Energy Savings Performance Contracting Initiative

The $10 Million Sustainability Project That Costs the City Nothing

Overview & Project Highlights:

Energy Saving Performance Contracting (ESPC) projects are unique, cost-neutral initiatives that cut costs or generate revenue by completing performance-enhancing engineering and construction projects. The firms that complete ESPC projects are referred to as Energy Services Companies (ESCOs) and must be certified by the state before they can complete ESPC projects in Delaware. These initiatives are guaranteed by the ESCO to pay for themselves over the term of the agreement through a combination of energy and maintenance cost savings or new revenue streams like the sale of electricity from renewable sources like solar panels. 

The City of Newark’s ESCO for this project is Seiberlich Trane Energy Services (STES) located in New Castle, Delaware. STES has extensive experience successfully completing ESPC projects for school districts, utility companies, hospitals, and private companies across the state of Delaware.

The ESPC project approved by City Council advances the City’s progress toward multiple sustainability goals outlined in the Newark Sustainability Plan. The major components of the project are:

  • HVAC upgrades, and repairs at the City Municipal Center & George Wilson Center (GWC)
  • Lighting upgrades for City facilities, streetlights, and parking lots
  • Installation of approximately 1,300 kW of new solar generation on City buildings and land (increases City owned solar generation by roughly 500%)
  • Roof repair or replacement at multiple City buildings
  • Multiple smaller energy efficiency enhancements like water pump upgrades and building automation/controls.

 Energy Services Companies (ESCOs) and Energy Saving Performing Contracting (ESPC)

The City has been aware of the impending need for several large maintenance projects at City Hall, the Newark Police Station, and other facilities for several years. Most notably, the HVAC systems in City Hall and the Police Department were beginning to fail due to age and the GWC, which did not previously have central air, was determined to need central air installed to continue to support City camps and community events. Each of these facilities would require substantial repairs or upgrades to avoid continuously increasing maintenance costs and to head off concerns about mold growth due to high humidity. Even individually, the cost of these projects was high enough that it was unrealistic that the City would ever have enough available cash in any given year, competing against other needs, to complete the projects without using debt or alternative financing models. The City has successfully completed three ESPC projects in over approximately the past 10 years. As such, contracting an ESCO to complete these vital upgrades through an ESPC project was a logical course of action for the City. After a competitive proposal/bid process, staff chose and Council approved Seiberlich Trane Energy Services to complete the City’s project.

Energy Savings Performance Contracting is a project financing approach that improves facilities’ energy conservation in a cost-neutral or revenue positive manner. For ESPC projects, an agency partners with an ESCO to identify potential energy conservation measures (ECMs) and other specific needs or goals that the agency would like to include in the project. The ESCO then determines the annual savings that would be generated by each ECM and compares the savings to the anticipated annual payment necessary to pay for it. They then add up these calculations for all project components to ensure that the combination of ECM’s and project elements are revenue neutral or positive. The ESCO then secures financing and enters into a capital lease agreement with the agency which sets the payback period and interest terms. The financing is not allowed to exceed the ESCO-guaranteed savings over the defined period.

So, for example, if an ESCO identified $5 million in savings from specific ECMs over a 15-year period, the ESPC project could be funded through a loan in an amount of no more than $5 million, including interest, with a payback period of no longer than 15 years. Once the project is completed, the ESCO performs annual audits of the savings generated by the project and compares the actual savings to the savings projected in their initial analysis. If the actual savings underperform, the ESCO is contractually obligated to make payments to the agency to cover the shortfall, eliminating risk to the agency from underperformance.

Newark Project Cost Breakdown and Loan Information

In the case of Newark’s ESPC project, the approved capital lease term is 20 years, over which the project outflows (debt service and measurement & verification services) will be matched or exceeded by project cashflows. These cashflows include energy cost savings, operations and maintenance savings, solar renewable energy credits (SRECs), and pledged Green Energy Funds. Unlike a vehicle lease, the City owns all assets at the end of the 20-year payback term.

The total ESPC project cost is $9,489,296. After DNREC Energy Efficiency Investment Fund (EEIF) grant funding (approximately $1 million), Conservation Advisory Commission contributions ($80,000), grant funding from Efficiency Smart ($50,000), and other funds earmarked for an expansion of the McKees Solar Park (included in this project), the amount to be funded via the 20-year capital lease for this project is $8,150,965. Including interest and 20 years of measurement & verification services for the project, the total rises to $10,728,763.

The project cashflows also total $10,728,763, using conservative estimates, which will be realized over the 20-year loan period. As with all ESCO projects, cashflows match outflows, meaning that the City of Newark’s project will be cost-neutral or better every year over the 20-year loan term.

In addition to the beneficial cost-neutral nature of the City’s ESPC project, the scope of work for this project (outlined above) incorporates three City capital improvement projects that were originally slated to be paid for using cash or reserves and were anticipated to cost several million dollars: George Wilson Center HVAC Installation, City Hall HVAC Repairs, and City Hall Roofing Repairs. By merging multiple City projects into one cost-neutral initiative, the City is able to complete much needed infrastructure improvements and support sustainability efforts while simultaneously protecting the City’s reserves (the rainy day fund) and freeing up cash for other critical City projects and programs.

More Information:

For additional information on this project and to see Council’s comments on the ESPC project, please visit the links below: