The Republican-American newspaper in Connecticut in the United States gives us an important example of how using performance contracting has become a winning proposition. The article discusses many of the issues related to using such financing mechanisms.
Improvements without bonds – Energy savings committed to pay for projects
Cheshire Town leaders believe they have found a way to pay for expensive capital improvements without floating bonds.
For years, residents and officials have debated over a $4 million request to replace an electrical heating system in part of Cheshire High School with a less costly system that uses oil or natural gas.
Replacing the system would save energy and money, and for several years it has been listed in the town’s five-year capital expenditure plan. But it has never made it past subcommittee discussions.
Now the town could is considering hiring a private company to replace the system and carry out dozens of other projects as part of what is known as an energy performance contract. The concept has been gaining momentum in the state as more and more municipalities and agencies look for ways to avoid borrowing to pay for big expenditures.
Performance contracting basically allows the town to hire a private company to undertake public projects, and to pay for the projects over time with savings from energy costs. It allows the town to do the projects outside of the capital budget process, bypassing referendums and without adding to its debt burden.
“The amount of projects, the town will have a hard time “The amount of projects, the town will have a hard time doing through capital budgeting,” said George Neowatne, assistant public works director.
Earlier this year, the town contracted with Ameresco, a Massachusetts-based energy efficiency and renewable energy service provider, for an initial energy audit. The company looked at all town-owned buildings, including schools, and came up with a list of projects worth $8.9 million. The list includes replacing boilers, refrigerators and lights.
Town officials have to decide which projects whether they want to undertake and whether to sign an energy performance contract with Ameresco.
Ameresco has been hired by other municipalities and agencies in the state, said James P. Daylor an account executive with Ameresco.
Ameresco is in the construction phase of a $3.7 million performance contract with the town of Farmington, Daylor said.
Daylor said the company is in the initial stages with West Hartford, Bloomfield, Simsbury and the New Haven Housing Authority.
“It’s a vehicle that allows a community to make capital improvements that generate energy savings,” Daylor said.
Other towns have gone with different companies. Naugatuck has a 10-year contract with Siemens for projects in borough and board of education buildings, including replacing boilers in school buildings. A 2010 borough report shows annual savings as a result of the program of $926,000.
Performance contracting has been around since the 1970s, with an increased popularity of late. According to data from the U.S. Environmental Protection Agency, energy performance contracting is growing at a rate of about 20 percent a year, with about 80 percent of the market made up of local governments, colleges and the federal government.
The idea of performance contracting was introduced to Cheshire several years ago, but the idea was dismissed more than once for different reasons, including wariness about inadvertently incurring debt.
A bit of that wariness still remains. “The only concern I have, once we start down this road, is that it doesn’t affect our bond rating,” said Town Councilman James Sima, who serves on a special town committee working with Ameresco.
Sima supports the work with Ameresco, as long as project payback does not go beyond 15 years. Sima is afraid that projects with longer paybacks may affect the town’s credit rating — with the debt from the performance contracting being counted as town debt.
For Ameresco to make money, it bundles projects with different energy savings payback times. At Cheshire High School, the heating system project is projected to pay for itself in just over 20 years; that project would be bundled with others with much shorter payback times, such as changing to more energy-efficient lighting. Sima said he wants to ensure that the bundle has a payback of no more than 15-years.
It could take a few months before the town signs with Ameresco, and the contract with be smaller than the company has proposed.
In working with municipalities, Ameresco staff have learned to be patient.
“When Cheshire is ready, we’ll be ready,” Daylor said.
