Can public-private partnerships (P3s) help governments adapt to the evolving energy landscape?
The energy landscape has been changing dramatically. Aggressive climate goals, impact of COVID-19 on government revenue and budgets, aging infrastructure, decreasing cost of energy, stakeholder pressure, need for resiliency, and innovative technical and market solutions are just a few of the factors driving this transformation.
Navigating this dynamic environment can be extremely challenging for cities and states as they implement initiatives and projects to deliver on reliability, resiliency and environmental targets, while most efficiently using their resources and tax dollars. P3s can provide local and state government officials solutions to tackle some of these challenges.
What Is This Dynamic Energy Landscape?
There are six factors that contribute to a dynamic energy landscape.
Climate Goals: While the U.S. may have withdrawn from the Paris Agreement, 24 governors and 446 U.S. mayorscommitted to upholding it. Furthermore, more than 200 cities and counties 11 states, Puerto Rico, and the District of Columbia have a 100 percent commitment or achievement — to put it into context, 1 in 3 Americans live in a city or state that has committed to, or achieved, 100 percent clean electricity.
Stressed Budgets: A recent analysis from the National League of Cities estimated that local municipalities are facing over $360 billion in lost revenues over the next three years due to the impact of COVID-19. States that were finalizing their Fiscal Year 2021 budgets are still in the process of understanding the near-term impact on their budgets with a few states like California estimating a 16 to 21 percent decline in revenues compared to the pre-COVID status quo — California would be facing an $18 billion deficit in FY21 under an optimistic U-shaped recession scenario assumption and a $31 billion deficit under the pessimistic L-shaped recession scenario.
Aging Infrastructure: The ASCE Infrastructure Report Card gave the U.S. energy system a D+. Between 2003 and 2012, weather-related outages, coupled with aging infrastructure, are estimated to have cost the U.S. economy an inflation-adjusted annual average of $18 billion to $33 billion.
Cost: Higher penetration of low cost renewables and natural gas has resulted in a steady decline of revenues for all generators. Additionally, according to the latest forecast from research company BloombergNEF (BNEF), the price of batteries has decreased by 87 percent in the last 10 years, from $1,100 per kilowatt-hour (kWh) in 2010 to $156/kWh in 2019. This decrease in energy storage prices will continue to facilitate the increased adoption of renewables.
Resiliency: An E&E News analysis of U.S. Department of Energy records show that electric companies have reported more than 2,500 major outages since 2002. Their analysis shows that approximately half of those outages were caused by weather conditions such as storms, hurricanes and unspecified severe weather — averaging 65 weather-related outages per year — and a total of 211 million customers have lost power since 2002 in weather-related disruptions. North American Electric Reliability Corp. reported that two major hurricanes in 2018 — Hurricanes Florence in North Carolina and Michael in Florida — knocked out power to 2.5 million customers combined. These statistics do not include 2020 data where more than one million Californians were without electricity during the largest public safety power shutoffs in the state’s history.
Diverse Industry Players: Major European firms, like oil majors including Shell, Total, Repsol and BP; utilities like Enel, ENGIE, EDF and Iberdrola; offshore wind giant Orsted; and energy traders like InCommodities and Axpo, are becoming increasingly active in the U.S. energy market. Many of them are setting on a path toward emission reductions and the diversification of their businesses into renewables, transportation electrification and other energy services. These firms are leveraging their experience in European power markets, where renewable energy already accounts for a large share of power generation. Unlikely players like Microsoft and Google, who focus primarily in technology, are entering the field with their focus on hourly (24/7) matching of renewable energy in order to meet their own decarbonization goals.
When Can P3s Help?
P3s are contractual arrangements between public and private sectors that allow for greater private sector participation in delivery of public sector projects, services and infrastructure. P3s serve as another tool to bring about investment and private sector expertise to the public sector.
The private sector provides services to performance-based specifications linked to contractual terms. To achieve true value from a P3, risks should be allocated to the public or private partner based on the party best capable of handling the risk.
