Energy Fund 

Overview

The Municipal Energy Fund was established in 1998 to be a self-sustaining source of funds for investment in energy-efficient retrofits at city facilities, so the City would be able to continually reduce its operating costs over time. The City operates 60 facilities and spends $4.5 million per year on energy (out of an annual budget of $288 million in 2005). The Fund is administered by the City’s Energy Office under the supervision of a three-person board, which must approve all projects. The Fund has invested in street light improvements, parking garage lighting, a boiler, two electric vehicles, and photovoltaic cells.

The Energy Fund demonstrates that energy efficiency can pay for itself in the long term. By providing the difficult up-front costs and then capturing 80% of the resulting savings, the Municipal Energy Fund not only motivates facility managers to move forward with energy efficient projects, but has the ability to become sustainable in 3-5 years requiring no additional annual appropriations. The Energy Fund projects not only save facilities/departments operating dollars, but also improve the comfort and appearance of City facilities. According to the City’s Energy Coordinator David Konkle, "This innovative Energy Fund is an excellent application of the concept of life-cycle costing being applied to create a self-sustaining program which moves us all closer to a sustainable future."

Frequently Asked Questions

Why did Ann Arbor identify the need for an Energy Fund? What were the challenges in implementing it?

The need for a Municipal Energy Fund was based on the City of Ann Arbor's Energy Plan which was adopted in 1981 and calls for the City to "promote energy conservation by using City facilities as a role model for the community." Following this directive, the City utilized its municipal bonding authority in 1988 to fund a $1.4 million Energy Bond project. The Energy Bond enabled the City to implement energy efficiency measures at thirty City facilities. The payments for this ten-year bond have been generated through energy cost savings.

In July 1996, the City of Ann Arbor became a partner in the EPA’s Green Lights program. This partnership committed the City to survey all of its facilities (over 100 buildings) and upgrade 90% of the lighting which was identified as desirable based on energy savings. The City was able to utilize state and public utility programs to perform many of the audits at little or no cost to the City but had difficulty in finding funding to implement the recommended upgrades.

The Energy Fund paid for new LED traffic and pedestrian signals for the City.

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. The Energy Commission proposed that rather than discontinue that budget item, that it be reduced to $100,000 that would be used to establish a Municipal Energy Fund. The Fund presented an opportunity to pay for the recommended lighting upgrades from the Green Lights Program as well as other energy saving measures. A well-developed plan for implementation and operation of a sustainable Municipal Energy Fund (a fund which could regenerate itself) was presented to the City Administrator and City Council and was approved for the fiscal year 1998-99 budget (see attachments for a copy of the plan). Succeeding budgets have contained similar appropriations.

The original plan called for facilities that utilized the Energy Fund to reimburse the fund with 80% of their actual energy cost savings calculated at the end of each fiscal year. However, the City’s Budget Director requested that the annual fund reimbursements be based on the estimated savings from the energy audits, a fixed number, rather than the uncertain "actual" energy savings. It was pointed out that the actual energy savings will vary with changes in the weather as well as changes in use patterns and occupancy of the buildings. This request was acceptable to the facility managers and City Administration and has served to simplify the accounting for the Energy Fund.

What was the role of the mayor and city government in creating the Energy Fund?

Mayors Sheldon and Hieftje have shown consistent support for the Energy policy and programs of the City. It is the Mayor’s responsibility to appoint, with Council approval, the members of the City’s Energy Commission. Commission members include representatives from the electric and natural gas public utilities, architects and engineers with a strong interest in energy issues, business representatives, homeowners, and even a representative from the student body of the University of Michigan. The Energy Commission developed the concept for the Municipal Energy Fund.

When the idea for a Municipal Energy Fund was first presented to Council, Mayor Sheldon strongly supported it, recognizing the potential to save valuable tax dollars as well as precious energy resources. She actively participated, providing opening remarks at dedication ceremonies for a wide range of energy projects and programs. Mayor Sheldon demonstrated a thorough knowledge of the energy issues faced by her community and is therefore a valuable asset in helping the community move towards a more sustainable energy future.

