CONTRACTING ENERGY EFFICIENCY RETROFITS IN THE

PUBLIC SECTOR – A DIFFERENT APPROACH

Alan Douglas Poole1 and Jaqueline Nascimento Poole2

1
International Energy Consultant, 2939 Van Ness St, NW, Apt.1247, Washington DC
20008 – USA, email: alan.douglas.poole@gmail.com
2
Tutor in UFCG/ABEAS - 2939 Van Ness St, NW, Apt.1247, Washington DC 20008 –
USA, email: jnpoole@gmail.com

Abstract: The use of performance contracts to increase the energy efficiency of the
public sector is widely regarded as an attractive option throughout the world. However,
in Brazil as elsewhere, it has been difficult to find a model which fits the regulations for
government procurement and is viable from a business perspective. This paper proposes
a new approach to procure energy efficiency retrofit projects, using the resources of the
existing public benefit wire-charge on electricity distribution utilities’ revenues known as
the Programa de Eficiência Energética (PEE). A reformed PEE could have vastly greater
impact on public sector energy use than the current use of grants. Copyright © 2009
CBEE/ABEE

Keywords: Energy efficiency in the public sector, performance contracts, public benefit
wire-charge for energy efficiency.

Palavras Chaves: Eficiência energética no setor público, contrato de performance,

Programa de Eficiência Energética (PEE) fiscalizada pela ANEEL.

