Wednesday, August 3rd, 2011 - 11:23
Wednesday, August 3, 2011 - 12:18
As we have seen in earlier posts, organizations that can successfully execute a strategy to reduce energy usage can potentially realize significant cost savings. In this entry, we will look at some different ways to pay for an energy cost savings program.
“It takes money to make money”… even when “a penny saved is a penny earned”
Profit-maximizing firms only invest in both revenue-generating and cost-cutting activities. In most public sector organizations, however, money is made generally when it is not spent, but even doing that sometimes takes money. Energy savings projects have traditionally been funded by:
- Tax Credits
- Other Incentives
Two other vehicles have become very popular in recent years. Let’s take a look at them.
Energy Savings Performance Contracts (ESPC) – Help Me Help You
The desire to reduce energy costs and the need to pay for such initiatives are not new concepts and neither is a pay-as-you-go model. For over 16 years, Federal agencies have implemented cost-cutting energy projects through ESPC funding vehicles that require neither upfront capital expenditure nor special funding from Congress. Under a typical ESPC, an energy services contractor will analyze an agency’s as-is state, determine an appropriate course of action that will guarantee cost savings, and help implement that solution. A negotiated percentage of the agency’s newfound cost savings is paid to the contractor over a period of time to satisfy the deal. In most cases, the agency will award an ESPC as an indefinite-delivery, indefinite-quantity (IDIQ) contract in order to keep reaping benefits as new projects are scoped and undertaken by the partnering company.
Power Purchasing Agreements (PPA) – Power to the People
A PPA is a contract between a seller and buyer (typically a utility) of electricity generated by a particular type of energy, such as solar, wind, or geothermal. The utility, then, often resells the power to other buyers via new PPAs. PPAs are growing in popularity in the U.S. Government because of the much-discussed (but not yet enforced) Federal mandates requiring that agencies source 15% - 20% of their electricity from renewable energy sources. One current drawback (that some have creatively worked around) is that Federal agencies can only sign PPAs valid for ten years or less.
Both ESPCs and PPAs represent innovative ways to “finance” energy cost savings, with the latter promoting the usage of renewable energy sources. Look for these two instruments to keep playing sweet tunes for more organizations as they seek to decrease energy usage and achieve cost savings.
Coming Up Next:
In the next few posts, we will explore how to effectively deploy the governance, policy, and technology structures necessary to optimize an energy usage reduction program for the long term.
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Tim Fain is an Associate Partner and Service Area Leader within IBM’s Global Business Services Public Sector. Mr. Fain has more than 30 years of technical, managerial, and consulting experience. Specifically his experience involves developing organizational, economic development and environmental and energy sustainability strategies; improving business models and processes; and helping organizations develop transformation roadmaps. He uses his extensive knowledge of Federal regulatory and budgetary processes, e-Government principles and methodologies, and strategic planning to help public sector clients address policy, service, and transformational challenges.
Prior to joining IBM, Tim spent eight years at the Office of Management and Budget where he worked on a broad range of Federal government information technology and policy issues. A former US Navy Submarine Officer, Tim holds a BS in Metallurgical Engineering, a MA in National Security Studies, and a MPP in International Trade and Finance.
Tim Fain (firstname.lastname@example.org)
Ankit J. Mody is a Senior Consultant in the Public Sector Strategy and Innovation practice of IBM Global Business Services. He has nearly 15 years of experience in providing business solutions to clients in industries including television broadcasting, food & beverage, consumer electronics, and government. Mr. Mody has led teams to research, develop, and deliver data-driven solutions to client executives.
He holds an M.B.A. from Georgetown University and a B.S. in Industrial Engineering and Operations Research from Columbia University. Ankit J. Mody (email@example.com)