The State of Iowa's Department of Natural Resources (DNR), therefore, established an ambitious Building Energy Management Program to install all energy management improvements with an average payback of 6 years in all public and non-profit facilities statewide by 1995. The DNR predicted such a program would require a $300 million investment, create energy savings of $50 to $60 million a year, and result in the creation of 12,000 person years of employment.

The DNR established two initiatives to implement this Program:

1. To facilitate energy management improvements in state agencies, it set up the State of Iowa Facilities Improvement Corporation (SIFIC), which finances and installs energy efficiency equipment. The initial $12 million in capital for this program came from the sale of state "energy conservation bonds". The agency pays for energy management equipment through a lease-purchase arrangement with SIFIC.

2. To facilitate energy management improvements in state hospitals, schools, and local governments, the DNR developed separate Energy Bank Programs. Through these programs, a regional lending institution provides a pool of capital for energy retrofits. Individual schools, hospitals and local government facilities repay the bank through a flexible lease purchase agreement.

The various Iowa school districts operate a total of 3,500 buildings, in which the DNR estimated that $70 million worth of energy improvements with an average payback of six years could be made.

In 1986 and 1987, the state legislature passed bills which:

• created the School Energy Bank (SEB) to provide public school districts, community colleges, and educational agencies statewide with technical assistance and financing for energy improvements;
• mandated that each school facility receive an energy audit at least once every five years; and
• authorized schools to enter into leases which bind the school district beyond the current fiscal year, making the energy management leases a better credit risk.

Key Financing Mechanism

All administrative costs of the SEB program are covered by state oil overcharge funds.

To be eligible for financing, a school energy management improvement project must have a price tag of at least $15,000, with no maximum. When a school district commits to such a project, financing is made available through Norwest Investment Services. All school districts are eligible for the same financing rate, which Norwest sets at slightly higher than the nationally published index rate for A-level bonds.

School districts repay Norwest through a lease-purchase mechanism. They are free to negotiate the length and payment schedule of these leases, with assistance from the DNR. Lease terms can be anywhere from 3 to 12 years, depending upon the payback selected and the cash flow desired by the district. Lease payments are usually structured to be the same as or lower than the estimated savings from the retrofit. Local government authorities responsible for collecting school taxes back the leases, providing a better credit risk for Norwest and, therefore, lower interest rates.

As of July 1992, the SEB had financed $12.5 million worth of energy improvements with a projected energy savings of $2.5 million a year. Another $2.1 million worth of projects were awaiting funding. The program has not, however, achieved its full potential. Many schools have self-financed improvements, resulting in shorter average paybacks, a lower level of investment in energy efficiency, and lower energy savings than originally predicted.

Replicating the Experience

The Iowa Building Energy Management Program illustrates several financing mechanisms which other municipalities can emulate:

• the establishment of a funding mechanism through state legislation;
• the use of bonds to raise capital for an energy efficiency fund;
• a partnership with a financial institution; and
• the aggregation of financing into a master lease agreement.

7.2 The City of Leicester, United Kingdom

The City of Leicester has long been committed to energy efficiency. In the wake of the oil disruptions of the 1970s, a local Energy Conservation Working Party developed a policy that has led to a reduction of energy used by municipal buildings of 16 percent over the past decade. As a result, Leicester is one of Europe's "Energy Cities", and one of 12 cities in the world honored at the Earth Summit for outstanding environmental accomplishments.

Leicester was also designated the first "Environment City" in the United Kingdom, part of a national campaign to create a partnership of local authorities, voluntary organizations, businesses, and individuals to tackle a broad range of environmental problems. The city is known for having developed broad-based community support for energy efficiency and other environmental initiatives. It also has an Energy Group made up of city employees and funded primarily from capital receipts, whose goal is to minimize energy consumption while maximizing both the efficiency of energy use and the use of clean and renewable technologies.

In 1990 Leicester announced its commitment, as part of a larger Energy Action Plan, to reduce energy use in municipal buildings by 50 percent by the year 2025. Offices and buildings owned by the municipality consume over 170 GWh of energy each year. Total energy consumption in 1991/1992, for example, was 610,000 GJ a year, creating energy bills of £2.9 million. Of this amount, municipal housing used about 400,000 GJ of energy, costing the City about £1.9 million. Energy consumption in these buildings will be reduced through increased investment in retrofit measures, as well as the design of new buildings to higher lighting, heating, and ventilation standards. Leicester is also exploring the use of planning regulations to promote energy efficiency in new developments.

