Summary
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.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
James E. Wells Jr
Government Accountability Office: Natural Resources and Environment
(202) 512-6877
Matters for Congressional Consideration
Recommendation: 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: In process
Comments: When we determine what steps the Congress has taken, we will provide updated information.
Recommendations for Executive Action
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: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Energy
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Justice
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Veterans Affairs
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: General Services Administration
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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 Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Energy
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Justice
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Veterans Affairs
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: General Services Administration
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Energy
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Justice
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Veterans Affairs
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: General Services Administration
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Energy
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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 Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Department of Energy
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