Under its full potential, a P3 is a single contract between the public sector and private partner, with private sector investment instead of segregated design, construction and operation and maintenance contracts where the public owner retains the risk and responsibility over these separated contracts.
As a result, some of the key benefits of P3s are optimal allocation of risk through a rigorous procurement process, cost certainty through stringent fiscal management from private sector capital, schedule certainty and acceleration, cost savings through lifecycle cost optimization and expanding to a global pool of private players that brings in best practices to the project.
Additionally, P3s incentivize service performance by tying payment to performance and predictable funding, and innovation through performance- based instead of prescriptive specifications that take into account the entire lifecycle of the asset.
However, P3s are not without their own challenges. P3 transactions are more complex, time consuming and expensive compared to the traditional prescriptive-based approach. While P3s provide access to new capital, they need a revenue stream to work. Additionally, P3s are not typically suitable for services and projects with limited risks and complexity that the public sector can better address.
Consequently, a P3 is not a solution to all problems, and is a viable option only when it provides value for money to the public sector and its constituents compared to the traditional approach.
How Are P3s Already Helping the Energy Transition?
The public sector has been seeing the benefit of P3s primarily in the energy efficiency space and can capitalize on early successes in the distributed energy generation field. There is also great potential for using P3s to help electrify public transportation assets and infrastructure.
Energy efficiency: Public private partnerships in the energy efficiency space have existed through energy performance contracting since the 1980s and it has been used for energy efficiency projects on a large scale. Governments have turned to energy savings companies (ESCOs) that integrate multiple efficiency measures, mitigating technical and performance risks, and providing a financial guarantee to project lenders that the energy savings generated will cover the debt service.
According to the National Association of Energy Service Companies (NAESCO), ESCOs have resulted in $50 billion in projects paid from $55 billion in energy savings since 1990 with 450 million tons of CO2 savings at no additional cost. A study by Lawrence Berkeley National Labs found that new annual ESCO project implementation is around $6 billion per year.
Case Study: With constrained budgets and the need for capital intensive energy upgrades, the City Council of the City of Englewood directed the administration to investigate energy efficiency savings. The city approached the Colorado Governor’s Energy Office for education and guidance through the ESPC process resulting in a competitive request for proposal (RFP) and the selection of Ameresco. Ameresco conducted a city-wide audit and provided a solution that resulted in a design-build-own-operate-maintain 20-year solar power purchase agreement and a $1.46 million ESPC guaranteed to reduce annual utility cost by $117,000 (23.3 percent electricity and 9.3 percent natural gas savings).
Distributed Energy: Distributed energy solutions like district energy systems can help cities reduce their energy costs and keep more energy dollars local. Additionally, environmental impacts are substantially reduced due to the markedly improved efficiency of heating and cooling systems and developing district energy systems that can support the transformation of the power sector as older, polluting power plants are shut down.
District energy can cut peak electrical demand, reducing burden on the grid and avoiding expensive peak power costs. When coupled with islanding capabilities to form a microgrid, these systems can provide even more resiliency benefits. Such local solutions may offer lower-cost alternatives to major system investments, particularly in areas at elevated risk from severe weather or other natural disasters.
Although the long-term energy savings and environmental benefits are substantial, even resulting in many well-paying jobs, the high upfront costs can discourage municipal governments from such investments. Connecting district energy or microgrid systems to the power grid can also be complex.
That is where P3s can help. A great example of this is the microgrid P3 between Montgomery County, Maryland and Duke Energy Renewables with Schneider Electric.
Case Study: A 2012 storm led to approximately 250,000 out of one million Montgomery County residents, and 71 county facilities out of 400 buildings, without power for multiple days. This event highlighted the need for resiliency for Montgomery County’s facilities.
Additionally, the county buildings and associated electrical infrastructure were 30- to 50-years-old on average and were showing their age. As early as 2009, the county had set a goal to reduce greenhouse gases. Government administrators needed to find a way to pay for expensive upgrades in line with their resiliency and green targets, without adding to its debt obligation or straining a budget, already pressed by the essential needs.
