In 1995, the University of Maryland (UMD) faced a difficult situation: it needed to find more than $50 million to correct an aging steam generation and electric distribution system. The university’s only option for financing was issuance of debt by the University System, Maryland Economic Development Corporation (MEDCO), or another state entity. The capital funds request was denied by the Maryland Department of Budget and Management (DBM) and the university was encouraged to explore alternative options, such as a Public-Private Partnership (P3).
“…we knew that the university’s core mission isn’t about producing and distributing energy services, so bringing in expert partners in this area was the right way forward.”
– Carlo Colella, Vice President for Administration and Finance, University of Maryland
Four years later, UMD, in conjunction with MEDCO, entered into a 20-year unprecedented P3 with College Park Energy LLC (now a subsidiary of Engie North America, N.A.). The P3 was unique; unlike other programs that just focused on modernizing and operating a central energy plant, this partnership encompassed UMD’s steam, electric, and chilled water distribution systems, its electric and natural gas supply procurement, and spearheaded all building energy conservation measures.
To achieve financing capital improvements with tax-exempt, off-balance sheet debt, UMD followed this structure:
- The university leased its existing system and electric systems to the Maryland Economic Development Corporation (MEDCO)
- In turn, MEDCO entered into a management and construction agreement with College Park Energy LLC (CPE).
- UMD concurrently entered into an energy services agreement with MEDCO, then signed contracts with CPE that (i) govern the transition of its central plant employees to CPE and (ii) retain CPE as its agent for fuel and electric supply procurement.
A 20-year contract was finalized and executed on August 31st, 1999; shortly after that, CPE assumed responsibility for UMD’s steam and electric system.
The New Benchmark
The 1999 agreement generated industry-changing results, proving that a P3 model can be an excellent approach for holistic energy infrastructure projects while supporting an institution’s educational and research mission. Through the P3, the university saw:
Sustained steam, electricity, and chilled water generation for 20 years even as campus demand for those services increased by 38, 35, and 35 percent, respectively.
The capital improvements to UMD’s Central Energy Plant (CEP) increased the plant’s efficiency by 68 percent and reduced carbon emissions by an estimated 53,000 tons, earning the university the 2005 Energy Star CHP Award.
This program utilized “trigeneration” technology to recover useful heat to generate steam, electricity, and chilled water. It was recognized nationally as having compelling environmental benefits and operational efficiencies.
Introduction of the NextGen Energy Program
As the original contract expiration date drew near, the UMD team prepared to transition to the next energy program. The university began an assessment in 2015 that included examining the campus’s long-term energy requirements and goals. Based on this study’s conclusions, UMD decided to move forward with a second P3 program, called the NextGen Energy Program.
The university considered two P3 commercial structure procurement options. The first option, similar to the 1999 structure, was a 501(c)(3)-type structure where UMD would utilize tax-exempt financing through a tax-exempt entity (such as MEDCO) to finance capital improvements to its energy systems. This program would require entering into an agreement with a private-sector provider to design, engineer, construct, and install capital improvements to the energy systems, as well as manage, maintain, and operate those systems for the program term. The second possibility was a Concession Structure, a program in which a P3 concessionaire would manage UMD’s energy systems as a Design-Build-Finance-Operate-Maintain project. The concessionaire (i.e., developer/investor) would finance capital improvements using a mixture of taxable debt and its own (or an equity partner’s) equity. Deductions for substandard performance would reduce the concessionaire’s recovery of its equity investment and expected return.
These programs typically have thirty-year terms, plus whatever timeline is needed for construction. Encouraged by its results with the first P3 program, the university indicated that it would be comfortable signing a contract for a term of up to 50 years.
Despite having started four years before the initial contract expiration, UMD knew that finding the right partner and properly structuring a long-term agreement would take time. To avoid rushing the process, UMD, MEDCO, and CPE negotiated an Interim Energy Bridging Program that sustains UMD’s current energy services operations until a new program is put in place. The interim program differs from the preceding P3 in term length, performance guarantees, and financial risk. This transitional program expires on June 30th, 2024 but can be terminated at any time with six months’ notice. Because capital improvements from the 1999 program are close to twenty years old, no performance guarantees were required, and financial risk shifted from the private sector (in this case, CPE) to MEDCO and UMD.
During the utility condition assessment in 2015, which was updated in 2018 and then again in 2019, the university found that using a new P3 to power the central energy plant while renewing the steam distribution system would save up to $14.5 million annually.
The university kicked off the project’s procurement phase, issuing a Request for Qualifications (RFQ) for the NextGen Energy Program in April 2020. The RFQ closed in July. In November, the university announced a shortlist of potential partners.
1-on-1 with UMD Vice President for Administration and Finance
Energy Services Media (ESM) connected with UMD’s Vice President for Administration and Finance, Carlo Colella. We wanted to learn how the university prepared for a second program, discover what lessons it learned from the 1999 program, and what type of partner the university is looking for to operate, manage, and sustain their energy systems for the next 30 years.
ESM: What are the objectives of the NextGen Energy Program?
