Energy Savings:

Performance Contracts Offer Benefits, but Vigilance Is Needed to Protect Government Interests

GAO-05-340: Published: Jun 22, 2005. Publicly Released: Jul 19, 2005.

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The federal government is the nation's largest energy consumer, spending, by latest accounting, $3.7 billion on energy for its 500,000 facilities. Upfront funding for energy-efficiency improvements has been difficult to obtain because of budget constraints and competing agency missions. The Congress in 1986 authorized agencies to use Energy Savings Performance Contracts (ESPCs) to privately finance these improvements. The law requires that annual payments for ESPCs not exceed the annual savings generated by the improvements. GAO was asked to identify (1) the extent to which agencies used ESPCs; (2) what energy savings, financial savings, and other benefits agencies expect to achieve; (3) the extent to which actual financial savings cover costs; and (4) what areas, if any, require steps to protect the government's financial interests in using ESPCs.

Although comprehensive data on federal agencies' use of ESPCs are not available, in fiscal years 1999 through 2003, we found that 20 federal agencies undertook 254 ESPCs to finance investments in energy-saving improvements for 5 to 25 years. Through the ESPCs, federal agencies plan to make annual payments amounting to at least $2.5 billion spread over the lifetime of the contracts. Agencies expect to achieve benefits that include energy savings worth at least $2.5 billion over the life of the contracts, as well as other benefits that cannot be easily quantified, such as improved reliability of the newer equipment over the aging equipment it replaced, environmental improvements, and additional energy and financial savings once the contracts have been paid for. While these benefits could be achieved using upfront funds and with lower financing costs, agencies stated that they generally have not received sufficient funds upfront for doing so and see ESPCs as a necessary supplement to upfront funding in order to achieve the benefits cited. Agencies believe that ESPCs also provide unique benefits such as a partial shift of risk from agencies to private energy services companies and a more integrated approach to providing efficiency measures. Agencies structure ESPCs so that financial savings cover costs and they reported that many do. However, GAO could not verify that conclusion using the data on ESPCs, and GAO work and agency audits disclosed ESPCs in which unfavorable contract terms, missing documentation, and other problems caused GAO to question how consistently savings cover costs. Furthermore, differing interpretations of the law establishing ESPCs about what components of costs must be paid for from the savings generated by the project or may be paid for using other funding sources have contributed to uncertainties about whether savings are appropriately covering costs. GAO identified concerns in the areas of expertise and related information and competition that are fundamental to ensuring that savings cover costs and to protecting the government's financial interests in using ESPCs. According to agency officials, they often lacked the technical and contracting expertise and information (such as interest rates and markups) to negotiate ESPCs and to monitor contract performance in the long term. The officials also think there may be insufficient competition among finance and energy services companies and that this could lead to higher costs for ESPCs.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: To ensure that agencies use ESPCs as the Congress intends, Congress may wish consider revising the relevant statute to more clearly define the components of costs that must be covered by savings. In particular, the Congress could clarify whether agencies may make lump sum payments using funds other than their current year utility savings.

    Status: Closed - Implemented

    Comments: In 2007 Congress amended section 8287 of 42 USCS regarding funding options for Energy Savings Performance Contracts (ESPCs). It noted that in carrying out a contract under this section, a federal agency may use a combination of appropriated funds and private financing under an energy savings performance contract, to make contract payments, including lump sum payments.