Some of Leicester's energy plans have been put on hold. Among them is a plan to set up the first city-wide combined heat and power scheme in the United Kingdom, which fell victim to the national privatization of electricity generation. Another is a plan to set aside 10 percent of all funds spent on energy except for that spent on housing and district heating for capital investment in energy efficiency.

Key Financing Mechanisms

Leicester has received some funding from the European Commission for pilot work in energy conservation, specifically for lighting retrofits in municipal buildings, which include both office buildings and council housing. The City has made a commitment to reinvest half of all identified energy savings in efficiency projects. The rest is returned to building managers to be spent on hiring and facility improvement. In addition, other players such as the Leicestershire County Council and the Leicester Ecology Trust are supportive of the City's energy efficiency measures. Many of Leicester's capital improvements have been directly funded from previous energy savings. Most measures they have implemented have paybacks of under 4 years, generating "an internal rate of return" of 25 percent. Leicester's energy budget, totaling some £3 million, has been cut by 2-5 percent per year, thus leveraging some £60,000-£150,000 per year.

Replicating the Experience

Leicester is an example of a municipality that started with a strong political commitment but with relatively few resources. The City has been innovative in developing widespread local support for environmental initiatives, including energy efficiency initiatives. Through its commitment to energy efficiency, Leicester has been able to:

• obtain funding from a variety of sources to carry out its energy efficiency improvement projects;
• achieve significant results since 1979, namely an estimated energy savings of 16 percent with a reduction in potential carbon dioxide emissions of 90,000 tonnes; and
• establish an on-going Energy Conservation Capital Programme, with an energy reduction target of 50 percent by the year 2025.

7.3 The City of Oslo, Norway

All electrical power produced in Norway comes from hydro-electric power, a renewable source of energy. In the City of Oslo, 80 percent of the energy used, with the exception of transportation, comes from electricity, the remainder from oil. A municipal utility the "Oslo Energi AS", owns and operates local electricity distribution and district heating plants in Oslo.

In 1978, to offset growing demands for power and the cost of constructing another power station, the City decided to purchase more power from other producers, expand the district heating system, and implement a heavy energy efficiency program to stabilize electricity power demand.

The energy efficiency program the City developed is the most comprehensive in Scandinavia. It is financed through the Oslo Ekon Fund and administered by the Oslo Energi AS. An energy efficiency project initiated by the Ekon Fund typically consists of a free energy audit paid for by the Fund and a report on suggested measures. Building owners can apply for a grant (usually 15 percent of the estimated total cost) and a loan (usually 85 percent of the cost) to perform the recommended improvements.

Key Financing Mechanism

The Ekon Fund was capitalized through utility rate increases. In 1982, the City Council which establishes the local price for electricity raised the price by an extra 1 ore per kWh sold (about one sixth of an American cent). This resulted in extra income to the utility of about NOK60 million per year (about $10 million) for the establishment of a fund to initiate cost-effective energy efficiency investments in Oslo that would otherwise never be implemented. Every year since 1982 another NOK60 million has been added to the fund, which had reached NOK600 million by 1993. Assuming today's interest rates of about 8 percent, Oslo can invest about NOK48 million a year without further need for fresh capital!

With the Ekon Fund, Oslo faces a relatively rare municipal problem: too much money and no feasible means of reinvesting the funds back into energy efficiency projects. When the Fund was established, no maximum or ceiling was established. As a result, the Fund has grown to unanticipated levels since its inception. At the same time, the residents of Oslo have ample access to relatively inexpensive power produced in a way they perceive results in little environmental damage, thus resulting in less incentive to pursue energy efficiency.

Replicating the Experience

Utility rate increases can be a relatively quick albeit controversial way to establish a considerable fund for energy efficiency over a short period of time. The Oslo experience also illustrates two important considerations when setting up a municipal fund for energy efficiency:

• the need for setting a ceiling to any energy fund; and
• the need for a clear vision of what that fund will be used to accomplish.

7.4 The City of Phoenix, Arizona, U.S.A.

From its modest beginnings in the late 1970s, the energy management program of the City of Phoenix, Arizona has saved millions of dollars and has been recognized as one of the most effective in the United States.

Phoenix started small, focusing on low-cost projects such as energy audits and the installation of controls on equipment in buildings. In 1978 Phoenix hired an energy manager who documented savings of over $150,000 the following year. In 1980 the city spent $50,000 to implement the recommendations of the energy audits. In 1984, Phoenix established the Energy Conservation Savings Reinvestment Plan with seed money from state oil overcharge funds. Under the plan, the city reinvests half of all documented energy savings, up to a limit of $750,000, in a fund that finances energy efficiency capital projects for the coming year.

