The Center for Sustainable Infrastructure Blog

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The Center for Sustainable Infrastructure Blog

Sustainable Energy Utilities and ESCO Financing Can Save Money and Reduce Carbon Footprints

May 3rd, 2017 · No Comments · Energy

saulk_0By Kathleen Saul Master of Environmental Studies Faculty at The Evergreen State College

“The quickest way to double your money is to fold it over and put it back in your pocket.”   —Will Rogers

William Penn Adair, aka Will Rogers, lived at a time before the spread of electric lights, before highways criss-crossed this nation, and when only 76.2 million people lived in the 45 states of the United States (1900 data).  His words ring true today as they did back then.  Today, over 308 million people reside in the 50 states and draw upon its natural resources to power cars and buses, computers, lights, heating and cooling systems, industrial equipment and cellular phones, hair dryers and electric toothbrushes, toll booths on highways and checkout stands in grocery stores.  Energy–sourced from coal, natural gas, nuclear, hydro, solar, wind, and other sources—keeps the country buzzing.

As expected, using energy is not free.  We pay for electricity in dollars per kWh, for natural gas in dollars per mmBTU, and gasoline or diesel for a car, bus or minivan in dollars per gallon.  Those prices fluctuate depending on national policies, subsidies accorded providers, global affairs (such as wars in the Middle East), demand, and local taxes (such as carbon taxes or taxes to pay for road repairs).

In recent years concern over global climate change and the impact of energy use on climate has forced many people to take a harder look at their energy consumption patterns.  Appliance manufacturers have introduced more efficient versions of popular brands.  The Environmental Protection Agency (EPA) and Department of Energy worked to develop labels to make it easier for consumers to choose more energy efficient options.  Automobile manufacturers have increased the miles per gallon achieved by many small cars.  As a result, the energy consumed by each American has gone down over time.


Figure 1: U.S. Energy Use Per Capita (Based on data from the World Bank, World Development Indicators)

But there is more to be done.  We have to turn our attention to the structures housing the computers and refrigerators, HVAC systems and televisions.  We need to look at personal residences and businesses.  This work starts with an energy audit.  After examining the structure and its energy profile, an energy service company (ESCO) provides a list of different options for making the home or business more energy efficient, how much each option will cost, and the amount of energy each will save.  The business owner or resident can determine how much invest.  They may decide just to replace light bulbs or may choose to invest in a new heating and cooling (HVAC) system, to replace leaky windows, and to add insulation to the attic and basement.  They will contract with the ESCO to do the work and to pay that ESCO based on how much money they save on their energy bills, from the start of the project until the total cost of the work has been repaid.  Figure 2 below illustrates a simple example:


Figure 2: A Simplified View of a New Way to Finance

If previous energy bills totaled $100 and new bills total $75 dollars per month, $25 per month (the hatched portion of the graph) will be paid towards the cost of the heating and cooling system, windows, and insulation.  There is no large up-front investment to worry about.  The bills are no higher than before the work was completed and, in the end, the building will be more energy efficient.  After the work has been paid off, bills will be reduced to $75 per month.

This same type of financing arrangement can also be applied toward renewable energy projects.  Rather than having to buy solar panels on credit, interested parties can work with a solar company which will install the panels and take the money that would have been paid to an electric company as the installment payment for the panels.  After a period of time, the interested parties become the owner of the panels and the electric bill drops to zero (theoretically).

The Delaware Sustainable Energy Utility (SEU) has built on this model to help increase the energy and water use efficiency of prisons and schools in Delaware, invest in renewable energy systems, and reduce the energy use of households.  The SEU, a tax-exempt entity, tapped the private bond market to raise $72.5 million with which to implement large scale, long-term sustainable energy measures.  These projects involve four interrelated contracts: a) A program agreement; b) A guaranteed savings agreement; c) An installment payment agreement; and d) An indenture (Sustainable Energy Utility (SEU): The Business Model of the SEU,  The program agreement describes the contracted relationship between the SEU, the ESCO(s), and other participants in the program.  It provides details about reporting requirements and monitoring programs, as well as specific targets for the programs.  The guaranteed savings agreement follows an audit by an ESCO and outlines the appropriate energy, water and other conservation measures, or renewable energy or distributed energy system installations that will be undertaken to reduce consumption.  The installment payment agreement details the plans for payments from the participant to the trustee.  The trustee works on behalf of the bondholders.  In the case of the Delaware SEU, the SEU is the trustee.  The relationship between the bondholders and the trustee is outline in the indenture.  Because the model relies on contractual agreements, the risk to any one party has been reduced.  Setting targets at the outset and providing monitoring throughout the life of the project both help ensure success of the energy efficiency and conservation projects.  Any deviations from the energy efficiency and conservation plans can be identified early and can be corrected.

In the case of the SEU, the figure looks slightly different than Figure 2 above.  Figure 3 shows that the Aggregate Guaranteed Savings over the life of the project will far exceed the Aggregate Payments made toward the project.  Thus, the concept is the same.  Regardless of the source of the funds, there is no large up-front payment and the contractually guaranteed savings will exceed the payments made.


Figure 3: Large Scale, Long Term Deep Retrofits (Source: Sustainable Energy Utility, SEU – The Business Model of the SEU)

Projects using this type of financing approach also have been implemented in Thane, India as part of the Campaign for Renewable Energy under Dr. Sanjay Mangala Gopal ; in Sonoma County, California and in Pennsylvania (See  Small scale, short-term projects can benefit from this approach, as can large-scale, long-term ones.   We can then put the money back into our pockets as Will Rogers bade us to do many, many years ago.


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