    Recommendations for Executive Action

    Recommendation: Finally, to strengthen the information available to the Congress for assessing the progress and effectiveness of ESPCs, the Secretary of Energy should collect more extensive information on agencies' ESPCs, including such critical elements as cumulative verified savings and costs, and include that information in its annual report to the Congress. As a part of this effort, the Secretary should compare projects funded by ESPCs with projects funded by upfront appropriations to determine their relative costs and benefits. Specifically, the Secretary should determine, among other things, the effects of deterioration of energy efficiency savings in the absence of measurement and verification and delays in obtaining upfront appropriations relative to obtaining funds through ESPCs.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In fiscal year 2006, DOE used new ESPC data to update an earlier study examining the point at which it becomes cost effective to use ESPCs rather than to continue to forego energy savings in the absence of up-front funding.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should ensure that the agency officials responsible for ESPC decision-making use appropriate expertise when they undertake an ESPC. If the officials do not have sufficient expertise themselves, they should be required to obtain it from such independent sources as a centralized pool within the agency; the contracting centers of the Air Force, the U.S. Army Corps of Engineers, the Navy, and FEMP; or from private parties. The costs of acquiring this expertise should be considered in deciding whether to use an ESPC.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In 2006, VA established a central energy contracting office, the National Energy Business Center (NEBC), to serve all of VA's ESPC and related energy services contracting needs. NEBC staff have received on-site ESPC training from DOE tailored specifically to VA's government-identified ESPC project approach.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should ensure that the agency officials responsible for ESPC decision-making use appropriate expertise when they undertake an ESPC. If the officials do not have sufficient expertise themselves, they should be required to obtain it from such independent sources as a centralized pool within the agency; the contracting centers of the Air Force, the U.S. Army Corps of Engineers, the Navy, and FEMP; or from private parties. The costs of acquiring this expertise should be considered in deciding whether to use an ESPC.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In June 2006, GSA sent a memorandum out to all regional offices to require use of DOE project facilitators when entering into any energy savings performance contracts. In this memorandum the Director Energy Center of Expertise noted that the regions were encouraged to use additional contracting, financial and asset expertise when developing various projects, as needed. In GSA the Regional Energy Coordinators for each region are the centralized experts on ESPCs for their region and thus make these decisions.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should ensure that the agency officials responsible for ESPC decision-making use appropriate expertise when they undertake an ESPC. If the officials do not have sufficient expertise themselves, they should be required to obtain it from such independent sources as a centralized pool within the agency; the contracting centers of the Air Force, the U.S. Army Corps of Engineers, the Navy, and FEMP; or from private parties. The costs of acquiring this expertise should be considered in deciding whether to use an ESPC.

    Agency Affected: Department of Justice

    Status: Closed - Implemented

    Comments: In order to meet this recommendation DOJ intends to rely on the Federal Energy Management Program (FEMP) until DOJ personnel acquire the expertise needed. DOJ is using FEMP for all of their ESPCs and the FEMP facilitators review all the proposals. The Bureau of Prisons, the major bureau within DOJ that uses ESPCs, have their own staff members (13 to date) and they attend FEMP training giving them the ability to review proposals and monitor contracts.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should collect and use ESPC-related data more effectively by (1) compiling information on key contract terms--such as interest rates and markups for energy-efficiency equipment--for each ESPC and as a key part of best practices make information accessible to agency officials in negotiating subsequent ESPCs and (2) tracking actual costs, verified savings, and any changes to ESPC projects that may affect these costs and savings.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: To implement this recommendation VA took a series of actions between 2004-2006. VA consolidated its ESPC data into the agency's Capital Asset Management System (CAMS). Relevant officials, such as energy managers, now have access to CAMS. Data fields in CAMS include details on individual energy conservation measures as well as key contract terms such as interest rates and mark-ups on equipment; projected costs and savings; guaranteed savings; revised costs and savings; actual costs and verified savings; and changes to projects and baseline conditions.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should collect and use ESPC-related data more effectively by (1) compiling information on key contract terms--such as interest rates and markups for energy-efficiency equipment--for each ESPC and as a key part of best practices make information accessible to agency officials in negotiating subsequent ESPCs and (2) tracking actual costs, verified savings, and any changes to ESPC projects that may affect these costs and savings.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: To carry out this recommendation, DOD working with DOE's Federal ESPC Steering Group collects the data GAO recommended for DOD Energy Savings Performance Contracts (ESPCs) as of 08/31/2007. According to DOD, key contract terms, actual costs, verified savings and any changes to ESPCs that could affect costs and savings are collected for all contracts and are maintained by the DOD administrative contracting office.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should collect and use ESPC-related data more effectively by (1) compiling information on key contract terms--such as interest rates and markups for energy-efficiency equipment--for each ESPC and as a key part of best practices make information accessible to agency officials in negotiating subsequent ESPCs and (2) tracking actual costs, verified savings, and any changes to ESPC projects that may affect these costs and savings.

    Agency Affected: Department of Justice

    Status: Closed - Implemented

    Comments: To meet this recommendation in April 2006 GSA sent out memos from the Director of the Energy Center of Expertise to all regions requiring input on ESPC contract specific data into the energy project database. In June 2006 GSA sent a memo to all regions from this same Director to periodically review the entries in their project database concerning contract terms and encouraging using contracting, financial and asset expertise when developing their energy projects. By including this information in their database and tracking the costs and savings of ESPC projects, GSA has met the GAO recommendation.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should collect and use ESPC-related data more effectively by (1) compiling information on key contract terms--such as interest rates and markups for energy-efficiency equipment--for each ESPC and as a key part of best practices make information accessible to agency officials in negotiating subsequent ESPCs and (2) tracking actual costs, verified savings, and any changes to ESPC projects that may affect these costs and savings.

