White Paper - Energy Public Private Partnerships

White Paper (Veolia) on Public Private Partnerships in Energy - Long form technical content edited here to remove company and State specific information.

Introduction

Public-private partnerships offer an excellent opportunity to reduce the cost of capital programs. There are many variants of public-private partnerships, each with benefits and challenges. Partnerships can be undertaken on a project by project basis or on an on-going advisory capacity.

Partnering for Solutions Experience has shown that the financial benefits realized through energy savings can easily finance the projects. Financing through the guaranteed savings of an Energy Savings Performance Contract (ESPC), grants supporting green technology, or utility technical assistance programs can make public-private partnerships all the more attractive, even under the tightest budget constraints. Economic and Financial Considerations Power Purchase Agreements also eliminate up front costs, but the right circumstances must in place for these types of agreements to be viable. Energy Savings Performance Contracts alleviate risk, offer financial flexibility, and guarantee results providing concrete evidence of a project’s value. However, they require selecting the right partner and entering a long term agreement. Choosing the right partnership depends on the goals, finances and technical specifics related to the project.

Based on the assumption that a facility is running at close to average efficiency levels and operating at about average cost, pursuing energy efficiency improvements can reasonably yield a 10-15% improvement in energy efficiency providing substantial energy cost savings. These numbers assume that optimal performance provides 0% opportunity for efficiency / cost improvements, and extremely poor performance provides even more opportunity for cost recovery (up to 40%).

Partnership Models The types of public-private partnerships normally employed for energy programs are:

• Energy Services Agreement

• Power Purchase Agreement

• Energy Consulting Services

• Energy Savings Contract

The public partner benefits by avoiding immediate risk and feeling no budgetary impact. ESA’s enable the pursuit of energy efficiency measures even without funding. It provides the unique opportunity to improve efficiency without investing capital. However, ESA’s also present unique challenges. An ESA require a private partner committed to investing. Providing enough incentive for the private partner’s investment can result in an agreement that may not be as favorable in the long term as some other options. ESA’s also face strict measurement and verification requirements as well as tight legal parameters to work within. Finally, they require a public entity to make a long term commitment to an energy partner. A Power Purchase Agreement (PPA) is an agreement for the purchase of power. PPA’s can be for power generated by solar, wind or other forms of energy, i.e. natural gas or biogas. Opportunities to pursue PPA's depend on facility specifics. An example of a PPA at a publicly run facility would be a a wastewater plant where biogas is recovered and used to make electricity. However, the opportunity to pursue PPA’s is typically limited under generation facilities owned by a third party.

• Project Development

• Ongoing Consulting

Ongoing consulting services can be used for the implementation of an overall energy strategy over a long period of time. Typically rates are agreed to and the public-private partnership is entered with the hopes of performance improvement and cost reduction over years. These agreements can extend to include a full energy management partnership where a private entity manages the public entity’s energy supply (procurement) and demand (consumption). The size and scope of such agreements can vary from commodity procurement to equipment performance to invoice verification and billing. Energy management is particularly attractive in unregulated commodity markets, for agencies that operate many facilities with a large number of utility accounts, or agencies that re-distribute power. The benefit of consulting agreements is the flexibility to choose the level of commitment and the ability to set parameters. Public entities have the ability to enter multiple public-private partnerships at once or over the course of years. Consulting partnerships are excellent for pursuing energy conservation measures, creating a broader energy strategy and for managing energy. The major drawback of a consulting partnership is that the project costs are incurred by the municipal agency up front. Whether it’s a long term advisory relationship or an immediate project, the public entity has to fund the project on the current year’s budget. An Energy Savings Performance Contract (ESPC) is a public-private partnership where energy savings are guaranteed. In an ESPC the private partner is the single source of accountability for the guaranteed savings. This guarantee alleviates risk for the public partner and also enables opportunities for third party financing. Major stages of an ESPC are:

