge to introducing ESPC in smaller markets is the size of the energy improvement project. County and small city governments typically do not meet the threshold requirements—energy bills above $500,000—to qualify as viable candidates for ESPC. Energy services companies normally do not take on small jobs (less than $1 million) and would prefer jobs that are significantly larger.

As John Boyd stated, “In performance contracting, size does matter. It takes as much effort for normal energy services companies to go through the sales process and project development for a $100 million project as it does for a $1 million project. Through LGERP, though, there are regional energy savings companies who have stepped up to the plate for the smaller $1 million to $1.5 million project market.”

ESPCs have been an integral component of Kentucky’s energy policy for nearly 20 years. Motivated lawmakers in the 1990s enacted legislation in what is now considered a great framework in the Commonwealth to do ESPC across all markets. Subsequently, the Kentucky General Assembly passed House Bill 2 (KRS 56.770-56.784) in 2008, which sets aggressive policies about ESPCs. In that same year, Governor Steve Beshear announced his comprehensive energy plan for Kentucky, Intelligent Energy Choices for Kentucky’s Future. This seven-point strategy calls upon the state to meet 18% of the Commonwealth’s projected 2025 energy demand with energy efficiency. The plan is designed to improve the quality of life for all Kentuckians by simultaneously creating efficient, sustainable energy solutions and strategies; by protecting the environment; and by creating a base for strong economic growth.

“In addition to bringing energy efficiency and sustainability to facilities, one important area that performance contracting is addressing is deferred maintenance in government buildings where governments, state or local, are not able to take care of,” Boyd said. “For example, in 1992, it was estimated nearly a half billion dollars in deferred maintenance existed in state buildings. Although much remains to be accomplished, ESPCs have addressed a large portion of that need. To date, more than $250 million in performance contracts have been implemented in state buildings.”

LGERP participants quickly learned that ESPC promotes a comprehensive, whole-building, whole-infrastructure approach to energy efficiency and conservation retrofits and upgrades, which can include energy-consuming infrastructure such as buildings, street lighting, and water/wastewater facilities. As the program continues to roll out this year, it has the potential for great success, building on existing networks and partnerships to further the use of ESPCs in local communities.

DLG, along with contractor support through the University of Kentucky Center for Applied Energy Research, is working with numerous communities to investigate ESPC as a mechanism for increasing energy efficiency. Recently, a Request for Proposal (RFP) for Kentucky’s first water/wastewater ESPC project was released, and more recently, draft RFPs are under review for three more communities, with more communities investigating the process. Once these local initiatives and the results are publicized, the more attractive the ESPC process will be for other communities.

With leadership, legislation, and collaboration, Kentucky has opened the door to enter into ESPC for energy-improvement projects. Local governments can profit from ESPC and create a mutual incentive for the most efficient projects possible, leaving the possibilities wide open in this new public–private partnership.