Developing, Financing and Implementing an Energy Savings Improvement Program

01.21.10

 

Chapter 4 of the Pamphlet Laws of 2009, effective March 23, 2009, was enacted to provide a means by which local school districts, public institutions of higher education, other local government entities included in the definition of Contracting Unit under the Local Public Contracts Law, N.J.S.A. 40A:11-2, state agencies and certain other public agencies may implement energy savings improvement programs through the process provided in that act (the ESIP Law).  The law was later amended by Chapter 55 of the Pamphlet Laws of 2012, effective September 19, 2012. The provisions governing local school districts are codified at N.J.S.A. 18A:18A-4.6 et seq.  The legislation took a very long time to develop, spanning a period of 15 years, and is intended to allow government agencies to make energy-related improvements to facilities and to pay for the costs using the value of energy savings that result from the improvements.  While modeled after legislation used in other states, it is significantly different in a number of ways.  In other states, legislation permitting the use of energy services companies (ESCOs) to develop and implement an energy savings program involves a turn-key process with a single ESCO involved.  In New Jersey, the process involves a number of procedural requirements intended to provide safeguards, including requirements to publicly bid sub-contracts and to obtain independent energy savings verification at several points in the process.  The legislation has been interpreted by Local Finance Notice 2009-11, adopted June 12, 2009, and some of those interpretations have been confirmed in the 2012 amending legislation.  Local Finance Notice 2011-17, adopted June 16, 2011, provides updated guidance.  The law is intended to encourage local governments and state agencies to implement energy savings improvements for the purpose of reducing their costs, reducing energy usage, avoiding the need for the development of additional energy production, and reducing carbon generation and to further the goals of the state’s Energy Master Plan approved in 2008.  The 2008 Energy Master Plan has since been updated as well. 

The Energy Audit

The process begins with an energy audit.  The energy audit must be conducted either by the Board of Education or by a qualified third party retained by the Board for that purpose.  The energy audit identifies the current energy use of any old facilities and energy conservation measures that can be implemented to produce energy savings and energy efficiencies.  The definition of energy conservation measures in the ESIP legislation goes beyond what is commonly considered energy conservation measures.  It includes

…an improvement that results in reduced energy use, including but not limited to, installation of energy efficient equipment; demand response equipment; combined heat and power systems; facilities for the production of renewable energy; water conservation measures fixtures or facilities; building envelope improvements that are part of an energy savings improvement program; and related controls for each of the foregoing.  N.J.S.A. 18A:18A-4.6(g).

The definition includes water conservation measures, which are defined to mean “…alterations to a facility or equipment that reduces water consumption, maximizes the efficiency of water use or reduces water loss.”  Id.  It also includes facilities for the production of renewable energy.

The State of New Jersey provides a Local Government Energy Audit program under which a municipality or school district may receive financing for an energy audit.  Apparently, this program is available on an annual basis, so some districts have participated in it more than once, and a municipality and a local school district can each participate in it.  From time to time there has been a backlog in applying for the program since only a few firms, currently four, have been certified as available to provide the program’s energy audits.  Other firms who are qualified, or the district itself, may provide the audit but not as part of the reimbursable program.  In certain circumstances, the cost of these may be much lower.  Obviously, the cost will depend on, among other things, the depth of the review.  When recommended improvements are undertaken, additional rebates or incentives may be available. 

Selection of Energy Services Company

Local school districts may decide to use the services of an energy services company or ESCO to help develop the energy savings plan and to assist in implementing and financing it, or to help with part of those services.  An energy services company is a commercial entity that is qualified to provide energy savings services in accordance with the provisions of the act.  If the ESCO helps develop the plan, it must also offer to guarantee the energy savings to be implemented through the plan, and the Board would decide whether to purchase that guarantee.  The ESCO may not conduct the initial audit.  The ESCO services could be provided by an engineer and through other means, but an ESCO provides specialized energy savings experience, often has broad resources and must offer to guarantee the energy savings.

Once the audit is complete and if the Board decides to utilize the services of an ESCO, it may select the ESCO either through traditional public bidding or through competitive contracting procedures set forth in N.J.S.A. 18A:18A-4.1 et seq.  If the competitive contracting proposals are utilized, the district would develop a request for proposals, publish the request for proposals, receive and review the proposals at least 20 days after the published notice, and select an energy services company on the basis of the criteria established in the request for proposals.  The Board of Public Utilities (“BPU”), which oversees the ESIP process, has developed a model RFP.  The RFP is submitted to BPU for approval and often must be submitted to the State Comptroller for approval as well prior to advertising if required by State law.   The Board would then adopt a resolution appointing the ESCO and probably authorizing a preliminary contract with the ESCO for development of the plan.

Some districts decide to pursue an energy savings improvement program without an ESCO.  These projects are referred to as Do It Yourself Projects.  The districts generally seek the assistance of architects and engineers with environmental engineering experience to assist in the development of the energy savings plan.  The district would then use conventional bid procedures to implement the energy conservation measures. 