1 INTRODUÇÃO for private sector consumers (including

Brazil’s public sector consumed 34,840 GWh/year in
2007, or 9.2% of total electricity supplied from the grid
in Brazil. This consumption is divided roughly equally
between government buildings (11,220 GWh), street
lighting (11,098 GWh) and other public services
(10,947 GWh, excluding rail transport). The cost of
this electricity was about R$ 7.3 billion in 2007, the last
full year for which data are available for a calculation.
As in other countries, there has been interest in
achieving energy savings in the public sector for
various motives:
• Reduces the operating costs of government –
quite substantially. It is likely that
consumption could be reduced by 30-40% on
average. This translates to R$2-2.5 billion per
year of possible savings.1
• Helps to consolidate the market for energy
efficiency goods and services by:
strengthening their familiarity and credibility
1
We exclude the small share of electricity for public
services which goes to rail passenger transport.
businesses); increasing volume and reducing
the costs of supply; establishing standards.
• Contributes to general improvement in
national energy rationalization, which is
important considering the huge challenge of
reconciling climate change restrictions with
the need for economies like Brazil’s to grow
substantially.
• Like energy efficiency projects in general,
contributes to more employment than the
equivalent supply would.
To improve the efficiency of energy use in the public
sector, various segments of the market need to be
addressed with different approaches:
1. For equipment procurement (e.g. computers &
office equipment, appliances) use life-cycle
costing.
2. Norms for new buildings and other new
facilities.
3. Retrofits to increase the energy efficiency of
public buildings and of public services such as
 street lighting, water & sewage companies.
These retrofits involve modernizing energy
use systems, not the simpler replacements in
segment (1) above.
In this paper we focus on the third area – retrofits.
More specifically we consider the procurement of
energy efficiency retrofit projects using “performance
contracts” with firms specialized in this kind of service,
which are called ESCOs. The popularity of seeking
this approach throughout the world is due to the fact
that most government agencies lack the skills required
to design and implement energy retrofit projects “in-
house”. ESCOs may also help by providing a channel
for financing the investment in energy efficiency.
Unfortunately, it has proven difficult to achieve savings
using performance contracts. Brazil, like most
developing countries, has not gotten very far. Many
common problems are confronted throughout the world,
ranging from lack of incentives, lack of technical
capability to legal difficulties and high transaction
costs.
In general it is difficult to find a model which
reconciles the regulations for government procurement
with the needs for a viable business transaction in this
area.
Much attention is now being given to this problem
internationally. The World Bank is preparing an
analysis later this year. There is in principle an inter-
ministerial Task Force addressing the issues at the
Federal level. However there has been little evolution
since the difficulties were systematically identified
back in early 2004 (Nexant, 2004).
Until now only two projects have been implemented in
Brazil. One began in 2000 with Infraero, another in
2006 with SABESP. Both were successful, but
probably neither of the RFPs (edital da licitação) would
have survived a court challenge, if there had been one.
A new more robust model for procurement of ESCOs is
needed. Yet even if all the basic problems are resolved
satisfactorily, a program involving the competitive
procurement of EE services by government agencies in
Brazil is likely to suffer from significant handicaps.
For example, there will almost certainly be a legal limit
on the length of contracts which allows only four years
after the commissioning of projects for the ESCO to be
remunerated. This time is insufficient for many
measures to be adequately remunerated and would
seriously restrict the possibilities for investments. At
the same time, the bidding process will have high
transaction costs and there is likely to be conservatism
of projected savings in the bids due to the uncertainties
the ESCOs will face when they make their bids
(Nexant, 2004; Poole, 2008).
In light of all these difficulties facing the procurement
of energy efficiency performance contracts and the
sparse results achieved so far, it is interesting to
observe that hundreds of energy efficiency projects
have been implemented by utilities in Brazil’s public
sector – at all levels of the Federation. These projects
have been implemented with resources from the PEE –
Programa de Eficiência Energética. Under the PEE,
which is regulated by the power sector’s regulator,
ANEEL, the distribution utilities are required to spend
0.5% of their gross revenue on energy efficiency
projects.
2 THE PEE AND PROJECTS IN THE
PUBLIC SECTOR TODAY
The PEE mechanism was established in 1998 to assure
that electricity distribution utilities would continue to
invest in energy efficiency projects with consumers (as
well as R&D) after their privatization. Projects are
proposed and implemented by the distribution utilities
under the oversight of ANEEL, the Federal regulator of
the power sector. Through mid-2006, the PEE had
provided more than R$1.8 billion in resources for
energy efficiency projects (Jannuzzi et alii, 2008). The
