Selected Agencies Have Awarded About $12.1 Billion for ESPCs for a Variety of Projects, and Their Plans for Continued Use Vary

In fiscal years 1995 through 2014, the seven selected agencies in our  review awarded approximately $12.1 billion in ESPCs for a variety of  projects, such as constructing biomass facilities to heat federal buildings. According to agency officials and documents, agencies plan to continue  using ESPCs to meet federal energy directives and initiatives, but some  agency officials said they are hesitant to use ESPCs to consolidate data  centers. For example, in response to federal energy goals, Army  officials said they plan to aggressively pursue using ESPCs, among other  financing options, to improve energy efficiency. Reported Savings Generally Exceeded Expectations, but Some Savings for Selected ESPC Projects Were Overstated

The cost and energy savings that contractors reported for most ESPCs  met or exceeded expected savings, according to studies by DOE’s Oak  Ridge National Laboratory, but some of these savings may be overstated. Our review of a nongeneralizable sample of 20 projects found that  contractors overstated cost and energy savings for 14 projects by  reporting some savings that, due to agency actions, were not achieved. Contractors must calculate and report savings in accordance with plans  agreed to in their contracts with agencies. They also include  assumptions about factors that are beyond contractors’ control, such as  agencies’ use of energy-saving equipment and utility prices, which may  change over the life of the contract. If changes in such factors reduce  savings, contractors generally are not required to reduce the amount of  savings they report or measure the effects of such changes. In contrast, the Air Force’s  removal of equipment associated with a sewer system upgrade resulted  in over $104,000 in annual savings that were reported but not achieved— about 40 percent of the annual savings reported for the project. Agencies Were Not Always Aware of How Much Expected Savings Were Not Achieved

Agencies were not always aware of the amount of expected savings that  were not achieved, in part because contractors generally did not—and  were not required to—report this information when savings were not  achieved due to agency actions. FEMP guidance states that when  reviewing measurement and verification reports, agencies should  understand changes in project performance and savings levels from year  to year, and what corrective actions should be taken to address  deficiencies resulting in savings that are not achieved. Agencies’ Oversight and Evaluation of ESPC Projects Is Limited

The seven agencies in our review have conducted limited oversight and  evaluation of their ESPC projects. Moreover, most of the agencies in our review have not  systematically evaluated their ESPC portfolios to determine the effects of  changing circumstances—such as facility use, utility prices, or interest  rates—on project performance because they do not have processes in  place to do so. Without this information, agencies may not be able to determine what, if  any, corrective actions they should take. Without ensuring that training provides officials with the information  needed to understand how to perform their oversight responsibilities,  agencies may continue to inconsistently perform their oversight  responsibilities. If  agencies do not systematically review the performance of ESPC projects  agency-wide compared with the assumptions developed when the  contract was signed, agency officials may be unaware of how changing  circumstances have affected the performance of their ESPCs and cannot  make fully-informed decisions about how to best strategically manage  their ESPC portfolios. Additionally, DOE may wish to consider  periodically analyzing data on other factors that may affect savings,  such as utility prices, to provide information on how savings achieved  by ESPCs awarded through its contract vehicle have been affected by  changing utility prices since its prior study in 2007.  the Secretaries of Defense, Energy, and Veterans Affairs; the  Attorney General; and the Administrator of the General Services  Administration work with contractors to determine the best way to  obtain estimates of cost and energy savings that are not achieved  because of agency actions in order to include these estimates in  future measurement and verification reports for existing contracts, in  accordance with DOE guidance, and where economically feasible. To help ensure that agencies have sufficient information on the effects of  changing circumstances on the performance of their ESPC portfolios, we  recommend that the Secretaries of Defense, Energy, and Veterans  Affairs; the Attorney General; and the Administrator of the General  Services Administration establish a process to systematically evaluate  their ESPC projects—including baseline assumptions about facilities’  energy use, utility prices, and interest rates—to determine how their  ESPC portfolios are performing and the extent to which they are  achieving expected savings. DOE partially concurred with the recommendation. This report examines  the extent to which (1) selected agencies have used ESPCs and plan to  use them in the future, (2) selected agencies’ ESPC projects have  achieved their expected cost and energy savings, and (3) selected  agencies have overseen and evaluated their ESPC projects. To determine which federal agencies to include in our review, we selected  agencies with the highest energy usage and greatest facility square  footage, based on government-wide data collected by the Federal Energy  Management Program (FEMP). We selected projects that reflected a range of award  dates, contract values, and other characteristics.
Why GAO Did This Study

