Energy Performance ContractingEnergy Performance Contracting
Published October 18, 2006
The City of Toronto supports the use of energy performance contracting (involving comprehensive energy and water retrofits and building renewal initiatives) with respect to both private and public buildings located within the City of Toronto through the Better Buildings Partnership (BBP) located within its Office of Energy Efficiency (OEE). BBP and OEE form an integral part of the city's efforts to contribute to global climate change. (Please refer to the Governance case study entitled “Mid-term Objectives: An Urban Experience, Toronto, Ontario”.)
Energy performance contracts (EPCs) provide a comprehensive turnkey service to retrofit facilities. In essence, they offer "one-stop shopping" for building owners and managers to upgrade facilities to make them more energy efficient. Typically, contracts include replacement/upgrading of HVAC systems, window replacements, upgraded lighting systems, etc. and are all inclusive in that they encompass capital investment and financing, engineering and design, project management, energy maintenance, specialized employee training, construction, commissioning of improvements, and so on. A major feature of EPCs is that building owners and managers use private-sector funding to finance the energy improvements in their facilities.
Costs for comprehensive building retrofitting, when combining short- and long-term investment opportunities, typically pay back over an eight- to ten-year period. To date, the BBP has produced up to $100 million in energy savings investments involving 155 buildings spread across Toronto. The investments have created approximately 3,000 jobs, mainly within the construction trades and the engineering sectors, and reduced building operating costs by $6 million, and CO2 emissions by approximately 72,000 tonnes per year, ongoing.
The majority of the money invested has come from the private sector through the firms contracted to undertake the energy/water retrofits. One estimate suggests that extending the program to all larger buildings within the Toronto metropolitan area would require an investment in the neighbourhood of $3 billion. Evidence suggests that the BBP presently has the capacity and momentum to increase energy savings investments by 400 to 800% with a concomitant 572,000 tonne reduction in CO2 constituting upwards of 30% of the City of Toronto’s CO2 target.
Major buildings included within the program include: the Toronto Community Housing Corporation, the Toronto Public Library, the Canadian Broadcasting Corporation’s Toronto headquarters, First Canadian Place Tower, Ryerson University, Toronto City Hall, and others.
Experience demonstrates that BBP sponsorship of energy performance contracting is indeed successful, but use tends towards larger buildings as well as favoring the institutional and large multi-residential sectors with significant exceptions such as the First Canadian Place Tower. To counteract this, BBP has put in place other programs focusing on smaller commercial and residential structures. While successful, their results are less than those of the energy performance contracting initiative.
Sustainable Development Characteristics
Municipal sponsorship of financial techniques such as energy performance contracting provides ready and large-scale financing for widespread implementation of energy efficiency and water conservation projects. Such projects, in turn, reduce ‘smog’ creating chemicals, thus making down town areas more livable.
In terms of sustainable development in its broadest sense, municipal support of energy performance contracting provides a necessary financing tool to achieving sustainable development through the implementation of energy and water saving equipment and processes. The tool, however, is based on investors finding positive financial returns using new, but well understood technologies.
Critical Success Factors
Critical success factors include:
an initial target set by the City of Toronto in 1990 to reduce the city’s net carbon dioxide levels by 20%;
continual support of Toronto’s City Council through sustained political support by elected municipal officials;
widespread and ongoing community involvement that has included city council, the citizens of Toronto, the utility companies, building owners, and suppliers (in this case essentially energy management companies that provide energy/water retrofit services to building owners). In some instances, Toronto’s Office of Energy Efficiency created the linkages; in others, the office coordinates these relationships; and,
the presence within Toronto of an energy management industry capable of delivering requisite energy management services such as engineering studies, planning, building reconstruction, product delivery (e.g. HVACs, windows, lighting fixtures), and energy monitoring services.
Community Contact Information
Energy Efficiency Office
City of Toronto
Phone: 1 416 392 1454
What Worked and What Didn’t Work?
The contracting and financial techniques tend to favor larger institutional and multi-residential buildings due to economies of scale and a preference for shorter investment horizons than those provided for with EPCs. Also, the use of EPCs often requires the carrying of additional debt for extended periods of time which many commercial and smaller businesses find difficult or unable to manage. As well, commercial enterprises can often earn a higher rate of return by investing in other endeavors such as enhanced marketing. The Office of Energy Efficiency provides other techniques to support smaller building s as well as the commercial and residential sectors. The impact of these alternative techniques has yet to be fully assessed.