The Energy Services Improvement Plan Development    

The ESCO or other professionals would then work with the Board to develop the plan.  The plan must (a) contain the results of the energy audit; (b) describe the energy conservation measures that will comprise the program; (c) estimate greenhouse gas reductions resulting from those energy savings; (d) identify all design and compliance issues that require the professional services of an architect or engineer and identify who will provide those services; (e) include an assessment of risks involved in the successful implementation of the plan; (f) identify the eligibility for and costs and revenues associated with the PJM Independent System Operator for demand response and curtailable service activities; (g) include schedules showing calculations of all costs of implementing the proposed energy conservation measures and the projected energy savings; (h) identify maintenance requirements necessary to insure the continued energy savings and describe how they would be fulfilled; and (i) if developed by an energy services company, a description of and cost estimates of an energy savings guarantee.

Calculation of Energy Savings

The Board of Education may only enter into an energy savings improvement program if it has determined that the savings generated from the reduced energy use from the program will be sufficient to cover the costs of the program’s energy conservation measures.  Energy savings is defined to mean

a measured reduction in fuel, energy operating or maintenance costs resulting from the implementation of one or more energy conservation measure services when compared with an established base line of previous fuel, energy, operating or maintenance costs, including but not limited to, future capital replacement expenditures avoided as a result of equipment installed or services performed as part of the energy savings plan.  Id.

The calculation of energy savings involves a determination of the dollar amount saved through implementation of the energy savings improvement program using the guidelines of the International Performance Measurement and Verification Protocol or other protocols approved by the Board of Public Utilities.  The calculation can include any operational savings, energy rebates or incentives and capital cost avoidance, but need not include the costs of the energy audit and cost of verifying savings.  Since the costs of the program are to be offset by the savings, guidance is expected as to how future capital replacement expenditures avoided as a result of equipment installed or services performed can be utilized and counted toward the energy savings.

When an energy savings plan includes energy conservation measures that involve power purchase agreements for installation of solar energy panels or energy conservations measures that benefit from the Direct Install Program, which are eligible for significant State funding, the savings generated by those energy conservation measures can count toward the plan savings.  Districts considering an energy savings improvement program also may wish to be careful about undertaking energy savings projects prior to adoption of a plan as that savings would not count and the energy projects with the fastest cost recovery might not be available to leverage projects with a longer cost recovery time. 

Third Party Energy Savings Verification, Plan Adoption and Guarantee Acceptance

Once a draft plan is prepared for the Board of Education and prior to adoption, the Board of Education is required to contract with a qualified third party to verify that the projected energy savings to be realized from the proposed program has been calculated as required by the ESIP law. After the verification, if the Board of Education determines that the energy savings generated from the reduced energy use from the program will be sufficient to cover the cost of the programs energy conservation measures as set forth in the energy savings plan, the Board may adopt the energy savings improvement program. If the guarantee option is accepted by the Board, the Board is required to approve the guarantee by a separate Board action.  Upon adoption, the plan must be submitted to the Board of Public Utilities for posting on the internet on a public webpage maintained for that purpose.  If the Board of Education maintains its own website, it must also post the plan on its website.  The Board of Public Utilities may require periodic reporting concerning the implementation of the plan.

 Subcontracting and Project Implementation

When the Board of Education approves the plan, the chosen energy services company may be designated as the general contractor for the improvements to be made pursuant to the energy savings plan, but subcontractors must be hired pursuant to the public bidding requirements applicable to the Board of Education.  Subcontractors must be classified under the act to perform the required work.  Generally, the energy services company may not use a subsidiary or wholly-owned or partially-owned affiliate to assist in implementation of the plan.  However, when the energy services company is the manufacturer of direct digital control systems and contracts with the Board of Education to provide an energy guarantee in accordance with the ESIP Law, the specification of the direct digital control systems may be treated as proprietary goods.  The bid specification then must set forth a price allowance for its supply by the energy services company to be used by all bidders in the public bidding process.  Direct digital controls must be “open” format and must meet the interoperability guidelines established by the American Society of Heating, Refrigeration and Air Conditioning Engineers.

To select subcontractors, the Board of Education may do the bidding or allow its representative to assist in the bidding process to assure that the requirements of the public bidding laws are followed.  Public bidding will involve the development of the detailed construction specifications, and an architectural or engineering firm may be hired to develop the specifications and contracts and to oversee the bidding process.  A Board of Education may wish to select these professionals as its representatives. 

The 2012 amendments clarified that the ESCO contract work may include a facility alteration required to properly implement other energy efficiency or energy conservation measures, provided the cost does not exceed 15% of the total cost of work and meets other criteria that ensure that such work is necessary or that it is economically advantageous to include such work.

When a district has chosen to proceed as a Do It Yourself Project, as noted, it would use conventional public contracting to select contractors to implement the work involved in the energy savings plan. 