In 2014, the county turned to the private sector for innovative ideas through a competitive RFP. Schneider Electric and Duke Energy Renewables proposed a plan that would allow the county to install two advanced microgrids and upgrade aging electrical infrastructure without any upfront investment.
Additionally, the private partners would maintain and operate the microgrids through a 25-year Energy-as-a-Service (EaaS) P3 agreement. The private partners would design, finance, build, maintain and operate the microgrids and upgrades. Montgomery County would make capacity and energy payments to the capital partner over the life of the contract. The payments include a locked-in energy rate, so the county avoids market price escalation.
The P3 agreement averted a $4 million capital expenditure in electrical upgrades alone. The P3 increased energy reliability, resilience, and clean power at a marginal increase in annual energy costs for the two facilities.
These two facilities are anticipated to generate over 11 million kilowatt hours (kWh) of electricity, equivalent to reducing greenhouse gas emissions by taking over 1,400 cars off the road or planting more than 178,000 trees. The microgrids also will ensure that the county can continue to provide critical services to the community during major storms and other external events. During the middle part of the day, enough electricity is generated on-site at the Public Safety Headquarters (PSHQ) to export into the public utility grid.
Montgomery County is no longer an outlier. More and more public sector entities are looking at P3 solutions for their energy needs. The District WRED project in Westminster, the National Western Center in Denver, Pittsburgh Airport, Santa Barbara Unified School District and the New London Harbor Energy project are a few district energy P3 project examples.
Transportation: Transportation is now the largest source of carbon emissions in the U.S. Many technologies that focus on decarbonizing the transportation sector rely on electrification to replace direct combustion of fossil fuels. P3s can serve as a potential solution to electrify government fleets and implement electric vehicle (EV) charging infrastructure.
In the U.S., there are about 66,000 buses in public transit fleets, and 480,000 school buses operated by public and private schools. While upfront capital investment is higher and operating aspects need to be resolved, historic experience with P3s in the transition to compressed natural gas (CNG) buses could provide a template for government looking to electrify their fleet.
Electric buses have much lower lifecycle costs than conventional buses—providing as much as $400,000 in lifetime savings for transit and $170,000 in savings for school buses, not accounting for improved health outcomes owing to decreased air pollution.
While there are a few examples of CNG P3s, including financing such as the PennDOT CNG P3 and LYNX, several agencies have successfully entered into design-build-operate-maintain (DBOM) contracts with private firms for CNG fueling and maintenance stations, including Orange County Transportation Authority (OCTA), Los Angeles County MTA, New York City Transit, the City of Burbank and Fresno Area Express.
In early 2016, the Pennsylvania Department of Transportation (PennDOT) announced its partnership with Trillium CNG to design, build, finance, operate and maintain CNG fueling stations resulting in a cost savings of more than $46 million by allowing PennDOT to install the fueling stations faster than if a traditional procurement mechanism was used for each individual site.
The CNG fueling stations will supply gas to more than 1,600 public transit buses at the 25 sites. Central Florida Regional Transportation Authority (LYNX) and Nopetro entered into a public-private partnership (P3) where the transit agency received a turnkey CNG fueling station and the generation of revenue from third-party customers.
Besides looking at CNG P3s, when it comes to laying out EV charging infrastructure across cities and states, governments can look at the opportunities and challenges presented in other sectors while implementing such comprehensive projects over large geographies such as the Kentucky Broadband P3, and Pennsylvania Rapid Bridge Replacement P3.
In these unprecedented times and in an age of tight government budgets, it is important for governments to have access to every tool in its toolkit while addressing their energy challenges. P3s offer a potential solution when immediate funding to pay for intensive upfront investment is unavailable.
P3s allow governments to focus on essential public services, which they are best able to deliver, while relying on the expertise of the private partner to minimize risks and lifecycle costs. They provide reliable, resilient and higher quality services that are based on innovative solutions in response to the goals and performance-based parameters outlined by the public sector.
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