Constrained budgets and increasing energy efficiency goals have led federal agencies to explore innovative ways to fund energy improvements, including ESPCs. An expected increase in the use of ESPCs has raised questions about agencies' ability to ensure that the government's interests are protected. ESPCs can span up to 25 years and be valued at millions of dollars each.
GAO was asked to review federal use of ESPCs since 2005. This report examines the extent to which (1) agencies have used ESPCs and plan to use them; (2) projects have achieved their expected cost and energy savings; and (3) agencies have overseen and evaluated such projects. GAO compiled data on awarded ESPCs; reviewed agency guidance and files for a nongeneralizable sample of 20 ESPC projects that reflected a range of contract award dates, contract values, and other characteristics; and interviewed officials from the seven agencies with the highest energy usage and greatest facility square footage—the Air Force, Army, and Navy within the Department of Defense; the Departments of Energy, Justice, and Veterans Affairs; and the General Services Administration.

What GAO Found

The seven selected agencies in GAO's review awarded approximately $12.1 billion in energy savings performance contracts (ESPC) in fiscal years 1995 through 2014 and plan to continue using them to help meet federal energy directives and initiatives. Under ESPCs, private contractors finance the up-front costs of energy improvements. Agencies then repay contractors from the savings, such as those resulting from lower utility bills. The seven agencies GAO reviewed have used more than 500 ESPCs for projects, such as installing energy-efficient lighting or power generation projects. Agencies' plans to use ESPCs vary, particularly for data center consolidation projects, which could reduce a significant amount of energy.
Cost and energy savings that contractors reported to agencies for most ESPCs met or exceeded expectations, but some of these savings may be overstated. GAO's review of a nongeneralizable sample of 20 projects found that contractors' reports overstated cost and energy savings for 14 projects. Contractors calculate and report savings annually in accordance with plans agreed to in their contracts with agencies. These plans include assumptions about agencies' use of equipment, which may change over the life of the contract. If changes reduce project savings, such as when an agency does not operate or maintain the equipment as agreed, contractors are not required to reduce the amount of savings they report or measure the changes' effects. GAO evaluated the extent to which changes in agency operations or other factors within agencies' control may have reduced energy savings for a nongeneralizable sample of projects. Estimates agencies provided to GAO of savings that were reported but not achieved ranged from negligible to nearly half of a project's reported annual savings. For example, one agency removed equipment for a sewer system upgrade, which resulted in over $104,000 in annual savings that were reported but not achieved, or about 40 percent of the project's reported savings. Federal guidance states that when reviewing contractor reports, agencies should understand changes in project performance and savings levels, and what actions should be taken to address deficiencies. However, agencies were not always aware of how much savings were not achieved due to agency actions because contractors were not required to report this information. Without clearer reporting of savings that are not achieved, agencies may be unable to determine what, if any, corrective actions should be taken.
The seven agencies in GAO's review have conducted limited oversight and evaluation of their ESPC projects. In GAO's sample of 20 projects, agency representatives did not perform some oversight activities included in guidance because they were unaware of these duties or how to perform them, among other reasons. Without ensuring that training provides officials with the information needed to understand how to perform their oversight responsibilities, agencies may continue to inconsistently perform oversight. Moreover, most of the agencies in GAO's review have not systematically evaluated their ESPC portfolios to determine the effects of changing circumstances—such as facility use—on project performance because they do not have processes to do so. Without such oversight and evaluation, agency officials cannot make fully informed decisions about how best to strategically manage their ESPCs.

What GAO Recommends

GAO is making recommendations to improve oversight of ESPC projects through clearer reporting of savings, improved training, and systematic evaluations of portfolios, among other things. In general, the agencies partially concurred with GAO's recommendations. GAO has modified the report, as appropriate, to address the agencies' comments.