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Performance contracts provide education institutions a path to energy savings that minimizes financial risks.
As the economy forces education institutions to squeeze their budgets, administrators have to be alert to money-saving possibilities. One fertile source for savings that many schools have mined is the energy budget. Campuses with aging, inefficient equipment can save hundreds of thousands or even millions of dollars over many years by upgrading their lighting fixtures, heating and cooling systems, energy management controls and power generators.
Finance officials at schools can crunch the numbers and make a persuasive case that their institutions will save money in the long run by taking advantage of the improved efficiencies the latest equipment offers. But many schools don't have the millions needed upfront to carry out a comprehensive overhaul of energy systems on campus.
One solution? Performance contracting. It allows education institutions to get at potential energy savings by having someone else — an energy service company — front the money for improvements as part of a long-term contract. The school pays the company an annual fee, and the company guarantees that the savings generated through the energy upgrades will meet or exceed the fee.
The National Association of Energy Service Companies estimates that companies are investing $1 billion to $1.2 billion a year on energy performance contracts. Much of that occurs on educational campuses. Schools, as well as other public facilities, are obvious candidates for performance contracts. Schools typically have large facilities, many of which have aged past their prime, and not much money they can spare for long-term investments.
Although many institutions have been using performance contracts for years to upgrade their energy systems, many more campuses could benefit. In recent years, most states have enacted legislation that allows schools and universities to use performance contracting, says Michael Arny, executive director of the Energy Services Coalition, a group based in Madison, Wis., that works to increase energy efficiency through use of performance contracts.
“There are lots of opportunities for performance contracting out there,” says Arny.
Since the economy has faltered in the last couple of years, performance contracting has generated more attention from education institutions.
“Any time tax revenues go down, there is an uptick in interest in performance contracting,” says Arny.
Many schools may not get into performance contracts because officials aren't familiar enough with how they work or they are stretched too thin even to pursue a contract. But Arny argues that maintaining the status quo is not truly a cost-free option.
“Waiting has a cost,” says Arny. “Every day a school waits means they have missed out on savings that can be used to upgrade their buildings.”
The University of Hawaii at Hilo and Hawaii Community College, which are on the same campus, ended the waiting several years ago and pursued an energy performance contract, the first energy-performance contract for state facilities in Hawaii. Some 50 buildings were retrofitted. The campus upgraded its lighting system, replaced its main chiller with a high-efficiency model, replaced its cooling tower, installed a building automation system to control air-conditioning, expanded its chilled-water loop to include more buildings, and replaced the chiller at the College of Agriculture Building.
In all, the energy service company provided $2.9 million in upfront improvements. Over the 10-year life of the contract, the schools expect to save $6.6 million in energy costs, as well as $200,000 a year in maintenance costs.
The University of Science and Arts of Oklahoma, Chickasa, Okla., decided earlier this year to enter into a performance contract to upgrade its facilities. It is the first college in Oklahoma to use performance contracting. The energy service company selected by the university promises to deliver energy savings of $298,000 a year — a one-third reduction in energy consumption, according to school officials.
The company will replace the university's chilled water plant and install a new boiler, energy efficient lighting, a campuswide energy management system, and water conservation retrofits. Air handling units will be replaced or converted.