Improving Efficiency: Affordable Housing Owners Use Different Approaches on Energy and Water Retrofit Projects

10 min read

Energy and water efficiency upgrades to affordable rental developments benefit owners by reducing utility costs, which in turn boost cash flow and the value of properties. Residents benefit from improved comfort and possibly lower utility bills.

Owners are using energy performance contracts in different ways to finance energy and water conservation measures and capital improvements to their existing affordable multifamily rental properties.

Some of the organizations doing so are the Denver Housing Authority, the Chicago-based Hispanic Housing Development Corporation, and Boston-based WinnCompanies. Their approaches include the use of the traditional energy services company (ESCO), a self-implemented model, and an “open market” ESCO.

Both the ESCO model and self-implemented model enable owners to undertake these retrofit projects in a more convenient and cost-effective way.

A traditional ESCO is a commercial company that enters into an energy performance contract with a building owner. It evaluates – or “audits” – the property, designs the scope of work, finances and installs the improvements, monitors the future utility usage, and guarantees a minimum projected level of cost savings. Since the ESCO finances the retrofit, it is repaid by the building owner from the utility cost savings over the term of the contract (typically 15 years). If the guaranteed savings aren’t achieved, the ESCO absorbs the cost of the shortfall.

A number of major corporations have subsidiaries that are traditional ESCOs, such as Honeywell, Johnson Controls, and Siemens.

Traditional ESCOs have been widely used to make energy efficiency improvements to commercial buildings, government buildings, and public housing properties, but infrequently for privately owned affordable apartment buildings.

Denver Housing Authority

The Denver Housing Authority (DHA) has used both a traditional ESCO and self-implemented model to complete two phases of retrofit improvements to virtually all of its public housing properties. Together these two phases have reduced natural gas costs by 34%, electricity costs by 10%, and water/sewer costs by 46%, for a combined savings of $2.5 million in 2013.

DHA owns and manages 5,116 housing units in 30 properties, including public housing, low-income housing tax credit, and other subsidized and mixed-income developments.

In the first phase, carried out over 2007-2008, DHA utilized Honeywell’s ESCO to retrofit 21 public housing properties with about 3,400 units. The ESCO audited the properties, developed the scope of work for each, installed the energy and water conservation measures, and funded the project at no upfront cost to the housing authority, according to DHA Portfolio Energy Manager Chris Jedd, who described the initiative in a recent interview and at National Housing & Rehabilitation Association’s Preservation Through Energy Efficiency Road Show in Denver. The public housing properties included a mix of row houses/garden style apartments, mid-rise buildings, and single-family homes.

Installed improvements in the first phase, which cost about $15 million, were more efficient lighting fixtures, low-flush toilets, low-flow showerheads and faucets, and some new furnaces and hot water heaters.

DHA had to get prior approvals from the U.S. Department of Housing and Urban Development (HUD) to enter into a 15-year energy performance contract (EPC) with Honeywell’s ESCO and for the proposed work itself. HUD permits and incentivizes local housing authorities to use ESCOs and EPCs to retrofit existing public housing properties to reduce utility costs. If the projected cost savings are achieved, HUD rewards housing authorities by continuing to pay the same amount of annual operating subsidies for the property as before the improvements were made. The differential between the original annual operating subsidy and the reduced utility expenses is used to pay off the ESCO’s financing.

“The ESCO did what they said they were going to do,” says Jedd. “We made our savings. HUD reimbursed us. We gave it to the ESCO. And the project was successful.”

Different Approach for Second Phase

In fact, the actual savings from Phase I – approximately $750,000 for natural gas, $620,000 for water/sewer, and $480,000 for electricity – surpassed the ESCO’s original estimates. In 2011, the ESCO invited DHA to team up on a second round of upgrades to the same properties. However, DHA, with experience under its belt and using in-house expertise from hiring Jedd, decided to undertake the project alone. The second phase was completed in August 2014.

Under the approach in the second phase, called a self-implemented or self-managed energy performance contract (EPC), DHA acted essentially as its own ESCO and developer, assuming responsibility for the design, installation, and financing of the retrofit improvements. “You can do the same thing as an ESCO does,” says Jedd, who supervised the work. “But you can do it on your own, with significant benefits.”

The authority retained outside engineers, a financial consultant, and a general contractor for the project, as well as relying on input from DHA’s staff and residents. These individuals helped DHA decide on the specific improvements, the particular equipment to use, the installation of the improvements, and securing HUD approvals and the financing.

The authority entered into a 15-year tax-exempt master lease purchase agreement with Bank of America to pay for the work. Under this arrangement, the bank essentially provided $31.5 million to pay for the Phase II project and to pay off the authority’s remaining financial obligation to the Honeywell ESCO for the Phase I work. HUD will essentially continue to pay the same amount of annual operating subsidies to the authority as before. The difference this time is that DHA will use the portion equal to all or most of the cost savings for lease payments to the bank over the term of the contract.

