Financing Energy Conservation

Overcoming Barriers to Implementing the Massachusetts Clean State Initiative

Executive Summary

Since 1985, when energy conservation began in earnest, the Commonwealth has invested $35.2 million in approximately 125 large-scale energy conservation projects in state facilities. For each million dollars invested in projects completed since 1985, the Commonwealth receives following financial and environmental benefits:

• Financial benefits: $309,000 per year in reduced utility expenditures on projects with an average discounted payback period of just over 5 years.
• Environmental benefit: Reductions in emissions of air pollutants (5,300 tons of CO2, 34 tons of SO2, and 23 tons of NOx) each year as a result of reduced electricity generation.
• External benefit: $88,000 per year, as a result of avoided health costs and avoided pollution mitigation costs.

Barriers to Implementation of Energy Conservation Projects

• Lack of Incentives:
  We recommend that A&F allow state agencies to retain a portion of energy savings for a specified number of years. We further recommend that state agencies and agency employees be given personal "incentive awards" for the successful implementation of energy conservation measures. The budgetary and appropriations process removes incentives for government agencies to pursue opportunities for efficiency improvement. State agencies cannot benefit from energy conservation, because the Legislature and A&F tend to "reverse" savings rather than letting the state agency retain them.
• Bureaucratic Hurdles:
  We recommend introducing legislation to exempt energy conservation projects from the traditional public procurement process. The bureaucratic process required to obtain capital funding is complex and time consuming, because it was designed to prevent waste, fraud, and abuse. This increases the cost of implementing energy efficiency projects and impedes conservation efforts. The costs to state agencies of navigating the bureaucracy are often higher than the benefits which the agencies receive for their efforts.
• Capital Constraints:
  We recommend establishing a Clean State Revolving Fund (CSRF), with the mission of financing energy conservation and other Clean State goals. Energy conservation is a low political priority. It is not central to the mission of most state agencies, and hence sufficient funds are unavailable for these projects. Energy conservation projects increase capital spending, which violates the Weld Administration's debt management objectives. A $1 million federal matching grant is available, if the Commonwealth dedicates $3 million to a revolving fund for energy conservation projects. The CSRF could help to overcome the capital barrier.
• Information Constraints:
  We recommend that DCPO update energy audits which are old and outdated, and then estimate the total potential energy savings in state facilities. Information constraints impede the Commonwealth's energy conservation efforts. Oversight and financing agencies may not know which state facilities could best benefit from energy conservation investment. Public facility managers may be unaware of conservation opportunities, available technology, and/or sources of funding. We further recommend that the CSRF evaluate municipal borrowing needs, and then estimate the total potential energy savings in municipal facilities. Based on these estimations, CSRF's administrators may decide to expand the fund's scope to include municipal participants.

Policy Options and Analysis

• Bond Financing - We recommend avoiding GO bond financing and public procurement for energy conservation projects. The Weld Administration has imposed limits of the Commonwealth's new debt issuance, and funding for these energy conservation projects has been "crowded out" by other public projects. In addition, bond-financed energy conservation projects typically require 45 months for implementation. As a result of these factors, the Commonwealth has implemented few bond-financed energy conservation projects in recent years. Since 1985, only $5.2 million out of $35.2 million in energy conservation capital investment has come from GO bonds.
• Shared Savings - We recommend expanding DCPO energy team staff, and evaluating Shared Savings against the Clean State Revolving Fund. The Shared Savings Program addresses some of the barriers that prevent government agencies from implementing cost-effective energy conservation projects, but it has drawbacks. This program effectively overcomes capital constraints and partially overcomes bureaucratic hurdles. Projects implemented under Shared Savings typically require 20 months, of which only about five months are spent on oversight and control. Shared Savings creates profit incentives for ESCos, but the program cannot be expanded to include other, unprofitable, Clean State goals. The primary bottleneck in the implementation of Shared Savings projects is that DCPO's capacity is limited to "Pilot Phase" staffing levels.
• Demand Side Management - We recommend encouraging state agencies to use any energy conservation opportunities available under DSM. Massachusetts public utilities implement energy conservation projects under DSM in order to reduce peak demand for electricity. Utilities provide energy-efficient capital equipment free of charge to state facilities, and the facilities enjoy reductions in electricity bills as a result; both utilities and state facilities gain. DSM has provided over half of all energy conservation capital in Massachusetts since 1985.
• Clean State Revolving Fund - We recommend that CSRF initially complement the Shared Savings Program, while CSRF administrators evaluate the fund's potential to meet other Clean State goals. CSRF would circulate funds to many capital projects over several years. This fund could assist in the implementation of energy conservation in both state and municipal facilities. CSRF's financial structure would allow it to offer program participants loans at highly subsidized rates.

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