The Ann Arbor Energy Office developed the Municipal Energy Fund from a concept to a reality. This municipal office is charged with implementing programs and policies consistent with the Ann Arbor Energy Plan, which includes providing support for the Energy Commission. The Commission initiated Fund is used strictly for a municipal program 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 who own and operate a large number of facilities.

The Fund is managed by the Energy Office and is overseen by a three-member board appointed by the City’s Environmental Management Team. The Energy 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, and educational or demonstrational value of the project. The Energy Office then implements the projects, often serving as the project manager.

How is the program financed?

The Energy Fund is financed by re-investing the funds saved through energy efficiency measures into new energy saving projects. In 1988 the City utilized its municipal bonding authority to fund a $1.4 million Energy Bond project. The Energy Bond enabled the City to implement energy efficiency measures in thirty City facilities. The payments for this ten-year bond were generated through energy cost savings. With the bond paid off in 1998, the City chose not to eliminate the bond payment line item in the annual budget but rather to reduce it by 50% to $100,000. This money was then used to finance the new Municipal Energy Fund.

City Council approved the first $100,000 to be available in fiscal year 1998-99 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 will generate $19,850 in energy savings of which $15,880 will be re-invested in the Municipal Energy Fund. This money will be transferred from the budgets of the facilities that received the energy improvements to the Energy Fund at the end of fiscal year 1999-00 and be available to finance further energy improvements in fiscal year 2000-01. The payments from these first year projects will continue 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 is being used to implement additional energy saving projects at City facilities which will generate another $15,000 in annual reimbursements. The energy savings from this second year of improvements will be available to finance further energy saving projects in fiscal year 2001-02. For fiscal year 2001-02, $30,000 were 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 payments from 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.

How has the program improved the quality of life in Ann Arbor?

Although this program is focused solely on improving the energy efficiency of City operations and facilities, the community benefits in a number of ways. The Municipal Energy Fund contributes to improved efficiency of City operations, reducing operating costs, and making better use of tax payer dollars, always a high priority of local citizens. In the larger picture, improved energy efficiency leads to cleaner air, preserves our planets shrinking fossil fuel resources, and reduces global warming emissions.

In nearly every case, the improvements lead not only to lower operating costs but also to a better environment for the facilities. This includes better control of temperature and improved lighting. These improvements make City facilities more pleasant to work in, more pleasant to visit, more comfortable for community meetings and events, and provide for a healthier indoor environment overall. Improvements at City facilities demonstrate a municipal government that cares about the quality of its operations and encourages the community to take pride in its City facilities.

In today’s economy, with low unemployment and strong competition for quality employees, employee retention is becoming an important consideration. A significant factor in attracting and retaining quality employees is providing a pleasant and comfortable work environment. The Municipal Energy Fund provides a mechanism to improve the attractiveness of the employee work environment.

Finally, the Ann Arbor Energy Plan directs the City to lead by example, providing demonstrations of energy saving technologies which can then be used by others in the community. The City is proud of its energy efficiency programs and makes information on energy savings at City facilities available to the community. Assistance is available from the Energy Office to businesses and homeowners who are interested in improving energy efficiency. One goal is to build community-wide enthusiasm for energy efficiency.

What are the major lessons that would be helpful to other mayors and cities who want to set up an Energy Fund?

The concept of a sustainable Municipal Energy Fund is working! The two critical components are an initial funding source (available for 3-5 years) and a manager assigned to support and coordinate the fund and its projects. 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.

Ann Arbor was fortunate to have an opportunity to establish the Municipal Energy Fund at a time when a ten-year bond was just being paid off. This made it possible to argue that this was not an increase in budget costs but just not as much of a decrease as was possible. 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 City adopted the rule that any facility that utilizes the fund for energy improvements will pay back 80% of the 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.