current level of disbursement is well over R$ 300
million per year. It is by far the largest energy
efficiency program in Brazil.
The share of these resources going to projects in the
public sector has been substantial – roughly R$ 670
million between the project cycle of 2000/01 to
20006/07, as shown in Table 1. Until 2005 more than
60% of the PEE’s resources was allocated to projects in
the public sector, being that almost 40% was allocated
to public street lighting projects alone. After 2005
investment in public street lighting was halted, due to
the existence of another large program of Eletrobrás –
called RELUZ – which also specifically targeted this
end-use. Investments in other segments of the
government, such as buildings and water & sewage
treatment facilities also declined somewhat - from 23%
to 18% of the total. It should be noted that since 2005,
at least 50% of PEE resources must go to programs for
low income residential consumers (in fact more than
60% have gone to this end). Thus, despite the large
absolute decline in investments in public sector
projects, they remain the next largest category.
Unfortunately, the relatively large investment in public
sector projects – which has been more than R$ 40
million per year since 2005 - has so far contributed
almost nothing to consolidate improved government
procedures to contract energy efficiency goods and
services. All of the projects have been funded as grants
(usually for the full cost of the project). While
obviously attractive to the lucky recipients, this mode
of funding meant there was little stimulus to develop a
more sustainable approach where the public sector
actually pays for the investments in efficiency. Indeed,
this steady flow of “freebies” has probably stunted
interest in more economically sustainable practices.
In addition, the habit of doling out grants has severely
limited the impact of the PEE. While there have been
hundreds of projects (usually quite superficial in the
measures taken), this must be compared with the more
than 465,000 government owned buildings in Brazil
plus 125,000 accounts for street lighting and other
public services (data from ANEEL). Only about 1% of
government buildings have been touched by the PEE in
its ten years of existence.
Table 1. Planned Investments by Category during Two
Periods
Category
Source: Based on Jannuzzi et alii, 2008
* Planned investment used because of long delays in final
reporting of realized investment.
** Estimates for the 2006/07 annual cycle are partial, due to
Public street
incomplete data.
This wasteful model could be changed under the
existing regulatory framework. In early 2008 the PEE
lighting
underwent a substantial reform with the explicit
objective of increasing its impact in terms of
transforming markets for energy efficiency (ANEEL,
2008 & Jannuzzi et alii, 2008). The changes made have
Residential
opened possibilities to support the widespread
contracting of energy efficiency services with
performance contracts.
3 ADAPTING THE PEE TO FUND A
Industrial
MUCH LARGER PORTFOLIO IN
THE PUBLIC SECTOR
There are two broad ways, not mutually exclusive, that
Public
the PEE could be adapted towards achieving this
objective. In the first approach, resources would be
used to help prepare the RFPs for the procurement of
performance contractors by the public sector. As part
Services
of the recent reform “energy management” projects
involving only studies or audits (without actual
investments in hardware) are now permitted at the
municipal level. It would be possible to bring
Education
substantial technical capabilities to bear on the RFP’s
preparation, bolstering the public agency’s usually very
Commercial
limited capability. While this kind project is currently
only possible at the municipal level there is no big
reason why it could not be extended to other levels of
government if experience were satisfactory.
A second, more radical, approach would simply bypass
the competitive procurement process at the level of the
public sector agency. In this, the local utility might
sign an agreement with the public agency – say a
school district – to retrofit a series of buildings. This
agreement would have elements of a “performance
contract” along the lines of a model already required by
the PEE with private sector beneficiaries. In this
model, the public agency would never pay more than its
P
prior (inflation adjusted) electricity bill while it
amortized the investments.
In the existing model of the PEE for projects with the
private sector, the performance contract is between the
executed by ESCOs who are sub-contracted by the
Inves
utility and the consumer. Most of the projects are
utility under standard “cost-plus” engineering services
contracts.
The first question is whether it would in fact be
possible to avoid the competitive procurement of
energy efficiency services by the interested public
2000/1
sector agency. The preliminary response has been that
it would be possible. This is due to the fact that the
utility already has a monopoly (or “sole source”)
relationship with most public agencies. The fact that
the PEE is a Federaly regulated program also helps.
2004/5
An intriguing additional possibility is that, since
payments for the EE investment are made to the same
entity which is supplying the electricity, it may well be
possible to avoid the disconnect between budget items
(especially between operating and investment costs)
which creates so much risk and other difficulties (such
as estimating values for the separate items) for the
374.6
conventional procurement of performance contracts.
There would only be a single formal budgetary