Colella: We established three objectives for the NextGen Energy Program. The first is to meet our long-term energy requirements holistically and sustainably while advancing our strategic and operational goals. We also want to improve the long-term resiliency of our energy services and systems. Finally, we want to pursue carbon reduction and responsibly steward our financial resources here at the university.
ESM: As the 1999 program was nearing its expiration, what type of conversations did university administration have?
Colella: The conversations about renewing our energy systems started back in 2015 when we commissioned an energy system and facility condition assessment. We assembled a team of engineering, financial program management, and legal professionals and examined our long-term campus energy requirements and goals to reduce carbon emissions.
In 1999, we pioneered using a public-private partnership model to convert a steam plant into a cogeneration plant. We evaluated what worked well in the years since and asked what we could do to improve sustainability across our campus. We wanted to better manage our assets through the end of their useful life while using competitive market forces to create the best possible value for the university.
ESM: What did the preparation look like for the second P3 program?
Colella: We consulted with many stakeholders over the last few years to carefully analyze different technical and commercial solutions. Whichever system we chose, it needed to continue to deliver thermal and electric service for the campus in a sustainable manner. This evaluation led us to determine that we should continue with our public-private partnership approach, and we wanted to feel out the market to better understand what options are currently available. That research showed us that the financial benefits for the university and our partners would be maximized with a long-term contract at least 25 years long, and possibly up to 50. We should pursue either a 501(c)(3) or concessions structure, and we found that private sector capital is readily available and interested in financing capital investments that meet the university’s requirements.
ESM: Can you describe the anticipation you felt when launching the 1999 P3 program?
Colella: One of the things that I recall from the first program was both excitement and anxiety about implementing something that, at the time, hadn’t been tried before in Higher Ed. Seeking a public-private partnership to convert our traditional steam generation and distribution to cogeneration was a substantial step in itself. To then have a third party operate, maintain, and deliver services that had previously been taken care of internally was an additional risk. However, we knew that the university’s core mission isn’t about producing and distributing energy services, so bringing in expert partners in this area was the right way forward. The public-private partnership model has worked very well for us.
ESM: What were some of the significant lessons the university learned from that program?
One of the most significant lessons we learned from the 1999 program was the importance of ensuring the private sector operator has a stake in energy system performance through the entire contract period. These systems need ongoing maintenance and upgrades, and it’s essential to structure the agreements to ensure that reinvestment continues throughout the whole term. Just relying upon reports and performance is not enough to ensure that operating capabilities stay on track.
Because of that, at this moment, we believe the concession structure is our preferred option and that’s what we’ll be communicating within the RFP process. Still, we’re certainly open to discussing additional options with the shortlisted proposers to ensure that we’re getting the best value for the money that we are investing.
ESM: How did you approach re-engaging stakeholders in supporting a new P3 program?
Colella: As we moved forward, we wanted to renew our campus engagement and involve a number of stakeholders, including student groups and our Sustainability Council. We’ve put together an executive steering committee of university leaders to advise the process from numerous perspectives.
We involved our Planning and Construction Department, Operations, Maintenance and Utilities Department, and our Environmental Safety, Sustainability, and Risk Department. Because we’re part of the state university system, we engaged several government institutions, including the state attorney general’s office. Finally, we reached out to our surrounding community to keep them engaged. Having enjoyed success with the prior public-private partnership model, we wanted to let our stakeholder community know of our plans to continue and expand upon that model going forward.
ESM: What is the university looking for in a private sector partner?
Colella: The partnership that we are pursuing is literally decades in duration, so we’re looking for a partner who can work with us over a very long term, who shares our values in addressing climate change. We want an organization that brings best-in-class technical skills, excellent customer relationships, substantial financial resources, and has delivered high-quality, reliable energy services in the past, and is committed to creating sustainable energy solutions for the future.
Our ideal partner will use both current technologies and develop future solutions regarding energy production and consumption. We need someone who will help the university continue its transition to a net carbon-neutral, highly efficient, and sustainable future. This requires staying on top of developing technology and then implementing it as soon as it is feasible and commercially practical. All of this will allow us to continually provide reliable, resilient, and affordable energy services that meet our environmental goals.
ESM: The RFQ closed in July. What are the next steps from here?
Colella: We were pleased to get such strong interest in our RFQ process. We received 13 excellent proposals and have advanced the top five to the next stage. We are now working on finalizing our request for proposals (RFP), which we expect to issue early in 2021 with a return due date to the university and its team by the summer of 2021. This will keep us on track to commence the NextGen Energy Program in the first quarter of 2023. We know there’s a lot of work ahead to get from an RFP response to selecting a final team, negotiating terms and conditions, and seeking approvals so we want to be realistic. We’re certainly hopeful that we can move forward faster than the beginning of 2023, if that’s possible.
ESM: What advice would you give other institutions of higher learning who are considering pursuing a P3?
Colella: I think what’s most important is staying in touch with those in the industry who are also working in this space. We’re wonderfully collegial in higher education. There are three legs to a university mission, typically teaching, research and service. All of those legs are part of sharing with others the success and lessons learned from our endeavors. I would encourage folks to reach out to colleagues and read publications like this so they can stay up to speed with the latest and best innovations in higher education.