Financial Costs and Funding Sources
The BBP has sponsored energy performance contracts valued at $100 million. The EPCs provide a comprehensive turnkey service for energy efficiency improvement within a facility or group of facilities. Elements of the contracts encompass capital investment, engineering and design, project management, energy maintenance, specialized employee training, construction, commissioning of improvements, and so on.
With an energy performance contract, external private-sector funding is usually used to finance improvements, although in-house funding can be used. Typically, the owner of a facility enters into a formal agreement with what is known as an Energy Service Company (ESCO) where the ESCO in turn borrows money from the private sector on its own behalf to finance the energy improvements. The ESCO repays the money from the savings accruing from the reduced energy consumption. Once the borrowed funds have been repaid and the ESCO has earned an agreed-upon profit, the energy-efficiency investments become the property of the facility owner, and all future energy savings from that date are credited to it. The ESCO also provides a guarantee that should energy savings not equal the initial borrowing plus accrued interest by the end of the contract, the ESCO must make up the difference. With the BBP, facility owners have both taken advantage of ESCO-supplied funding, and self-financing using proceeds from City of Toronto debentures.
The BBP also has a Loan Recourse Fund to finance energy-efficiency improvements in smaller commercial facilities and the residential sector. Historically, these sectors have tended not to take advantage of energy performance contracting either because they lack a capacity to attract funding or because expected savings are not large enough to warrant the engineering expertise normally associated with energy performance contracting. The Loan Recourse Fund provides financing through Enbridge Gas Distribution Inc. Loan repayments are made through charging an additional amount on monthly gas bills, which in essence treats these loans as a lien on property, hence transferable should ownership of the property change.
Analysis of this case study leads to six key observations:
BBP support of energy performance contracting is undoubtedly a success in that $100 million of energy savings investments have been made.
While the program has had unqualified success with respect to larger and institutional facilities, success in the commercial field and residential sectors has not been as great due to a lessor capacity to attract funding and/or to take on debt. This phenomenon, however, is not untypical.
The innovative Loan Recourse Fund, operated through Enbridge Gas Distribution Inc, needs careful monitoring to assess both its potential impact on energy/water savings within the commercial and residential sectors and its transferability to other communities.
BBP objectives, and those of the City of Toronto’s Office of Energy Efficiency derive more from a concern for climate change and energy/water savings than from arriving at a sustainable community. Nevertheless, success with respect to municipal support of energy performance contracting undoubtedly serves both sets of objectives.
EPCs are financially based. They must provide a positive rate of return and as such will tend towards well-tested and reliable “off-the-shelf” technologies.
Plans for EPCs are normally comprehensive, but can lend themselves to 'cherry picking’ as a means to enhance returns on investments and, therefore, limit the full degree of possible energy savings. The degree to which cherry picking occurs depends primarily on how early building owners/operators want to use energy savings to finance other operating expenditures.
Detailed Background Case Description
The Better Buildings Partnership
In 1990, the City of Toronto committed to reducing the city’s net carbon dioxide emissions by 20%, by 2005, relative to 1988 levels. To aide in this, the city, inter alia, put in place the Better Buildings Partnership (BBP) to assist building owners and managers to contribute towards the city’s objectives. In establishing the BBP and its objectives, the city consulted with a wide range of key stakeholders including: Enbridge Gas Distribution Inc, the Toronto Atmospheric Fund, Toronto Hydro and Ontario Hydro Energy ltd. Also consulted were financial institutions, building owners and managers, the environmental community, trade unions, community groups, equipment manufacturers, and the construction energy/water efficiency service delivery industries.
Key to the BBP is the sponsorship of energy performance contracting through the Large Office Building Program, which focuses mainly on larger institutional structures. The BBP also, however, provides programs aimed at assisting other types of facilities. These include:
the Residential Energy Awareness Program designed to increase the public's general knowledge of energy efficiency and conservation in the residential sector;
the Small/Medium Commercial Buildings Program, which provides planning and other tools to assist participants of this sector to realize energy and expanding cost savings;
the Multi-Residential Non-Profit Buildings Program to assist non-profit organizations providing housing assistance to Torontonians;
the In-House Energy Efficiency Program to retrofit municipally-owned buildings; and,
The BBP Loan Recourse Fund to assist the financing of energy retrofits in the smaller commercial and multi-residential sectors.
Energy Performance Contracting Defined
Energy performance contracting (EPC) is a key element of the BBP’s success to date. EPCs provide a comprehensive turnkey service to retrofit facilities. In essence, they offer "one-stop shopping" for building owners and managers to upgrade their facilities to improve energy efficiency. EPCs are typically all inclusive in that they encompass capital investment and financing, engineering and design, project management, energy maintenance, specialized employee training, construction, commissioning of improvements, and so on.