reference – the electricity bill before the investments
were made. It may even be possible to avoid the limit
on the length of the performance contracts – currently 4
133.5
years – which in practice eliminates measures with
simple payback times longer than 18 months.
Since the projects would no longer be funded on a grant
96.0
basis, it would be possible to re-invest in an increasing
volume of projects as time passes, even with the same
volume of new funds each year. A kind of “revolving
fund” could in effect be created.
At first glance, the impact on the capacity to increase
the volume of projects unfortunately seems rather slow.
For example, if one assumes an average amortization of
4 years, it is possible to double the annual project
91.3
volume only after at least four years have passed. Of
course, at the end of this period the Revolving Fund can
expect substantial income over the next 4 years, while
in comparison there would be nothing with current
80.9
practice. This has very favorable implications for
program sustainability or introducing future policy
options. But the increase in shorter term impact is
relatively small.
However, moving to the “performance contract” mode
can also open the way to obtaining credit. This would
permit a substantial leveraging of PEE resources, which
could come to be viewed as equivalent to “equity” in
projects.
Figure 1 illustrates the idea with a simple simulation.
In the Baseline Case (current practice or Scenario A)
R$ 50 million are invested each year on a grant basis
over 5 years and 10 years, (in order to simplify, we
ignore the growth of electricity consumption and
receipts). Then we show a Revolving Fund Case
(Scenario B), where projects are amortized in four years
and these receipts are reinvested. Finally there is
Scenario C - a Revolving Fund with Debt Financing,
where we assume that PEE resources provide 25% of
the project financing, with 75% debt. We do not
include return on equity capital in the reinvestment.
Figure 1: Impact of Modes of Funding on Cumulative
Project Volume
We can see that in Scenario C - Revolving Fund with
Debt Financing, the cumulative volume of projects
funded is 6 times higher than with current practice
(grants) after five years and more than eight times
higher after 10 years. It is also far higher than can be
achieved just by going from grant mode to a Revolving
Fund. Defining a practical way to obtain loans for
these projects should be a key part of designing an
initiative to promote energy efficiency retrofits in the
public sector.
Supposing one’s objective really is to maximize the
savings which can be achieved, this simplified example
illustrates the importance of using the PEE to leverage
additional resources. Simplified calculations suggest
that doubling the annual flow of new PEE resources to
R$100 million under Scenario C one would probably be
close to retrofitting all the major government buildings,
street lighting and water and sanitation facilities in
Brazil within a decade.2 Having a clear and ambitious
2 http://www.efficiencyvermont.com/pages/, is operated by an
Assumes that a 30% average reduction in electricity costs
(currently ~R$ 7.6 billion) would require projects with on
average 4.5 - 5 years of payback (including simple payback of
equipment plus engineering services and profit). Thus: R$
2.3 billion x 4 = R$ 9 billion (or R$ 11 billion with 5 years).
Obviously this is a crude calculation. Investment might be
(but doable) target could be very interesting to mobilize
serious political support for a program of this sort.
A concern with using the PEE as a mechanism is that
utilities may not naturally seek to maximize
economically viable savings among public sector
consumers. But even if they only do the kinds of
superficial projects that they have mostly done
historically, they will at least be doing more of them,
with some additional benefits.
However it should be possible to do much better than
this. There are several possible ways. A key aspect of
the recent reform of the PEE is that it allows for the
creation of a new category of project, called “Priority
Programs” (ANEEL, 2008). Whereas all other projects
are proposed and implemented by the utilities – subject
only to approval by ANEEL – under a Priority Program
the government has wide latitude to establish the
institutional mechanism or procedures which are most
appropriate to achieve results towards what is, by
definition, a policy priority.
Thus it is possible, in principle, to escape the
limitations of a classic “DSM” approach where the
distribution utility takes the lead in defining and
implementing projects. One possible approach would
be possible to create a mechanism which has an
institution focused on the market for energy efficiency.
This entity – a kind of “energy efficiency utility” –
would be selected by the government, preferably in a
competitive process. There are many different possible
ways to define the role of the “energy efficiency
utility”, and its relation to the electric utilities. To some
extent this new entity would take the place of the
electric utility’s DSM activity, but they might also work
together in some market segments.
There is a successful working model for this “energy
efficiency utility” approach. The State of Vermont
established “Efficiency Vermont” in 2000.3 It uses
resources collected via a “public benefit wire-charge”,
as this is called in the US – a procedure very similar to
that of the PEE in Brazil.4 The results are closely
monitored and have been among the greatest,
proportionally, of any State in the USA.
