The Good News, the Bad News, and the Really Bad News for Georgia Performance Contracting.

The Good News:

GEFA’s David Godfrey announced at the Georgia Energy Services Coalition meeting on Thursday that the procurement process for the first state performance contracting project in Georgia has begun.  The first project will be at Phillips State Prison in Buford, Georgia.  At first, the timeline looked promising—an ESCO would be selected by July 19^th and an investment grade audit would be completed by October.  This was good news considering that prequalified ESCOs were just announced last week.

The Bad News:

However, the performance contract will not be signed until July 2013.  Yes, a full nine months after the energy audit is completed and more than two years after the performance contracting statute came into effect.

The reason given for the lengthy delay between the audit and the contract signing was that  GEFA is financing this project through general obligation bonds.  That means that the project essentially must go through the state budget cycle.  The amount of the project must be submitted to the Georgia Office of Budget Planning by October 2012 in order to be considered and approved by the Governor for the 2013 budget.   According to Godfrey, the contract cannot be signed until the funds have been approved.

So, the state will lose out on the energy savings that could have been generated in the period from October 2012 through until the project is completed sometime after July 2013.  But also, it will be hard for the winning ESCO to accurately forecast prices and costs that far in advance, and with no mechanism built into the agreement for cost escalation, the ESCO will likely have to factor in a contingency (i.e increase the price of the contract to hedge against unknown cost escalations) that otherwise would not be needed if the project were proceeding immediately.  The state may also end up paying more for financing, as interest rates may increase between now and next summer.

The Really Bad News:

There will not be any other performance contracts procured by the state through GEFA until this pilot project is completed and deemed a “success.”  And, Godfrey was noncommittal as to whether this would be the procurement model for all future performance contracts (requiring each one to be approved to be in the following year’s budget).

If this is true, then there will be no other performance contracts solicited until at least late 2013 or early 2014, and if they are also subject to the same budget cycle delays, those projects would not be constructed until 2014 or 2015.   This is a huge disappointment to the ESCO and performance contracting industries, who have moved resources and personnel to Georgia over the last 18 months in anticipation of a growing performance contract market.  It is also a disappointment to the struggling Georgia construction industry, especially when one of the big selling points for the amendment that was passed to allow performance contracting was the creation of jobs in the construction sector.

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Georgia is Ready (and Waiting) to Experience the Benefits of Performance Contracting

Last year, Georgia enacted a statute allowing state agencies to enter into energy savings performance contracts.  The Georgia Environmental Finance Authority (GEFA), which is the agency that will oversee the procurement of performance contracts for state agencies.  According to the 2012 Georgia Energy Report that was recently released by GEFA, it has been working with advisory groups to develop rules and regulations for the program as well as standardized procurement and contract documents.

Although there have not yet been any solicitations for proposals for ESPC projects for state agencies, GEFA recently announced the ESCOs that have been pre-qualified to compete for future performance contracting projects.  The prequalified ESCOs are: AECOM, Chevron Energy Solutions, ConEdison Solutions, Constellation Energy, Eaton-EMC, Energy Systems Group, Honeywell, Johnson Controls, Linc Mechanical, NEXTera Energy Solutions, Noresco, Pepco Energy Services, Schneider Electric, Siemens and Trane. Additionally, GEFA has posted samples of its proposed Investment Grade Energy Audit Agreement and Energy Savings Performance Contract forms on its website.

According to the 2012 Energy Report, GEFA expects that performance contracting will help product 11,000 direct and indirect jobs and will ultimately help to reduce the state’s energy bills by up to 20 percent. In this month’s issue of the Construction Specifier (pg. 12), I have written an article about the benefits of ESPCs for both public agencies and contractors, particularly in a bad economy.  Hopefully, we’ll start to see some of these benefits in Georgia as the new performance contracting projects are initiated.

 

Amendment 4 is a Good One – Vote Yes

I am a skeptic when it comes to constitutional amendments.  I don’t think I have ever voted “yes” for any proposed amendment to the Georgia Constitution.  This year is different. I will be voting “yes” for Amendment 4 on the November 2^nd ballot, and you should too.  Here’s why:

Here’s the thing—constitution amendments are usually so poorly worded that even those that merit passing often do not because no one understands what they say or what the proposed amendment is meant to achieve.  I’m afraid that this is true for Amendment 4 as well.

On the ballot, it will read like this:

“Allows the State to execute multiyear contracts for projects to improve energy efficiency and conservation.

Senate Resolution No. 1231

Ga. L. 2010, p. 1264

Shall the Constitution be amended so as to provide for guaranteed cost savings for the state by authorizing a state entity to enter into multiyear contracts which obligate state funds for energy efficiency or conservation improvement projects?

(   )  YES

(   )  NO”

The actual amendment will be to add a new paragraph to Article VII, Section IV to read as follows:

Paragraph XII.  Multiyear contracts for energy efficiency or conservation improvement.