According to Jedd, advantages of the self-implemented ESCO over the traditional ESCO model were:

  • Greater customization of the scope of work.
  • Buy-in from DHA staff and residents, which historically results in longer-lasting, more durable energy savings.
  • The ability to finance capital improvements through the project.
  • The ability to hire local contractors.

Phase II, he said, included both “high energy savings” measures – low-cost upgrades such as low-flow water fixtures that generate large cost savings over a short payback period – and “low energy savings” measures. The latter included capital improvements that have a longer payback period and may cost more but enhance the value of a building, such as more efficient windows and central heating plants. DHA selected a mix of improvements with a blended maximum projected payback period of 15 years.

The disadvantage of the self-implemented EPC over the traditional ESCO, Jedd explained, is the financial risk to DHA from having to make upfront payments for consultants and pre-development work and the lack of a guarantee of the utility cost savings.

Chicago Approach

In Chicago, the Hispanic Housing Development Corporation (HHDC), a local nonprofit, has utilized an affiliated ESCO to complete one phase of retrofit improvements to a portfolio of 11 of its affordable multifamily rental housing properties containing 1,174 units, and is preparing to undertake a larger second phase.

The ESCO, called Affordable Community Energy (ACE), is a subsidiary of HHDC, which has developed more than 45 housing projects containing over 3,500 units and manages 4,300 units serving more than 12,000 residents. ACE was formed in February 2012 to design, install, and finance energy efficiency, water conservation, and renewable energy improvements in existing affordable rental housing properties.

According to ACE Chief Operating Officer Jeffrey Greenberger, the first phase retrofit project cost $6.25 million and was funded with part of a HUD grant, support from multiple foundations, federal new market tax credits and business investment tax credits for renewable energy and co-generation, financial incentives from the Illinois Department of Commerce and Economic Opportunity, utility incentives, and property reserves. HHDC received the HUD grant as part of a collaborative effort involving Enterprise Community Partners, Enterprise’s PartnerPREP Initiative in New York City, CNT Energy (now Elevate Energy), and LINC Housing in California.

ACE’s first phase retrofitted a wide range of multifamily structures, ranging from 40-unit courtyard buildings to newer mid-rises to a converted industrial building with 294 units. The developments included Section 8, low-income housing tax credit, and other types of properties.

ACE designed and installed energy efficiency and lighting improvements at the properties – the specific upgrades varied by building according to need – and put in solar photovoltaic systems to generate power for common areas. “Every building is a ‘snowflake,’” Greenberger said, “They all have their own special needs.”

A sub-ESCO, a private Houston-based firm called eConserve, installed and funded the water efficiency upgrades, and will be repaid from a portion of the water cost savings.

The improvements included such measures as lighting upgrades, boiler controls, new HVAC and domestic hot water systems, air sealing and insulation, solar photovoltaic panels, and a somewhat unique application of combined heat and power (CHP). The CHP units are essentially domestic hot water heaters, coupled with small generators, which use the heat that would otherwise be wasted in heating the water to generate electricity for the building.

ACE’s second phase targets a larger number of affordable multifamily properties, located in Illinois and owned by both HHDC and other nonprofits. ACE has audited the properties and designed and installed most of the energy efficiency improvements. The renewable energy and co-generation systems in the second phase will be completed when ACE closes on its new markets tax credit financing.

Performance Targets Achieved

The first-phase improvements have met or exceeded ACE’s original performance projections, with average measured savings of 37% in electricity consumption, 15% in natural gas usage, and 34% in water consumption. In addition, the solar panels and CHP units, when completed, will generate more than 1 million kWh of electricity for use by the properties. The same level of savings and power generation is expected in the second phase.

In both phases, ACE will be repaid by a portion of the utility cost savings under 10-year EPCs with owners and by a below-market payment for the electricity generated onsite. eConserve will make and finance the water efficiency improvements in a similar manner.

The goal is to create a model showing that, with the use of an ESCO such as ACE, energy and water retrofit projects can eliminate the risk and capital requirements for multifamily affordable housing properties.

“We’re trying to solve the problem for owners who know that they’d like to be more energy efficiency, more sustainable,” says Greenberger, “but who don’t have a near-term capital event for a property (e.g., a refinancing or resyndication) that could generate the dollars to pay for a retrofit project.”

Open Market ESCO

WinnCompanies, a for-profit firm that develops, owns, and manages affordable and market-rate apartments, has an energy division that has created an “Open Market” ESCO. This new $9 million pilot program is a collaboration with the Local Initiatives Support Corporation that will finance energy efficiency retrofits for an estimated 1,200 low-income housing units.

Leveraging a HUD grant with private and state dollars, the ESCO has created a credit-enhanced multifamily loan fund that will deliver off-balance sheet financing for energy and water retrofit projects and the installation of renewable energy systems. The ESCO will enter into an energy services agreement with owners and be repaid from a share of the utility cost savings.

Another feature of the initiative is the establishment of a network of approved contractors and service providers to handle different aspects of the retrofit projects.

The Open Market ESCO program is initially limited to Massachusetts, Connecticut, and New York City. To be eligible to participate, low-income housing developments must have the potential to save at least 20% on their energy costs.