We imagine that the instinctive reaction of most
utilities to this sort of institutional arrangement would
be negative. After all, they lose control of some
spending – though it must be remembered that the
resources of the “wire-charge” do not really belong to
the utility; nor is it proposed that all of these resources
be disbursed through this new channel. .
increased if projects are associated with some improvement in
energy service quality or quantity. This “something more”
can be an important incentive to mobilize government agents,
as was shown in the RELUZ street lighting program.
3
Efficiency Vermont,
NGO, Vermont Efficiency Investment Corporation
http://www.veic.org/ .
4
There is confusion in translating the term “wire-charge”
from English to Portuguese. In Portuguese “taxa-de-fio”
suggests the price for transmitting electricity.
There are some factors which may increase of fuel and water use (with the important exception of
acceptability to the utilities (though they should not be cogeneration projects) would probably be off-limits.
the final arbiters). For a start, the majority of Brazil’s Since the public sector energy consumption is almost
64 distribution utilities have quite small PEE programs totally in the form of electricity, so this is not such an
and cannot afford to have the specialized capabilities to important restriction as in countries with large fuel use
design good projects in different sectors.5 There is no for heating. If adapting the PEE to “performance
need for a “one size fits all” approach; in the case of contracts in the public sector proves to be successful it
larger utilities the new entity’s role might be smaller. should be possible to extend the same basic approach to
include water and natural gas since these are also
The desirability of bringing complementary debt
supplied by publically regulated utilities which have a
financing to the process and the practical issues this
comparable “sole source” relationship with the
raises may also condition attitudes both of utilities and
consumer. Expanding coverage might be facilitated by
the government policymakers who design the program.
having an entity such as an energy efficiency utility.
With one exception, RELUZ, the resources of the PEE
have never been used in projects together with loans –
not even in the projects under “performance contracts”
with private sector consumers (whose model is a
starting point for this proposal). In the case of RELUZ 4 REFERENCES
the loans were from the RGR fund of Eletrobrás and ANEEL: Manual para Elaboracão do Programa de
represent a special case. Resources from the BNDES, Eficiência Energética – 2008 (2008). SPE –
for example, have not been leveraged. The objective to Superintendência de Pesquisa e
introduce borrowing may be a factor which makes Desenvolvimento e Eficiência Energética;
letting someone else do it a more attractive option to Agência Nacional de Energia Elétrica; approved
some utilities. by the Normative Resolution nº 300 of February
12, 2008.
It is not necessary to solve all the issues at once. A step
Jannuzzi, G.M., Saidel, M.A., Haddad, J., Poole, A.D.
by step process is possible. The first step is to start to
& Johnson, T.M.; Brazil’s Energy Efficiency
gain experience by implementing some performance
Program for Electricity Utilities: Evaluation of
contracts with government consumers. Then adapt
the Program and Recommendations for Revising
some vehicle for loan financing. The energy efficiency
Current Regulations (2008). Part I of “Brazil
utility could come later if it comes at all. Initiatives
Energy Efficiency Studies”, World
could start at a State level in dialogue with ANEEL
Bank/ESMAP, May 2008.
When defining the process of preparing projects within Nexant Ltda: Contratos de Desempenho para Serviços
this new approach, there should be clear objective to de Eficiência Energética no Setor Público do
maximize the economically viable savings in Brazil’s Brasil: Questões Jurídicas e Possíveis Soluções
public sector and keep the costs of achieving those (2004). report for the U.S. Agency for
savings as low as possible – i.e. maximizing the Net International Development and Brazil’s Ministry
Present Value (NPV) of energy savings.6 of Mines and Energy, Brasília DF, 2004
Poole, A.D.; The Procurement of Energy Efficiency
Performance Contracts in Brazil’s Public Sector
One advantage of having the distribution utility and/or
(2008). Study prepared for ESMAP/World Bank,
a new “EE utility” as intermediaries, is that projects
December, 2008.
need not be limited to four years, as is likely to be the
case with direct contracting by the government agency,
as mentioned earlier. Another advantage is that it is
possible to envisage a step-by-step process where
proposals are developed in an incremental way much
closer to that found in the private sector. This would
mitigate the likely tendency for conservatism in the
proposals in conventional public sector bidding and
could also enhance the value added that ESCOs can
contribute.
The PEE is by definition restricted to improving the
efficiency of electricity use. Increasing the efficiency
5
Less than a dozen out of 64 utilities have programs whose
total annual expenditure exceeds R$ 10 million (US$ 4-5
million) per year. About half have total expenditures smaller
than R$ 1 million. From this total value at least 50% must
immediately be deducted for projects targeting low income
residential consumers. See Jannuzzi et alii, 2008.
6
Fortunately, the necessary guidelines and parameters for
analysis of NPV in most EE projects have already been
established in the PEE by ANEEL.