Energy

Ann Arbor, United States of America

An energy efficiency fund costing $500,000 over five years that is reducing CO2 emissions by 980+ tonnes annually

Summary

Ann Arbor’s Energy Fund demonstrates that energy efficiency can pay for itself in the long term. Through an initial allocation of $500,000 over five years, and by capturing 80% of the resulting savings, the city has implemented energy efficiency projects in its buildings and throughout the city that pay back their investments in 3-5 years, eliminating the need for additional annual appropriations.

What is it?

Established in 1998, the Municipal Energy Fund is a self-sustaining source of funds, investing in energy-efficient Municipal projects – such as LED traffic and street lighting while also funding pilot projects like solar energy and electric vehicles - projects that are able to continually reduce operating costs and global warming emissions.

How was it set up?

• In 1981 the City of Ann Arbor's Energy Plan called for energy conservation to be promoted in City buildings.
• By 1988 the municipal bonding authority provided a $1.4 million energy bond to implement efficiency measures at 30 City facilities. The payments for this ten-year bond have been generated through energy cost savings.
• In July 1996, the City became a partner in the EPA’s Green Lights program, committing it an efficiency survey all 100 buildings and facilities, and an upgrade 90% of the lighting that was identified as inefficient.
• State and public utility programs were used to perform many of the audits at little or no cost to the City, but it had difficulty finding funding to implement the recommended upgrades.
• In 1998, the final payment on the Energy Bond was made. Energy Bond payments of over $200,000/year had been included in the annual City budget for each of the last ten years.
• Instead of discontinuing the budget item, it was reduced by 50% to $100,000 for the next five years and used to establish a Municipal Energy Fund.

The City of Ann Arbor has just over 60 facilities, which pay about $4.5 million/year in energy costs. The $100,000/year initial funding has proven to be adequate, both for the energy saving opportunities available and for the fund management.

How does it work?

The Energy Fund finances itself by re-investing funds saved through energy efficiency measures into new energy saving projects.

The Fund is administered by the City’s Energy Office under the supervision of a three-person board who approve funding, implement the projects, and often serve as project manager. The Office provides the board with information from energy audits along with applications from facility managers for projects requesting energy funds. The board reviews all applications and makes final decisions on what projects to fund each year. Decisions are based on:

• energy saving potential
• improvement of the facility environment
• educational or demonstrational value of the project

Over the nine-year period, it has invested in:

• LED traffic and pedestrian signals
• street light improvements
• parking garage lighting
• a boiler
• two electric vehicles
• solar energy demonstration projects

The City adopted the rule that any facility that utilizes the fund for energy improvements will pay back 80% of the projected energy savings for five years starting the first year after the energy saving measures were installed.

Establishing a five-year payment plan allows projects that have a shorter payback (three years or less) to help support projects that have a longer payback (over five years). At first glance this does not seem fair to the facilities that install three-year payback measures, since they will have paid back their loan after three years. However, the logic used is that they will continue to have the same level of energy savings in the fourth and fifth year, so their operating costs will be lower still. We feel this type of sharing is important to the overall accountability of the organization.

Financing

The City operates 60 facilities and spends $4.5 million per year on energy (out of an annual budget of $288 million in 2005). Most of the measures financed by the fund have payback periods of three to six years.

• In the fiscal year 1998-99, City Council approved the first $100,000 to be available, of which $87,000 was spent in the first year to update energy audits for 21 facilities and to implement lighting improvements at 14 of the facilities.
• During fiscal year 1999-00 these improvements generated $19,850 in energy savings of which $15,880 was re-invested in the Municipal Energy Fund. The money was transferred from the budgets of the facilities that received the energy improvements into the Energy Fund at the end of fiscal year 1999-00 and then available to finance further energy improvements in fiscal year 2000-01.
• The payments from these first year projects continued into the Energy Fund for 5 years, contributing $15,880/year or a total of $79,400 back to the fund.
• A second $100,000 was approved for fiscal year 1999-00 and was used to implement additional energy saving projects at City facilities generating another $15,000 in annual reimbursements.
• The energy savings from this second year of improvements were available to finance further energy saving projects in fiscal year 2001-02.
• For fiscal year 2001-02, $30,000 was available from reimbursements from the first two years of the program.
• The $100,000 budgeted annual contribution to the Fund was discontinued after the fiscal year 2003-04.
• From that point forward, the Fund has relied on payment of past projects to finance new projects.

Facility budgets are not impacted by the up-front costs of the energy improvements, which are covered by the Energy Fund. The annual payments are made from a portion (80%) of the resultant energy savings, allowing facility budgets to be reduced or to apply the remaining savings (20%) to further improve the facility or services.

Application

• The two critical components required to make an Energy Fund work are:
  1. An initial funding source (available for 3-5 years)
     The level of the initial funding will depend on funds available and the number and condition of municipal facilities. The City of Ann Arbor has just over 60 facilities, which pay about $4.5 million/year in energy costs. The $100,000/year initial funding has proven to be adequate, both for the energy saving opportunities available and for the fund management.
  2. A manager assigned to support and coordinate the fund and its projects.
• Ann Arbor was fortunate to have an opportunity to establish the Municipal Energy Fund when a ten-year bond had been paid off.
• Other cities may choose to provide funds for an Energy Fund simply because it is a good investment or can look for opportunities similar to Ann Arbor’s to avoid significant budget increases.
• One opportunity may be connected to the deregulation of energy utilities in the United States. A portion of the money saved through the purchase of natural gas or electricity from alternate suppliers could be used to establish an Energy Fund.
• Ann Arbor has maintained an active Energy Office for over ten years, with an ongoing mission to improve energy efficiency at City facilities. This means that many of the best energy saving opportunities were already implemented before the creation of the Municipal Energy Fund.
• Most of the measures that have been financed by the Ann Arbor Municipal Energy Fund have payback periods of three to six years. For cities that have not been actively installing energy saving measures, there will be many opportunities available with payback periods of less than three years. This will contribute to a much quicker regeneration of an energy fund.
• The Energy Fund is used strictly for municipal programs aimed at improving energy efficiency at municipal facilities. However, the Energy Plan calls for the City to lead by example, and this type of fund should be feasible for many local businesses that own and operate a large number of facilities.