Michigan officials recognized six public entities this week for making $39.5 million in cumulative energy efficiency investments that will save nearly $2.1 million a year in energy costs.
The projects by local units of government, public schools and colleges may not have otherwise happened without performance contracting, which allows public entities often short on capital to pay for multi-million dollar clean energy projects. Similar to Property Assessed Clean Energy (PACE) financing, debt services on the projects are paid back through annual energy savings.
While it’s a more established financing tool than PACE, performance contracts are geared toward public entities, said Daniel Mack, an energy solutions account executive at Johnson Controls and president of the Michigan chapter of the Energy Services Coalition.
“It’s exciting to see it become more commonplace and helping more school districts and cities,” he said. “Cities, schools and universities are getting a lot of things done they didn’t think they could. It makes people feel better about what they’re doing versus scraping and clawing for every dollar.”
Under energy performance contracts, various efficiency projects are paid for through avoided energy costs. These projects include HVAC upgrades, energy-monitoring devices, lighting and weatherproofing. Though Mack said they make up a small percentage of projects in Michigan, renewable energy installations like geothermal or solar also qualify.
Also, project savings can be bundled. Whereas replacing a roof may be expensive with fewer energy savings, that can be offset with a better return on investment, such as lighting upgrades.
“If we bundle we can help get some of the (additional) things without a great payback,” Mack said.
Once a project is installed, a company like Johnson Controls provides a “performance guarantee” of the annual savings, which are used to pay off the debt. Mack says there are several different lending options available for public entities. In most cases, cities usually bond for projects, he said. In Michigan, the length of contracts is limited to 20 years. Energy service companies follow federal standards to verify savings are achieved.
“We’re guaranteeing that will be achieved,” Mack said. “We’re not pledging revenues, we’re pledging the savings to those payments.”
The first laws enabling energy performance contracts in Michigan were adopted in the mid-1980s, and later on for schools and universities. Earlier this year, a Republican-sponsored bill that gained wide support in the Legislature extended Tax-Exempt Lease-Purchase (TELP) agreements to school districts.
Backed by multiple clean energy groups, such financing leads to lower interest costs and doesn’t act as debt like traditional loans, but rather “multiple renewable short-term leases,” according to the Senate Fiscal Agency. Mack said two projects so far have used TELP financing.
“They basically take the savings that fund a project in the operating budget and pay off the lease, which stays in the operating budget,” he said. “It doesn’t count toward debt capacity, which is real important for small cities and schools.”
This year’s winners of the Leaders in Energy Efficiency Awards — which is sponsored by the Energy Services Coalition’s Michigan chapter — were Branch County in southern Michigan; the city of Grand Rapids; Monroe County Community College; Oakland University; Parchment School District near Kalamazoo; and St. Ignace Area Schools in the Upper Peninsula.
Projects included a $16.1 million geothermal system at Monroe County Community College that will provide $275,000 in energy savings compared to its old HVAC system. A $12.7 million, 5-megawatt cogeneration turbine and waste heat recovery boiler at Oakland University is expected to save nearly $1.5 million a year in energy costs.
Matt Miller, superintendent at Parchment, said the school district initially needed about $650,000 of work needed on roofing. That morphed into a $2 million project that also included boiler replacements, temperature control and water conservation retrofits, and lighting upgrades. The district was also helped by Qualified Zone Academy Bonds that allowed it to borrow funds at 0 percent interest for 15 years.
“What we really needed was the roof repairs,” Miller said. “We really didn’t have on our radar doing the other energy-saving projects, though they were certainly welcome and are proving to save us a lot of money.”
Parchment’s upgrades were completed in January 2016. Since then, the district has already saved about $260,000, Miller said.
“The project has worked out very well for the district,” he said. “We’ve had declining enrollment. As that goes down, funds get tighter and tighter. Being able to come up with $650,000 to do roof repairs is not easy.”
Mack said Johnson Controls has led more than 150 performance contracts across Michigan, adding that there have been roughly 400 projects in total.
With lower LED costs, Mack said lighting is emerging as one of the improvements with the most value in energy savings. Energy-management and building automatic controls also provide a strong return.
“Lighting and controls typically will fund other things that need to be done,” he said.
Mack said the biggest change since the Energy Services Coalition launched in Michigan several years ago is awareness among state lawmakers about efficiency potential.
“It’s starting to trickle down and become more commonplace as it’s put in the public spotlight,” he said.