Key Financial Mechanism

Energy savings are established by comparing energy consumption before and after a retrofit, for the first year the improvement is in place. For the following ten years, half of this amount goes into the Plan. The rest goes into the City's general fund. By 1986, annual energy savings were greater than $1 million, and the fund reached its ceiling of $500,000 a year. To compensate for inflation this ceiling has recently been raised to $750,000.

Phoenix also uses the fund to help municipal departments pay for new energy-efficient equipment. The fund, for example, pays the difference between the price of a more expensive, energy efficient piece of equipment over a standard piece of equipment. While many of the measures funded are considered low technology in nature, such as improved lighting, motors, and chillers, the fund was critical in financing a district cooling system and a thermal storage system for the new Phoenix City Hall, as well as small scale cogeneration, solar, air volume, and waste water systems. Part of the fund goes toward research into new technologies and approaches to energy efficiency.

Through the Reinvestment Plan, Phoenix expects to save $42.6 million in energy costs from 1978 to 2002. To date, audited savings through the Reinvestment Plan are $18 million. There has been some unanticipated erosion of savings. Some of the energy efficiency measures are no longer in use because of turnovers in building stock and building tenants.

CHART 1: Annual savings from energy efficient projects at Phoenix facilities from City of Phoenix, Energy Conservation Program.

Replicating the Experience

Phoenix has demonstrated that when it comes to energy efficiency, financing can start small and achieve impressive results. Other municipalities can easily replicate this financing model by choosing to set aside funds for the first year, and by reinvesting a portion of the energy savings in energy efficiency.

Among the advantages of a municipal fund for energy efficiency is that it is easier to plan and budget energy management improvements. The fund provides a predictable and ongoing reservoir of money.

One of the keys to the success of the Phoenix Energy Management Program is that the City developed the ability to plan and monitor its actions and to calculate energy costs and savings in-house. The City also created an Energy Conservation Team which included representatives from all municipal departments. It brought department managers on-board by promising support for their budgets through participation in the program, both in operations, and in future projects. Another key to the Phoenix model has been the recognition that about 8-15% of any energy efficiency project should be reserved for maintenance and operator training.
Contact: Lera Riley

7.5 Sacramento Municipal Utility District (SMUD), California, U.S.A.

SMUD is a publicly owned municipal utility which provides electricity to over a million people living in an area of 900 square miles in the City of Sacramento, California, and the surrounding area. It has offered load management and electricity conservation programs to its customers since 1977. The initial purpose of these programs was to reduce the utility's summertime "needle peak" electricity demand. They have since been expanded to reduce the need for new electrical capacity, thus protecting the environment.

SMUD's Conservation Power Financing Program (PFP), started in 1990, provides loans and rebates for a range of electrical efficiency measures to the utility's residential, commercial, industrial, and agricultural customers. A separate program applies to public schools, local governments, and other public agencies. Under state law the boards of these public agencies cannot take on debts that will encumber future boards. To get around this roadblock to energy efficiency, SMUD sets up long term lease-purchase arrangements for these customers.

Through the PFP, SMUD provides free audits, identifies appropriate energy efficiency measures, identifies financing options, helps arrange installation of the retrofit measures by an outside contractor, and provides ongoing monitoring. The utility also provides rebates for the installation of certain peak energy saving measures, including:

• indoor and outdoor lighting conversions ($150 per kW saved or controlled);
• cooling/refrigeration/electric heating modifications or replacements ($250 per kW saved or controlled);
• demand limiting devices and energy management systems ($50 per kW shed or controlled); and
• daylighting systems ($250 per kW controlled).

Key Financing Mechanisms

For SMUD, investing in demand-side management costs an average of 3.3¢/kWh, which is less expensive than investing in energy supply. The utility has therefore provided generous funding, rising from $10 million annually in 1990 to an estimated $50 million in 1993. The money for the Power Financing Program (PFP) is raised primarily through regular revenue bond issues, with some contribution from general utility revenues.

Through the Commercial/Industrial/Agricultural PFP, SMUD provides loans and rebates up to a value of $100,000 for each commercial site. Specific projects may be offered additional financing. The terms of the loans are generally established so that energy savings cover the cost of repayment, unless the customer opts for a shorter period. Interest rates are lower than prime. Payback periods range from three to five years. Customer eligibility for loans is based on generally accepted lending industry practices.

To date, the PFP has reduced peak demand by 294 MW.

