Guide to Financing EnergySmart Schools

With the recent passage of the American Recovery and Reinvestment Act, school districts nationwide have an unprecedented opportunity to construct new high-performance schools and modernize existing facilities to significantly decrease energy consumption and create healthier, more productive learning environments. School districts seeking to make a strong case for proposed high-performance school projects will find a valuable reference in a free report by the U.S. Department of Energy, Guide to Financing EnergySmart Schools.

The economic stimulus package includes several sources of funding potentially relevant to U.S. school facilities.
  • The $53.6B State Fiscal Stabilization Fund includes $39.5B for local school districts using existing funding formulas, which can be used for preventing cutbacks and layoffs, school modernization, or other purposes; $8.8B to states for high-priority needs such as public safety and other critical services — which may include education — and for modernization, renovation, and repairs of school facilities and institutions of higher education facilities; and $5B to states as bonus grants for meeting key performance measures in education, including $650M for innovation grants to school districts.
  • $2.8B is included to extend Qualified Zone Academy Bonds to provide no-interest loans for renovation, repairs, and technology, distributed to states based on population and within states based on need.
  • $22B in Tax Credit Bonds is made available for new construction. This is a new school bond program distributed to states based on the Title I formula. Forty percent of these bonds are directed toward the 100 largest school districts by number of children below the poverty line, and the remainder is for other school districts.

Resources for Decision Makers
The U.S. Department of Energy’s EnergySmart Schools (ESS) program offers valuable tools and resources to help school districts across the nation find creative yet practical ways to plan, finance, design, build, and operate high-performance facilities. The program recently released its Guide to Financing EnergySmart Schools, designed to help school districts address real and perceived financial barriers to high-performance construction or renovation projects. It describes a number of financing mechanisms and strategies that can help districts achieve their project objectives.

The goal of the EnergySmart Schools program is to promote 50 percent improved energy efficiency in new schools and major renovations, and 30 percent in existing buildings. With an average age of 42 years, many of the nation’s 93,000 K-12 public schools are spending more than $8B annually in energy costs, making it the second-highest operating expense for schools after personnel costs. But if all new school construction and school renovations went green, energy savings alone would total $20B over the next 10 years, according to the U.S. Green Building Council.

Each new building or renovation project presents an opportunity for school districts to invest in a high-performance facility that uses less energy and water, lowers operating costs, and frees up resources that can be rerouted to educational needs. At the same time, high-performance schools create healthier, more productive learning and work environments, and decrease carbon emissions that contribute to global climate change.

Integrated Design Pays Off
Many school officials believe that construction costs for a high-performance, energy-smart school are significantly higher than for a conventionally built school. However, with the right planning, there may be little to no additional upfront cost.
 
For example, when Poudre School District in Fort Collins, CO, needed to build a new high school, a primary goal was to construct the most energy-efficient school building possible in order to save money on energy costs. Poudre also wanted the school to be flexible and adaptable, to make it a teaching tool for environmental stewardship, and to build it for the same amount as a traditional building. The resulting high school is a state-of-the-art, 290,000-sq.-ft. building with capacity for 1,800 students — all of whom will learn in an environmentally responsible, healthy building that is saving the school district money.

Like all school districts, Poudre had to make decisions within a tight budget. The district used an integrated design approach that delivered a higher-quality building for no added cost: at $179 per sq. ft., including design fees, furnishings, and equipment, Fossil Ridge’s cost compares favorably with other school building projects in the region. The extra attention to high performance is paying off: Fossil Ridge is 60 percent more energy efficient than traditional schools and saves the district an estimated $11,500 in water costs per year. Fossil Ridge’s energy bills are expected to be about one-third less than comparable high schools in the district.

Poudre School District’s success was a result of involving not just architects and engineers, but also teachers, maintenance staff, and others from the very beginning. Making sure that all key disciplines and stakeholders were engaged in planning was essential to achieving efficiency and environmental stewardship goals.
 
Making the Case
School districts planning to build new energy-efficient schools or to renovate existing buildings may well benefit from the strategies found in the Guide to Financing EnergySmart Schools. The document is geared toward school administrators, board members, and business officials who are planning new school construction or renovation projects, helping them identify the best options for financing their project and capitalizing on energy efficiency and renewable energy opportunities.

The guide is designed to walk planners through the entire project. Because an energy-efficient school depends on whole-building design systems, it requires more planning than most conventional schools. Whole building design weighs a wide range of options to find optimal design solutions that meet the defined project goals and fit the school’s size, functions, and climate zone. School administrators are encouraged to determine project objectives first to increase the range of financing possibilities.

Often, decision-makers are not aware of the true costs and benefits of energy-efficient investments. The guide recommends providing potential investors with information about life-cycle costing — calculating the costs over the project life. For example, highly efficient equipment choices may have higher up-front costs than standard efficiency investments, but result in a longer expected life and reduced energy costs over the length of the investment. School officials should calculate the energy costs and factor in replacement costs when determining which option is the best value.

The guide also helps administrators design a convincing business case for high-performance schools that will appeal to decision makers and other stakeholders, including parents who are hoping for a better learning environment for their children. For instance, in addition to cost savings, high-performance schools offer non-monetary benefits such as improved student focus, reduced absenteeism, or improved air quality.

Identifying the Options
The pros and cons of various options for financing high-performance projects are compared in the guide. Internal financing is the simplest and most direct way to pay for improvement projects, but these funds are most often used to finance smaller, short-term projects that have relatively low capital costs and short paybacks.

Debt financing is another option appropriate for larger projects. Bonds are often tax-exempt, which lowers their cost, but they also require voter approval and incur a debt that is reflected on the school’s balance sheet.

Leasing arrangements are a financing tool schools may use to secure equipment or energy-efficient improvements from a private vendor, who is repaid over the term of the lease through energy-cost savings from the project. There are no up-front costs for the school and the equipment can be bought at the end of the lease for a pre-negotiated price. These agreements can require complex administration as well as financial expertise but are worth consideration.

Energy-saving performance contracts also can be used to upgrade equipment and improve the energy performance of existing facilities. A performance contractor estimates potential energy-cost savings for the school, and the school and contractor divide the amount saved. The more energy-cost savings generated, the more the performance contractor earns — and the more money the school has to put toward other projects. The formula for that division is negotiated prior to the lease signing.

A number of external financing sources, including federal and state grants, also can lower the overall cost of a high-performance school project. For instance, the U.S. Department of Homeland Security offers grants to enhance the ability of states to prepare for and respond to terrorist attacks and other disasters. These grants provide capital financing to “harden” structures and infrastructures that will be used in the case of a national disaster. Schools are eligible to receive funding if they serve as local shelters in the event of a disaster. Energy efficiency and renewable energy are important parts of the hardening process. Schools that improve electrical systems so that they can endure significant periods of time without being connected to a larger grid are eligible for these grants.

Another external financing source is the local utility. Power companies may offer reduced-interest loans or rebates for energy-efficient projects or features. Some electric utilities include a fee with their monthly charges that goes toward Public Benefit Funds, which can then be used for a variety of energy-efficient projects.

Determining the best strategy for financing high-performance facilities — potentially including economic stimulus funding in the mix — requires disciplined analysis and consensus-building. Yet the ongoing financial returns and other benefits to school districts make the extra effort well worthwhile. Helpful resources offered through DOE’s EnergySmart Schools program, including the Guide to Financing EnergySmart Schools, are available for downloading at www.energysmartschools.gov.

Margo Appel is program manager for the U.S. Department of Energy’s EnergySmart Schools.

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