For Funders and Social-Enterprise Investors
Because buildings consume 40% of the energy used in the United States, this sector offers an enormous opportunity for energy savings and greenhouse gas reductions.
It is widely known that current funding for most state and municipal climate change goals will cause them to fall far short of their aspirations. At a minimum, federal funding for energy efficiency has been scaled back with the end of the American Recovery and Reinvestment Act (ARRA). In some sectors, funding for energy efficiency has been reduced below pre-ARRA levels.
If the significant energy reductions needed to reach those climate change goals are to take place, billions of dollars of private investment in energy efficiency and renewable energy must flow into the market.
Since the 1970s, energy service companies have successfully been using private capital to improve the energy use of large buildings. ESCOs help large institutional clients reduce energy costs by:
- Analyzing the energy use of buildings and operations
- Identifying opportunities for deploying energy-efficient technologies and on-site renewable energy systems
- Estimating the costs and savings of new equipment and building improvements
- Contracting, financing, and managing energy projects
- Monitoring and verifying energy savings
A recent study puts the annual value of the ESCO market between $5 and $7 billion, with an annual growth rate of 7% for the ESCO industry.
These commercial ESCOs seek projects that offer a maximum return on investment and low financial risk to their investors. ESCOs typically take on energy improvement projects that are in excess of $1 million. Their approach features energy performance investments that have relatively short payback terms (typically 5 to 7 years for large institutional projects in the municipal, university, state, and hospital markets), are easily implemented and measured and which represent the best returns on investment that are achievable for their investors.
To meet their targeted returns on investment, ESCOs undertake large projects. This leaves an underserved market in smaller buildings generally, with a largely unserved market of these smaller buildings in affordable housing, schools, health care facilities, and municipal buildings. These are buildings with classically low levels of access to capital.
The PPESCO approach
The daily operations of a PPESCO are similar to those of ESCOs, though the core objectives and purpose differ. The business is dedicated to identifying new clients, exploring project ideas with them, screening proposed projects for cost-effectiveness, negotiating contracts, undertaking construction, completing projects, and managing post-construction with building owners or operators and their tenants / occupants.
The PPESCO model assumes that energy performance work is bundled. The integrated services involve:
- Technical assistance (especially building energy analytics)
- Management of the construction and installation of specified building energy measures
- Coordinated access to capital
- Energy performance contracting (EPC) through which PPESCO guarantees the energy savings, and helps the client optimize energy performance for the duration of the project.
In many ways, a PPESCO’s approach is different from that of an ESCO. A PPESCO has a primary goal of serving the public and reducing environmental impacts. It extends the ESCO model in the following ways:
- Goals based on energy savings, not return on investment. It has an operating goal of achieving 30% average minimum energy savings
- Size. A client base of owners of small to medium-sized public-purpose buildings
- Comprehensiveness. Whole-building energy assessment and comprehensive technical services to achieve maximum energy reductions
- Mission alignment. A dedication to aligning the mission and goals of the client with interested capital sources
The PPESCO offers an innovative approach to responding to the environmental imperative to reduce greenhouse gas emissions from buildings. By placing the investment emphasis on reductions in greenhouse gas emissions and increases in public benefits, the PPESCO opens the door for smaller public-purpose building owners to link up with mission-aligned social-enterprise investors.
This solution reduces energy costs, allowing clients to make the most of the funds they have. A PPESCO can help a client meet primary mission goals while also protecting their operations from a future of increasingly volatile energy costs.
Public-purpose client engagement
Owners of public-purpose buildings often have a hard time knowing how to reduce their buildings’ energy use due to limitations in both resources and building science knowledge. At a minimum, they should:
- Know how the energy they pay for is being used in their buildings
- Understand which building energy improvements are cost effective and correctly specified for them
- Access the kind of capital that can fund those improvements
Most of all, they need to have confidence that any building energy improvements they undertake will in fact save energy and reduce energy costs.
PPESCOs engage clients, and bring well-recognized standards of excellence for energy improvement services to underserved markets.
About energy performance contracting
PPESCO energy performance contracts (EPCs) are structured to guarantee the energy savings estimated by the PPESCO. This is important for ensuring payback on the investment and cash-flow-positive status for the building owner.
An EPC forms the basis for specifying all work to be done, terms and conditions, and mutual expectations between the client and the PPESCO.
It is the backbone of any project. It ensures that building systems are regularly monitored, and that adjustments to maintain optimal energy savings are made expeditiously. The building owner continues to bear the risks pertaining to general building operations, whether energy price fluctuations at the utility level, impacts from adverse weather conditions, changes in occupancy or use, or other factors beyond those related to building energy improvements.
EPCs stipulate regular commissioning of buildings (ensuring energy improvements have been installed as specified and are performing to those specifications). It also enables continued energy savings through training of building staff in system operations, and via helping tenants use best practices for optimizing energy use.
What competes with a PPESCO?
Despite the fact that the idea is not new, no one else has put together a viable PPESCO business model to serve the intended markets identified here, using a long term integrated services approach that results in deep energy savings.
This model has been built with consideration for each of the services that should be integrated, for the level of expertise needed to build a PPESCO business, and for the knowledge and management skill necessary to see projects to completion. At the heart of this model is its design for durability under fluctuating market conditions.