    Agency Affected: Department of Veterans Affairs

    Status: Closed - Implemented

    Comments: Regarding this recommendation, DOJ notes that it now compares data for each ESPC. This includes evaluations of interest rates and equipment mark ups. DOJ now requires energy companies to perform competitions in the commercial marketplace for project financing. DOJ also tracks ESPC costs and savings and for all ESPC projects completed in 2005 it measures and verifies these aspects annually. A qualified DOJ staff member is involved in verification proceedings.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should collect and use ESPC-related data more effectively by (1) compiling information on key contract terms--such as interest rates and markups for energy-efficiency equipment--for each ESPC and as a key part of best practices make information accessible to agency officials in negotiating subsequent ESPCs and (2) tracking actual costs, verified savings, and any changes to ESPC projects that may affect these costs and savings.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: According to DOE, in fiscal years 2005 and 2006, DOE developed and made available to other agencies on-line tools for locating and benchmarking prices of energy conservation measures and for calculating the financial value of ESPC offers from contractors. For energy conservation measures that do not lend themselves to benchmarking, DOE compiled a searchable database of contract prices and made it available to project facilitators for all agencies.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should ensure that the agency officials responsible for ESPC decision-making use appropriate expertise when they undertake an ESPC. If the officials do not have sufficient expertise themselves, they should be required to obtain it from such independent sources as a centralized pool within the agency; the contracting centers of the Air Force, the U.S. Army Corps of Engineers, the Navy, and FEMP; or from private parties. The costs of acquiring this expertise should be considered in deciding whether to use an ESPC.

    Agency Affected: Congress

    Status: Closed - Implemented

    Comments: To carry out this recommendation, DOD revised its Instruction 4170.11 on installation energy management in 2006. Each DOD Component entering into a financed project agreement must ensure a qualified project facilitator is designated and assigned to insure that aggregated annual costs do not exceed savings and that any contracts that are awarded have teams with documented experience and training.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should ensure that the agency officials responsible for ESPC decision-making use appropriate expertise when they undertake an ESPC. If the officials do not have sufficient expertise themselves, they should be required to obtain it from such independent sources as a centralized pool within the agency; the contracting centers of the Air Force, the U.S. Army Corps of Engineers, the Navy, and FEMP; or from private parties. The costs of acquiring this expertise should be considered in deciding whether to use an ESPC.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: According to DOE, in fiscal year 2006, DOE began requiring that agencies using DOE's super ESPC contracts also use the services of a DOE project facilitator, thereby helping to ensure that an official with ESPC knowledge and expertise was involved in each contract negotiation. Through an agreement between DOE and Navy, agencies using Navy's contracts must also use a Navy project facilitator that met DOE's specifications for expertise. DOE also increased the seminar and webinar training on ESPCs available to agencies. Hundreds of agency officials increased there ESPC skill sets via that training, according to DOE.

    Recommendation: Because the contracting centers can play an important role in helping the agencies develop and monitor their ESPCs, the secretaries of Defense and Energy should require the contracting centers to continue and expand their ongoing efforts regarding competition, including taking steps such as re-competing the super ESPCs as soon as possible and then more regularly.

    Agency Affected: Department of Veterans Affairs

    Status: Closed - Implemented

    Comments: DOD implemented this recommendation in 2006 by stating that as each Service's current ESPC contracts expire; these contracts will be re-competed prior to the date of expiration. In addition DOD noted they in consultation with the Federal ESPC Steering Group found a conflict in incentives that contractors currently have in their surveys to identify energy conservation projects. DOD has requested the assistance of the Inspector General for Acquisition and Contract Management to resolve this conflict.

    Recommendation: Because the contracting centers can play an important role in helping the agencies develop and monitor their ESPCs, the secretaries of Defense and Energy should require the contracting centers to continue and expand their ongoing efforts regarding competition, including taking steps such as re-competing the super ESPCs as soon as possible and then more regularly.

    Agency Affected: Department of Veterans Affairs

    Status: Closed - Implemented

    Comments: According to DOE, it completed its re-competition of the super ESPC contracts in December 2008. The contracts have a 5-year term with an option to extend. DOE plans to renegotiate the contracts roughly every 5 years.