• Analysis

• Implementation

• Verification

With the IGA in hand, the public partner can secure funding for the project. Banks and other third party financiers base the terms of their proposed loan on the guaranteed savings specified in the IGA. Once a guaranteed savings contract is executed, the next phase of the ESPC is implementation. The private partner acts as the general contractor for the energy improvement project taking full ownership of the whole process. This ensures that the project is executed with the same integrity as the analysis and also ensures single source accountability from the development phase to the guarantee phase. Once the improvements have been successfully implemented there are different scenarios for verification:

• The private partner trains public sector employees to appropriately operate the newly renovated/installed equipment to maximize efficiency. Then the private partner provides measurement and verification of the new renovations, performing testing and monitoring to ensure that the equipment is running as projected. Performance deviations are identified and resolved.

• The private partner operates the equipment guaranteeing optimal efficiency and making adjustments as necessary.

• The private partner owns and operates the equipment guaranteeing optimal efficiency and making adjustments as necessary.

Public sector entities are well suited to take advantage of ESPC partnerships. Capital bonds and tax exempt loans can be leveraged to enhance the ultimate financial outcome. Spreading a project’s cost out over time, lessens the impact on budgets, and ultimately allows the project to pay for itself as savings are realized. The guaranteed savings of an ESPC provide tangible results that can be used by public entities to argue in favor of investment. Coupled with the flexibility of the financing options, ESPC’s provide a strong case for implementation. The major challenge presented by an ESPC is finding the right partner. In order to fully commit to an ESPC partnership and realize the benefits of guaranteed savings there needs to be a long term commitment to the private partner. For Water Authorities this is especially challenging since few ESPC are true experts in water/wastewater operation. Energy Firm is unique as an ESPC that can rightfully claim to be world class water system experts. Only through full implementation of the proposed plans and measurement and verification can the guaranteed savings of an ESPC be realized. A public-private partnership can help a municipality align their sustainability goals in ways that may not be immediately obvious. Independent critical analysis can often lead to innovative solutions. Energy Services Agreements require no immediate investment, but may cost more in the long term and are subject to strict measurement and verification requirements. Energy consulting agreements provide project by project partnerships with private entities, but they have to be funded accordingly. There are many opportunities to save money relating to energy, but the specifics vary for each municipality and facility. Owning the property and plant equipment at facilities can help eliminate additional the hurdles of seeking landlord or equipment-provider approval. These hurdles, while by no means insurmountable, add additional factors for consideration when pursuing renovations. Pursuing energy improvements at a municipal facility typically requires a consulting engineer to develop the specifications or the internal development of specifications. Improvements would be implemented by outside contractors, municipal resources or a combination of the two. An Energy Services Agreement (ESA) is public-private partnership where the private partner takes on the cost of implementing the energy conservation measures. By taking on the cost, the private partner incurs the risk, and the project’s cost is completely off of the public entity’s balance sheet. The public partner pays the cost of implementation as energy savings are realized. Energy Consulting Services provide an excellent mechanism for partnering with private organizations to pursue energy efficiency objectives. Public entities can hire private consulting and project management firms to identifying and execute energy conservation measures that save money and improve efficiency. The nature of the relationship can vary in degree and scope. Project Development energy consulting services are provided for specific projects with defined scopes of work. For example, a municipality may put out a request for proposal for an energy audit. The preferred vendor is selected to execute the audit, and once their obligation is fulfilled the relationship is ends. Due to the guaranteed savings, ESPC’s require the in-depth analysis known as the Investment Grade Audit (IGA). An IGA provides a thorough breakdown of potential energy conservation measures at a facility, everything from operation and maintenance recommendations to suggestions for major renovation. The IGA includes cost analysis of implementation and financial analysis of the savings guaranteed by such implementation. Third party financing is arranged during completion of the IGA. Performance guarantees remain in place until the expiration of the contract term, typically 15 to 20 years. Conclusion Public-private partnerships can be extremely beneficial for both parties. When considering a public-private partnership selecting the right kind of partnership and finding the right partner are key ingredients for success. There are a range of public-private partnerships from which to choose, each with unique benefits and challenges.