In either case, the Board of Education must also obtain the necessary approvals from the State Department of Education for the implementation of a school facilities project or an other capital project. Of course, no final approval to move forward can be obtained until financing is in place or at least authorized. 

Financing

Financing may be undertaken through conventional means.  If so, the district may be eligible for State facilities aid.  Alternatively, the district may decide to finance through the financing options provided by the ESIP Law.  The Department of Education has taken the position that facilities aid is not available unless conventional financing is used and facilities aid is otherwise available. 

Under the ESIP Law, the Board of Education may authorize a lease purchase agreement between the Board of Education and the ESCO or another public or private entity.  Under the lease purchase agreement, the ownership of the equipment or improved facilities will pass to the Board of Education when all of the lease payments have been made.  The lease purchase agreement may not exceed 15 years, except that a lease purchase agreement may be for as long as 20 years if financing a combined heat and power or cogeneration project, from the time the program is placed in service.  The law provides that such a lease purchase agreement may contain a clause making it subject to the availability or appropriation annually of sufficient funds as may be required to meet the obligation and may have a non-substitution clause providing that the Board of Education may not replace the leased equipment or facilities with equipment or facilities that perform the same or similar functions if the agreement is terminated for non-appropriation (emphasis added).

Alternatively, the Board of Education may arrange for the issuance of energy savings obligations as refunding bonds in accordance with the requirements of N.J.S.A. 18A:24-61.1 et seq.  These requirements include a vote by the board of education on introduction of a bond ordinance at one meeting with final adoption of the bond ordinance by a two thirds majority vote at a second meeting following a public hearing that has been advertised in a qualifying newspaper at least seven days earlier and approval of the bond ordinance by the Local Finance Board, a state agency in Trenton.  The energy savings obligations must mature within the period of usefulness of the projects being bonded and are funded through appropriations for utilities services in the annual budget of the Board.  Short-term financing may also be utilized as necessary, provided that all the bonds and notes mature within the periods authorized for the energy savings obligations.  They may be issued either through the Board or another public agency authorized to undertake financing on behalf of the Board.

The lease purchase agreements and energy savings obligations may not be used to finance maintenance, guarantees or revocation of guarantees of energy conservation measures.  They may be used to finance the cost of the energy audit or the cost of the verification of the energy savings prior to adoption of the energy savings plan.    The repayment of both lease purchase agreements and energy savings obligations are subject to budget and tax levy limitations otherwise provided by law.

Energy Savings Verification Prior to Commissioning

Once the energy savings equipment is installed, construction is complete and the energy conservation measures are placed in service, the ESIP Law again requires verification by a qualified third party to ensure that the savings projected in the energy savings plan has been achieved.

Individuals or organizations performing energy audits, acting as commissioning agents or conducting verification of energy savings plans, implementation of energy conservation measures, or verifying guarantees must be pre-qualified by the Division of Property Management and Construction in the Department of the Treasury to perform their work under an energy savings improvement program.

Maintenance

The Board will have to arrange for the maintenance of the facilities in order to ensure the continued projected energy savings.  The Plan is required to identify the maintenance measures required and how they will be implemented. Board representatives can be trained or the services can be contracted.  If the Board has elected the guarantee, the guarantee will require adherence to a maintenance program.

Guarantee Verification

As noted, an ESCO must offer to guarantee the energy savings at an agreed upon cost.  When a guarantee is purchased from an ESCO, the contract must require verification of the energy savings at agreed upon intervals.

Public Responsibility Driving Decision Making

Many districts are proceeding with energy savings improvement programs in the expectation that the programs will have no cost, may or will result in additional savings and will help the district serve as a leader and model for the reduction of energy use and greenhouse gas production consistent with the state policy as expressed in the state Energy Master Plan and the ESIP Law.

Legislative Tinkering for Future Consideration

After the state has experience with the program, it may be useful to revisit the program and reconsider some of the decisions made.  First, the state should legislatively address the Department of Education’s determination that state facilities aid is not available for financing under the ESIP program.  As noted the Department of Education has taken the position that voter approval is required for a type II school district to receive facilities aid.   This puts poorer districts at a disadvantage once more and allows districts with a greater ability to get voter approval to implement these programs.  Since the purpose of the program is to be cost neutral, possibly create savings, and certainly encourage the beneficial goals of reduction of energy use for cost savings, national security and reduction of greenhouse gas production, districts should be encouraged to participate without the need for voter approval.

Additionally, in other states, ESCOs have greater latitude in implementing the program without the need for subcontracting through a competitive bid process.  In order to keep costs low, ESCOs could avoid the costs of developing the detailed construction plans before bidding, could require the subcontractors to produce drawings and could comment on and refine such drawings to better improve the program and reduce the costs further.

Nevertheless, it is encouraging to see that the State has provided this alternative to encourage public bodies to implement energy savings programs.  Many school districts now have undertaken energy savings improvement program with very favorable results, and many others are now preparing to move forward.  

Revised December 17, 2015 and again November 3, 2017