Guaranteed savings contract helps Minnesota college finance efficiency

By: - December 22, 2021 6:00 am

A proposed solar project at Winona State University. Credit: Winona State University / Courtesy

One of Minnesota’s oldest state universities will undergo a major energy savings retrofit next year without tapping into any public funding.

Winona State University, founded as a teachers’ college in 1858, is set to benefit from $12.3 million worth of upgrades to its southeastern Minnesota campus.

School officials could have spent years trying to persuade legislators to approve bonding money. Instead, the university is working with a contractor to manage a portfolio of energy improvements guaranteed to produce enough cost savings over the next two decades to pay for the projects and then some.

It’s the largest project of its kind since state officials started the guaranteed energy savings program a decade ago. Without the financing option, “we probably wouldn’t have been able to do this project at this cost,” said Nathan Engstrom, Winona State’s campus sustainability and planning director. “We don’t have $12 million lying around; that’s the bottom line.”

The Minnesota Department of Commerce provides advice and information to state, county and local government institutions related to energy savings performance contracts, a budget-neutral way for public entities to pay for efficiency upgrades. Commerce recently changed the program’s name to “energy savings performance contracting” to include a wider variety of projects.

Energy savings performance contracts make a simple promise — the energy saved through improvements will pay for the cost of the projects. Several states have programs similar to Minnesota’s to help agencies, universities and local governments with the performance contracting process. Nationally, after years of little growth, Lawrence Berkeley National Laboratory reported the industry grew 3.4% from 2014 to 2018, with revenues expected to reach $9 billion this year.

In Minnesota, the program has helped invest $45 million into retrofitting 108 buildings representing nearly 6.4 million square feet of property. The participants, including four colleges, two cities, and the state transportation and natural resources departments, collectively save about $2.4 million annually.

Winona State University’s contract is the largest the state office has ever assisted with. Commerce Commissioner Grace Arnold said the project shows there is momentum for more public service energy investments that do not require taxpayer dollars.

“We are optimistic Winona will inspire more higher education, state and local agencies to pursue energy savings performance contracting because it saves money and helps Minnesota have energy that is affordable, reliable and clean,” Arnold said.

Winona State was happy to have support from the state office, whose involvement “offers additional levels of competence [and] security through the program that you wouldn’t necessarily have if you did a performance contract with one of these energy service companies on your own,” Engstrom said.

The university had been compiling a list of potential energy savings projects for a few years. Once selected, McKinstry did additional studies to determine the payback on deferred maintenance, solar and other repairs. The university found a lender through a competitive bidding process and signed an 18-year lease-to-purchase contract.

McKinstry will replace 21,000 light fixtures, make improvements to the school’s central power plant, and replace every toilet, shower head, urinal, and faucet aerator on the campus. It will also build a large solar installation. As a result, the campus should save $26 million over 25 years, about $685,000 annually, and reduce carbon emissions by nearly 25%.

Every aspect of the improvements, including light bulbs and plumbing fixtures, are leased until the contract ends. Energy performance contracts carry liens for all the items installed, limiting to a degree what changes can be made. Engstrom said windows cannot be part of an energy performance contract because they cannot be removed should the university default on its obligations.

Engstrom said the energy savings start growing larger compared to the lease payments even in the first year. Savings the first year will be $670,000. The mix-and-match nature of the projects means that lighting saves money immediately while solar’s payback comes years later, he said.

McKinstry recently finished work with the city of Rochester on a $6.8 million initiative that included retrofitting its civic center, recreational center and aquatic center. The first two projects will save the city $347,000 annually and help the city reach its climate goals.

Gregg Mast, executive director of Clean Energy Economy Minnesota, said guaranteed energy savings contracts are an affordable approach to reducing energy use, improving building infrastructure and creating local jobs.

The program “is a budget-neutral option for public entities looking to pursue energy improvements in their facilities,” Mast said. “Upgrades can be made with no upfront cost, and energy savings pay for the improvements over time, eliminating the need to tap into precious capital budgets or asking more of taxpayers.”

Despite having been around for decades and widely used by the federal government, performance-based energy contracts are still not widely embraced by institutions that would benefit from them, advocates said.

Timothy Unruh, executive director of the National Association of Energy Service Companies, said several obstacles exist to the model. One is that governments often have established “procurement pathways” for projects with a preferred list of contractors. “Someone might come in and protest that they’re [a contractor] taking business from an area I used to get business and you know, and I’m a long-standing citizen here of this community,” he said. “That’s a reasonable claim.”

Still, local companies often receive work on guaranteed energy savings jobs. National contractors often do lighting and water retrofits, but work involving building controls and mechanical systems are often assigned to local companies, Unruh said. In addition, he said local firms with government experience often receive work because of their familiarity with state and university buildings.

Secondly, the entire process is different from how institutions usually hire contractors. An energy performance provider identifies the scope of a project rather than the client. “You end up having to make a selection of a company to move forward with a project before you know the scope of the work of the project,” he said. “It’s difficult to create a bid situation to evaluate that.”

Other issues involve concerns over financing, whether the approach offers the lowest cost for a project, and public employees’ hesitancy to try something new. Because the contracts last between 15 to 20 years, public employees are unlikely to do more than one in their careers. Without institutional knowledge, employees remain skittish to be the first ones to try something new, Unruh said.

McKinstry’s Midwest regional director, John Neville, said the primary advantage of using an energy services company is their sole focus on buildings, efficiency and clean energy. Universities and state agencies may have knowledgeable facility managers but rarely have the time or staff to thoroughly study potential efficiency upgrades or integrations with clean energy generation, he said.

The company revisits energy-saving and solar generation estimates with performance annually to ensure customers see progress. “We want every project that we do to be a success because that’s how we get the next project — that’s how we get to phase two with the same customer,” he said.

This article first appeared on Energy News Network and is republished here under a Creative Commons license.

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Frank Jossi, Energy News Network
Frank Jossi, Energy News Network

Frank Jossi is an independent journalist and consultant based in St. Paul and a longtime contributor to Midwest Energy News. His articles have appeared in more than 50 publications, including Minnesota Monthly, Wired and the Los Angeles Times. Frank has been a Fulbright journalism teacher in Pakistan and Albania, and a program director of the World Press Institute at Macalester College.