One of the more attractive features of EPC is that building owners and managers can use private-sector funding to finance energy improvements in their facilities. Under a typical energy performance contract, a department or agency enters into a formal agreement with what is known as an Energy Service Company (ESCO). The ESCO then borrows money on its own behalf from the private sector to finance the energy improvements, and repays it from the savings attained through reduced energy consumption. Once the loan has been paid off and the ESCO earns an agreed-upon profit, the energy efficiency investments become the property of the building owner, and all future energy savings accrue to the building owner. The ESCO undertakes this while at the same time guaranteeing that the savings will indeed occur. If not, the ESCO must make up the difference over the period of the contract as well as surrender the energy efficiency investments to the building owner.
Alternatively, building owners can directly finance energy retrofits. An ESCO would then provide a similar turn-key service less financing.
Typical Savings from Energy Retrofits
A Natural Resources Canada survey of ESCOs suggests that the benefits of energy retrofits can be substantial. Studies of projects using only commercially available energy efficient equipment and processes indicate:
energy costs can be reduced by as much as 25% and, in some cases, as much as 40% in existing general purpose buildings such as offices or classroom facilities, 40% in laboratory complexes, and 10% in central heating plants;
energy costs can be reduced by up to 40% by modifying standard practices in designing and constructing new buildings;
savings are ongoing, and contribute directly to sustainable development; and,
an overall improvement of indoor working environments through enhancements such as the installation of modern lighting systems, the removal of drafts, better lighting through the installation of modern windows, improved air circulation, etc.
The survey results also point out that substantial improvements can be achieved through renovation of facilities that have already been retrofitted for energy efficiencies in the past five to ten years. This occurs as commercially available energy efficiency technology tends to remain current for only seven to eight years, after which an additional 10% energy reduction can be achieved due to improved technology.
Description of a Typical Project
Municipal Facilities Including Toronto City Hall
Municipal facilities within Toronto were retrofitted taking advantage of an energy performance contract, the details of which follow:
Annual Energy Savings: 6.6 million ekWh
Project Cost: $4 million
Annual Cost Savings: $570,000
Payback Period: 7 years
Annual Carbon Dioxide (CO2) Reduction: 6,598 tonnes
7 city buildings
788,779 square feet
Municipal buildings/facilities, including City Hall, St. Lawrence Market, and Allen Gardens
Features: natural gas and electric heating, central air conditioning, district heating system for City Hall.
Lighting retrofit (City Hall - 1st and 2nd floor)
Asbestos remediation (City Hall - 1st and 2nd floor)
Water-efficient technologies and measures
Building automation system upgrades (City Hall)
Heating, ventilation and air conditioning (HVAC) system upgrades
High efficiency chiller replacement (City Hall)
Condensate heat recovery (City Hall)
Conversion from electric heating to natural gas.
Toronto City Hall (source: Wikipedia Commons)
Major BBP Projects Undertaken
The BBP has sponsored over 150 projects. Major ones include:
- The Toronto Community Housing Corporation at 25 Mutual Street
- The Toronto Public Library at 789 Young Street
- The Canadian Broadcasting Corporation at 250 Front Street
- The First Canada Place Tower
- Ryerson University at 350 Victoria Street
- St Ignatius of Loyola Catholic School
- St Patrick Catholic School
- John Ross Robertson Junior Public School
- The Ellesmere Yard at 1076 Ellkesmere Road
- Toronto City Hall
- Nisbet Lodge at 740 Pape Avenue
- The York Condominium Corporation at 301 Prudential Drive
- The Metropolitan United Church at 56 Queen Street East
Retrofits include items such as:
- indoor lighting replacement and upgrades,
- lamp and PCB ballast recycling,
- building automation systems upgrade,
- boiler upgrades,
- air sealing,
- heating, ventilation and air conditioning (HVAC) retrofits,
- washroom renovations,
- water-efficient technologies and measures.
Detailed information on these projects and others is available at http://www.toronto.ca/bbp/projects/.
Natural Resources Canada, Office of Energy Efficiency, Federal Buildings Program
What financial models can be put in place to assist the retrofitting of individual homes?
What lessons can be learned from the experience of the BBP’s Loan Recourse Fund, and are these lessons transferable to other communities?
Resources and References
Natural Resources Canada “Energy Performance Contracting Primer”
Natural Resources Canada “The Federal Buildings Initiative”
City of Toronto “Better Buildings Partnership: Program Information”
City of Toronto “Toronto Atmospheric Fund”
City of Toronto “Energy Efficiency Office”