    Recommendation: Because the contracting centers can play an important role in helping the agencies develop and monitor their ESPCs, the secretaries of Defense and Energy should require the contracting centers to work with the agencies that use them to ensure that the contracting centers have the information and expertise needed to effectively develop and monitor their ESPCs.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD implemented this recommendation through a revision to DOD Instruction 4170.11 on installation management in 2006. The instruction states that activities not possessing prerequisite expertise may use the contracting centers of the Air Force, Navy, Army and Defense Energy Support Center where such expertise is maintained.

    Recommendation: Because the contracting centers can play an important role in helping the agencies develop and monitor their ESPCs, the secretaries of Defense and Energy should require the contracting centers to work with the agencies that use them to ensure that the contracting centers have the information and expertise needed to effectively develop and monitor their ESPCs.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: According to DOE, in fiscal years 2007 and 2008, it offered the services of its staff to agencies on methods for effectively monitoring ESPCs. Few agencies took advantage of the service, however, and DOE is considering how to increase agency interest. For DOE ESPCs, DOE trained its contracting officers and contracting officer representatives on, among other things, witnessing measurement and verification of savings carried out by contractors, and provided instruction on identifying and monitoring the major savings drivers.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should require, as appropriate and in line with available resources, that inspectors general or other audit offices conduct audits of ESPC projects to ensure the projects are achieving their expected results.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: DOD implemented this recommendation through a revision to DOD Instruction 4170.11 on installation management in 2006. Each Component contracting center that awards or administers Energy Savings Performance Contracts (ESPC) shall conduct internal audits at intervals no greater than five years to insure project performance and guaranteed savings.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should require, as appropriate and in line with available resources, that inspectors general or other audit offices conduct audits of ESPC projects to ensure the projects are achieving their expected results.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: In its comments to the report, VA agreed with our recommendation and stated that its Office of Inspector General should conduct audits of ESPCs. In September 2009, VA reported that the agency had not entered into any ESPCs since the GAO report was issued, so the IG had not undertaken any audits, and confirmed that VA continues to support the recommendation for an independent audit review of any energy savings performance initiatives and contacts.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should require, as appropriate and in line with available resources, that inspectors general or other audit offices conduct audits of ESPC projects to ensure the projects are achieving their expected results.

    Agency Affected: Department of Defense

    Status: Open

    Comments: DOJ agreed with GAO's recommendation in its 60 day letter back in 2005. The agency noted they would establish an appropriate Energy Savings Performance Contracts (ESPC) audit schedule with the Office of the Inspector General. As of 09/2009, there was no evidence that this had occurred and DOJ officials were uncertain when these actions would be taken.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should require, as appropriate and in line with available resources, that inspectors general or other audit offices conduct audits of ESPC projects to ensure the projects are achieving their expected results.

    Agency Affected: Department of Veterans Affairs

    Status: Closed - Implemented

    Comments: According to DOE, in fiscal year 2009, it conducted both IG audits and an internal review of existing ESPCs to, among other things, examine whether the ESPCs were achieving the savings expected. The OIG audits focused on selected ESPCs and pointed out problems with savings stipulations and verification. They served as a starting point for an internal audit, conducted by the DOE Chief Financial Office at the request of the program office, that reviewed ESPCs at all sites. The program office is using the results of the internal review and OIG audits to revise its guidance to agencies on measuring and verifying ESPC savings.

    Recommendation: To better ensure that federal agencies undertake only those ESPCs having the greatest likelihood that savings will cover costs and that the agencies negotiate the best possible contract terms and monitor the contracts properly, the Secretaries of Defense, Energy, Justice, and Veterans Affairs, and the Administrator of the General Services Administration should require, as appropriate and in line with available resources, that inspectors general or other audit offices conduct audits of ESPC projects to ensure the projects are achieving their expected results.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: To meet this recommendation, GSA first in May 2006 sent a random sample of EPSCs to be reviewed by approved facilitators. In December they sent a request to Oak Ridge National Laboratory to provide technical assistance by reviewing the random sample of the GSA ESPC projects. The scope of work was for the laboratory to review and evaluate a year of the ESPC annual reports and other documentation to verify project savings. GSA agreed to fund these reviews through existing memorandums of understanding with various agencies. The major step that GSA took to complete this recommendation in December 2007, GSA set up an interagency agreement with DOE to audit ESPC projects. GSA has agreed to provide the requirements and funding to DOE to perform the study of ESPCs.

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