'Escos' guarantee their customers energy savings.

WHEN THE CITY OF FORT SMITH'S ENERGY costs exceeded by more than $1 million what it originally had budgeted in 2006, city officials had no choice but to become more energy efficient.

Like most municipalities, Fort Smith had a tight budget and no money to throw at a pricey project to identify and correct energy waste. Enter the energy performance contract, which is a growing trend among municipalities and other public entities to pay for energy savings upgrades with little risk and often no money up front.

Performance contracting has thus far been used primarily by government agencies, but it's a concept that may soon find more favor in private industry as well.

"The beauty of performance contracting is that, generally speaking, the project requires no up-front cost to identify energy savings, and once a contract is signed to move forward with the project, the firm would be paid from the savings achieved through energy efficiency," said Alie Bahsoon, purchasing manager for the city of Fort Smith. "And if they don't reach that guarantee, then the firm will pay the city."

An energy performance contract typically works this way:

An energy service company, or Esco, identifies and evaluates energy-saving opportunities and recommends a package of improvements guaranteed to pay for themselves with the savings they generate over a specific time frame. A building owner, the Esco or a third party often provides financing for up-front costs, but in some cases state bonds or federal grants also factor into the contracts to decrease or offset the initial cost.

All fees associated with the project are generally pinpointed in the initial contract to be financed, including a general ballpark payment to the company between 15 and 30 percent of the total cost. The total cost is then broken down into monthly lease payments to be made from the savings.

If they don't pay for themselves over the length of the contract, which is generally 10 to 20 years, the Esco pays the difference.

"The benefit, especially for a school district like us, is definitely that we don't have to have any cash," said Jerry Massey, director of plant services for the North Little Rock School District, which completed a $4 million HVAC and clean air project in two of its schools last summer through a performance contract with Trane Inc. "It's a great way to get an expensive project done that we normally would not have been able to afford."

Energy performance contracts are mostly, though not exclusively, executed by municipalities and other public entities.

"They are the ones that often have no capital or extra money set aside to throw at projects like these," said Scott Beardsley, senior vice president at Crews & Associates Inc. of Little Rock, which offers financing for Escos to help pay for the projects up front, like Trane's project with the North Little Rock School District. "Big companies often can use capital for expenses like that or budget ahead to do those."

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A classic example is Baldor Electric Co. of Fort Smith, which invested $1.5 million over three years in energy conservation and achieved energy savings of $800,000 a year. Cash-strapped public entities would love to see those savings, but don't have the money in their pockets to make the initial push.

"Cities, especially ones in a situation like ours, can't just decide to throw that much at energy efficiency up front, regardless of how much it might save in the long run," said Fort Smith's Bahsoon. "We're extremely excited about getting an audit and seeing firsthand what we can be doing better and then seeing those results. We couldn't do that without an energy performance contract."

Makes Cents

Bahsoon said the city collected bids from five companies and is narrowing the group down to "two or three" that will then come in for an interview.

Once a company is chosen and the City Council approves, Fort Smith will have a sweeping audit done on everything from the energy that traffic signals use to upgrading the heating and air-conditioning units across a wide range of city facilities.

"At this point, it's too early to put a price tag on how much the project will cost and how much it'll end up saving, but I do know that we're dedicated to being more energy efficient and are eagerly anticipating the results," Bahsoon said.

The Russellville School District recently completed a 10-year contract with Johnson Controls of Milwaukee, which is one of the country's leading Escos. According to the company, it entered a 10-year, $1.27 million contract with the district to bring aging equipment back to original manufacturer specifications and upgrade lighting, replace HVAC systems and overhaul chillers. The company said it saved an initial one-time $206,156 on equipment upgrades and reduced utility bills there by about $133,000 per year.

According to Trane, which handled the North Little Rock School District project, that job is guaranteed to deliver annual savings of about $98,000. Other identified maintenance, operational and cost-avoidance savings will allow the project to fund itself during the course of the contract.

The University of Arkansas was sold on the potential benefits of energy performance contracts and is currently wrapping up a $3.5 million, eight-month project to upgrade its John W. Tyson Building.

"If at the end of the payback period the projected savings fall short, the contractor will actually write us a check for the difference; therefore the anticipated energy savings are guaranteed," said Larry Young, construction coordinator for the UA's facility management department. "I will say, however, we expect that won't happen; in fact it's very possible the energy savings will exceed the guarantee."

Specific legislation, Arkansas Act 1980 of 2005, opened the door for state revenue bonds to finance energy performance contracts. In the UA's case with the Tyson Building, the bond issue will be retired over the length of a 20-year performance contract with Energy Systems Group of Newburg, Ind.

The 112,000-SF building houses the UA's poultry science department, units of the UA System Division of Agriculture's Center of Excellence for Poultry Science and the U. S. Department of Agriculture's Poultry Production & Product Safety Research Unit.

Energy-Saving Areas

Young said several energy-saving areas were found in the initial audit and were executed, including:

* All fluorescent bulbs changed to use less wattage, along with the installation of electronic ballasts (devices that limit the current in electric circuits) and motion sensors in offices, labs and hallways;

* A constant, low-flow system was retrofitted onto 57 fume hoods in laboratories;

* Automatic temperature controls were upgraded and linked to the motion sensors in new lighting systems;

* A 90-ton heat-recovery chiller was installed to save energy by transferring heat from condenser water in the cooler system to the heating systems.

Noel Neighbor, a building executive for the Tyson Building, said other improvements were also being made along with the energy upgrades because of the savings.

"Our coolers and other systems were also in need of repair," he said. "Because of the savings on this project, we were able to get everything taken care of all at once."

The UA is so keen on performance contracting and the benefits of energy efficiency that it created a new position and made a new hire just last week to oversee and coordinate sustainability efforts in campus facilities. Nick Brown, formerly the pollution prevention coordinator in the office of environmental, health and safety within the facilities management department at the UA, will handle all future facility sustainability efforts.

By Nate Hinkel

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RELATED ARTICLE: Escos aim to educate potential clients about savings.

ACCORDING TO A STUDY completed last ear by the National Association of Energy Service Companies, revenue generated by Escos is growing.

The study showed industry-wide revenue grew at a steady 20 percent rate from 2004 to 2006 and totaled about $3.6 billion in 2006. The savings generated from being more energy efficient, according to the study, accounts for about $2.5 billion of that total.

The study does show, however, that performance contracting is not the best approach in all markets, especially where projects are small and prospective energy and dollar savings are not significant enough to warrant a performance contract.

That could be the case in Arkansas, where much of the public work and "low-hanging fruit" already have been picked over, according to Mike McClellan, a specialist at Trane, which has handled a variety of performance contracts in the state, including the North Little Rock School District.

The Arkansas Department of Education reports that of the 245 school districts in Arkansas, about 111 of them entered into an energy performance contract at one time or another since the early 1990s, whether it was simply for lighting ranging from $25,000 or a full sweep that goes as high as $4 million.

Municipalities--such as Fort Smith, Texarkana and Little Rock--have also used them. In Little Rock's case, it used Johnson Controls for a $7 million deal to recover methane gas at the city's land fill and sell it, which will generate about $400,000 per year, or more than $7 million during the course of its 15-year performance contract.

But getting the private sector to realize the benefits is the key to future growth for Escos in Arkansas, according to McClellan. There's also plenty of emerging technology and processes as "green" increasingly becomes the buzz.

"Escos are part of the future business proposition because they have the skill sets to develop a range of complicated, in-depth and innovative projects," he said. "It's becoming an emerging business, but the key is having clients that are receptive to it, especially on the larger scale it takes to make these work."

--Nate Hinkel