The General Assembly may by general law authorize state governmental entities to incur debt for the purpose of entering into multiyear contracts for governmental energy efficiency or conservation improvement projects in which payments are guaranteed over the term of the contract by vendors based on the realization of specified savings or revenue gains attributable solely to the improvements; provided, however, that any such contract shall not exceed ten years unless otherwise provided by general law.

In an earlier post, I explain how performance contracts work and address the most obvious benefit of these contracts, which is the ability of cash-strapped governments to obtain badly needed renovations and infrastructure improvements without having to have a large annual capital budget.  But there are several other good reasons to vote for this amendment.

• It’s good for the environment. The improvements implemented through performance contracts will mean that the state is consuming significantly less energy and water.  In Georgia, anything that reduces demand on the electric grid during peak times and/or conserves the use of water are good things.

• It will save money. State and local governments will immediately save money on electricity, natural gas and water bills upon completion of the improvements.  I have seen some projections of savings between $30 million and $50 million per year.  In times like these when governments are looking for every way to cut budgets and decrease spending, this is an innovative and painless way to do it.

• It will restore construction jobs. Georgia sustained greater than average unemployment rates during this recession and one of the sectors that lost the most jobs was construction.  If state and local governments start entering into performance contracts, Georgia will have a greater demand for construction workers again.  In fact, the National Association of Energy Services Companies (NAESCO) has performed an estimate of the potential employment growth that could come from performance contracting.  Click here to read it.

• It has a history of success. The federal government and many of our border states have been using performance contracting for decades to fund renovations, retrofits and infrastructure improvements with great success.  Georgia does not have to invent the wheel with respect to performance contracting legislation, and can benefit from the lessons learned by these other government entities.

• It will NOT increase taxes. State and local governments will not need to raise taxes in order to build annual capital budgets for these projects.  The projects are paid for by the savings in the energy bills created by the improvements.  If the energy savings are less than what was promised, then the ESCO, not the government is responsible for the shortfall.

The vote on Amendment 4 is well timed.  It comes at a time when we need it most.  Let’s not let this opportunity slip by.

 

Performance Contracting Amendment Is Now In The Hands of Georgia Voters

photo by Robert S. Donovan

This November when Georgia voters go to the polls to cast their ballots for mid-term elections, they will also have the opportunity to vote on an amendment to the Georgia Constitution to allow public entities to enter into Energy Savings Performance Contracts (ESPCs).

Most people have never heard of ESPCs or “performance contracting” and may not be able to fully understand the implications of this amendment simply by reading the proposed language on the ballot.  However, this amendment (designated as Amendment #4 on the November 2, 2010 ballot) is an important one because it is a step forward for Georgia in embracing legislation that promotes progressive energy policies and green building initiatives.

Under an ESPC, a state agency enters into a contract with an energy services company (ESCO) to perform a detailed energy and water use audit of a particular facility or campus to identify energy and/or water-saving improvements that can be made to reduce the agency’s operation costs going forward.  The ESCO then designs a retrofit project and builds or installs the energy/water saving measures identified in its audit.

Here’s how ESPCs differ from other contracts:

The Performance Guarantee

• The ESCO “guarantees” that the state agency will incur a specified amount of savings in energy and/or water consumption for a period of years (usually 10 years). “Savings” are generally tracked by ongoing various measurement and verification protocols that are written into the contract.

• If the savings do not meet the amount of guaranteed savings specified in the contract, the ESCO pays the agency the difference between the guaranteed savings and the actual savings.

Payment for the Project Costs

• Unlike traditional retrofit projects that are paid for from capital improvement budgets, with ESPCs the ESCO pays for or arranges financing for the project upfront so that the state agency does not have to come up with a substantial lump-sum payment at the time the project is performed.

• Instead, the project is paid for over the “guarantee” period from the “savings” that are generated by the improvements.  During that period, the ESCO is usually under contract with the state agency to operate and maintain the equipment and improvements for a separate fee.

Many states and the federal government have been using ESPCs for over a decade as a means to obtain badly-needed infrastructure improvements when shrinking budgets have not otherwise allowed for capital improvements.

The reason that ESPCs have not historically been used in Georgia is because Georgia’s Constitution prohibits the state or any of its agencies from entering into multi-year contracts.  This year, the Georgia legislature passed a constitutional amendment which would allow state agencies to pay over multiple years for “energy efficiency or conservation improvement projects.”  In order to take effect, the amendment must be approved by a majority of the voters casting ballots on the amendment.

If the amendment passes, it will be a significant victory for green building and energy-efficiency companies and advocates.  This change could potentially open the door to hundreds of millions of dollars of state projects, and could substantially reduce overall the energy and/or water consumption of the State of Georgia and its agencies.

So, I encourage everyone to check out these websites for more information about energy savings performance contracts and the proposed Amendment #4:

Energy Services Coalition

Georgia Environmental Finance Authority

Taxpayers for Energy Efficiency

U.S. Department of Energy, Federal Energy Management Program

I will also be posting more discussion points about energy saving performance contracts in the next few weeks in order to aid voters in their research about this important constitutional amendment.

In the meantime, do you think voters should vote “yes” to the amendment and bring energy savings performance contracts to Georgia?