Replicating the Experience:

The SMUD experience provided several lessons of transferability to other utilities interested in reducing peak demand:

• keep the program simple to eliminate confusion and avoid costly delays in program implementation;
• to minimize expensive labour costs, ensure that the program capitalizes on the use of labour to install combined measures such as energy efficient electronic ballasts with T-8 fluorescent lamps, which have greater life-cycle savings for small incremental costs;
• avoid dealing through a middleman contractor by hiring and supervising the labourers directly through the utility;
• go to the open market for the procurement of energy efficiency products that need to be supplied for the program, thus avoiding the use of a "state contract";
• building into the program "persistence measures" that perpetuate energy savings such as stickers in the lamp fixtures specifying energy efficient lamps for replacement;
• determine prior to instituting such a program, that savings would occur during the utility's peak, typically found during normal business hours;
• conduct a cost-benefit analysis on the disposal of old fluorescent lamps, because of increasing stringent environmental legislation which could hamper the cost-effectiveness of any program; and
• understand the staffing costs needed to implement the program from the outset, or there can only be an estimate of the real staff cost. SMUD's conservation programs averaged 3.3¢/kWh which is only slightly less than SMUD's cost of new electricity generation that must be less than 3.6¢/kWh.
  

7.6 The City of Toronto, Ontario, Canada

The Toronto Atmospheric Fund (TAF) is a unique corporation set up by special provincial legislation, at the request of Toronto City Council. In 1990, the City pledged C$23 million towards atmospheric and environmental protection measures, thereby creating the TAF as an independent vehicle to manage these moneys, which were raised from the sale of surplus City property. The C$23 million fund is intended to finance projects that reduce CO2 emissions for which conventional financing is not available.

In 1990, Toronto pledged to reduce CO2 emissions by 20 percent by the year 2005. To help meet this target, Toronto established an Energy Efficiency Office whose mandate includes the auditing of city-owned buildings and the development of a strategic plan for retrofit measures. Approximately half of the building stock consumes significant energy, and also falls directly under the jurisdiction of the Corporation. The City is, therefore, looking at a fast track retrofit of half of its municipal building stock, as one of the first steps towards reducing CO2 emissions. Toronto will be conducting a three-phase approach, consisting firstly of a electrical retrofit, e.g. lighting, motors, secondly a non-electrical retrofit, e.g. building envelope upgrades, mechanical systems retrofit, and building automation systems, and thirdly, special projects such as cogeneration and thermal cool storage.

The City approved audits for phase one under a program provided free of charge by the provincial power utility, Ontario Hydro. In total, the audits included 268 buildings and facilities. The audits focused on electricity rather than other energy sources. The City, therefore, decided it needed to develop a separate retrofit plan where oil or natural gas is the fuel of the primary building heating system. The cost/benefit analysis of the audits suggested that by mixing high and low cost retrofit measures, the average payback would be a little under four years. Estimated overall electric demand savings (peak demand savings) are in the order of 11 percent, while the estimate for overall energy consumption savings is in the order of 14 percent.

The audits performed by Ontario Hydro resulted in a list of recommendations for retrofitting the buildings for improved electrical energy efficiency. Ontario Hydro estimates the City will save roughly C$1.2 million a year on its electricity bills. These figures were cited in the event that the City implemented all the suggested electrical retrofit measures.

Key Financing Mechanisms

Preliminary data suggested that the total cost to implement the electrical retrofit measures is C$4.6 million, plus C$200,000 for project management. The total amount of C$4.8 million will be provided by a loan from the TAF. The City will repay the TAF from energy savings achieved from the retrofits, with average payback estimated at slightly under 4 years. The repayment of the loan is structured so that the annual loan payments are equal or less than the energy savings for the first year. Twenty of the largest buildings have been selected for immediate retrofit in fiscal year 1993, and will incorporate both electrical and non-electrical measures.

Replicating the Experience

Although not every municipality may be as fortunate as Toronto which happened to have surplus property at its disposal, other municipalities can replicate the idea of selling assets to establish a fund that can greatly assist in the pursuit of energy efficiency. The key aspects to the City of Toronto's approach include:

• the sale of assets to create in essence a "revolving fund" similar to TAF;
• a "fast track approach" to doing building retrofits involving the largest and most
• energy intensive buildings;
• a close "partnership" with the local and Provincial utilities, Toronto Hydro and Ontario Hydro; and
• Toronto's Energy Efficiency Office will be facilitating the monitoring and verification of the entire retrofit program on an on-going basis, which will also allow the City to take advantage of new technologies that may be utilized in future retrofit activity.