University energy partnerships
Universities across the United States are looking for private companies to modernize, operate and maintain university energy and utility systems.
A wave of deals has closed in the last few years, including partnerships for energy and utility systems at The Ohio State University, the University of Iowa, Syracuse University, the University of California at Fresno, the University of Idaho, Georgetown University and Howard University.
More deals are in procurement or are in planning and are expected to be procured in the near term.
The transactions are structured as long-term leases of university utility systems or concessions to provide utility services and require the private company providing the utility services to meet key performance indicators, or KPIs, in exchange for payments from the university during the term of the agreement.
A number of deals have been public-private partnerships, or P3s, where a public university enters into a partnership agreement with a private company, but private universities have also closed deals.
The reasons for entering into these arrangements vary from university to university, but certain common objectives have emerged.
Universities want to modernize or replace aging university utility systems, including central utility plants and steam facilities. They are interested in increasing the sustainability and resiliency of university utility systems and achieving other environmental, climate or energy objectives.
Some are looking to drive better utility system performance and increase the efficiency and reliability of their utility systems.
Some want to leverage physical capital to gain access to funding for utility-related projects and for other strategic investments.
Another motivation is to lock in predictable, long-term and sometimes reduced payments for campus energy and address deferred maintenance issues.
These arrangements can also better align university resources with teaching, research and the core university mission of education, by delegating utility system responsibilities to third parties with operational expertise.
Notwithstanding these common goals, different deal structures have emerged that reflect the different needs and objectives of the universities involved in these deals.
One common deal structure focuses on the long-term operation, maintenance and optimization of an existing utility system. This deal structure typically requires the private company to make a substantial upfront payment (which has exceeded $1 billion in some of the largest deals) in exchange for the rights to the concession or lease. The university, in turn, is required to pay utility fees over the term of the agreement. The utility fee structure usually includes payment of some or all of the following amounts: a fixed-fee component, an operation and maintenance component that may be capped based on historic O&M costs and expected future O&M performance, and variable components that provide a return both of and on capital investments made by the private company.
In this deal structure, the university usually wants to maintain some control, including approval rights, over the capital improvements that will be made on the university campus during the term of the agreement. At the same time, the private company will want assurances that it will be able to make the capital improvements that it is required to make during the term, including in order to comply with applicable laws and KPIs.
The private company may also be assuming a certain level of capital investment and return in its base case projections. It may want assurances that it will have the opportunity to make this level of capital investment during the term.
Another deal structure provides for the upfront modernization or replacement of an existing, aging or run-down utility system, as opposed to capital improvements during the term.
In this structure, there may not be an upfront payment by the private company. It will be responsible instead for financing construction of the new facilities. The university repays the financing over the term of the agreement. Given the front-loaded construction period, this structure may not involve as long a term and the payment mechanism may not assume major capital investments during the term, beyond maintenance of the initially-installed infrastructure.
The rest of this article is a high-level survey of the first wave of deals that closed, the deals that are currently in procurement or under negotiation, and certain deals that are in planning and that may come to market in the near term.
Ohio State University
The Ohio State P3 was the first university energy partnership of its kind to close in the United States, and it set the precedent for some of the ensuing deals.
The deal closed in 2017. The private company, Ohio State Energy Partners, is a joint venture between ENGIE North America and Axium Infrastructure. The joint venture was awarded a 50-year lease to operate and maintain the university's power, heating and cooling systems. It will be responsible for energy conservation measures to help the university meet sustainability objectives, including to improve energy efficiency by 25% within 10 years, and other system improvements to be made during the 50-year term.
The joint venture paid the university $1.015 billion at closing, and it has agreed to pay another $150 million toward an academic collaboration program. The university is paying the joint venture an annual utility fee that is comprised of a fixed fee (starting at $45 million), an operating fee that is aligned with operating costs (starting at $9.2 million) and a financial return for capital investments made by the joint venture (which is calculated based on an assumed 50% equity contribution at an initial return of 9.35% and an assumed 50% debt-financed contribution at an initial interest rate of 3.691%). The university will buy other electricity, natural gas and supplies it consumes directly from other providers during the term.
University of Iowa
The Iowa P3 is similar to the Ohio State P3, but was structured to meet the specific objectives of the University of Iowa, including transitioning the university away from the use of coal and toward a zero-carbon footprint.
The Iowa deal was executed in December 2019 and reached financial close in March 2020. The private counterparty, Hawkeye Energy Collaborative, is a consortium comprised of ENGIE, Meridiam and Hannon Armstrong. Hawkeye Energy Collaborative will manage and operate the university's steam, cooling, water and electricity systems during the 50-year term of the agreement.
The deal will allow the university to meet its goals of being coal-free by January 1, 2025 or sooner and to explore opportunities to buy renewable fuels and incorporate sustainable, lower-cost fuel options into the existing utility systems.
The university received an upfront payment of $1.165 billion from the consortium that it put into an endowment to be used to fund institutional priorities.
The deal will allow the university to invest $15 million annually toward the its strategic plan and core missions of teaching, research and scholarship.
The utility fee structure for the payments the university will make to the private consortium is similar to the utility fee structure for the Ohio State deal, including an annual fee of $35 million for providing the utility services.
University of Idaho
The University of Idaho is using the same agreement structure as Ohio State and Iowa.
The Idaho deal was executed in November 2020 and reached financial close in December 2020. The private counterparty for the Idaho deal, Sacyr Plenary Utility Partners Idaho LLC, is a joint venture of Sacyr and Plenary. The joint venture will lease and operate the university's district heating and cooling, water distribution and electricity distribution systems during the 50-year term of the agreement.
The deal will help the university meet its goals of modernizing its utility systems, achieving institutional energy independence by having a micro grid on campus and incorporating energy conservation measures.
The university received an upfront payment of $225 million from the joint venture that will be invested with the university foundation and provide approximately $6 million annually to fund strategic initiatives.
The utility fees it will pay the joint venture are similar in structure to the fee structure for the Ohio State and Iowa P3s.
UC at Fresno
The Fresno State P3 reached financial close on February 26, 2021 and involves replacing aging central utility infrastructure on the university campus.
The private counterparty is Bulldog Infrastructure Group, which is a joint venture of Meridiam and NORESCO.
The joint venture was awarded a 33-year concession to modernize and maintain the central utility infrastructure system that will require replacing a central utility plant originally built in 1954 with a new utility plant. The joint venture will also address the hot-water and chilled-water generation and distribution piping network, install solar panels over existing campus parking lots and take energy conservation measures within buildings to reduce campus energy usage and the carbon footprint.
The arrangement includes energy savings targets, with more than 30% of energy savings expected in the first year of operation, according to a press release from Meridiam. The joint venture financed its initial capital investment with a "sustainable development goals" impact bond whose interest rate is linked to the targeted 30% reduction in energy consumption. The interest rate incorporates financial penalties through the project life if energy performance objectives are not continuously met.
Syracuse University was the first private university to enter into a similar long-term agreement for operation of its steam and utility systems. The Syracuse deal closed in September 2020. The counterparty in the deal is CenTrio Energy (formerly Enwave Energy USA).
A key element of the Syracuse deal is modernization of the university's steam station, which has been operating for nearly six decades and requires significant repairs and efficiency upgrades. The steam station operates around the clock every day of the year and serves other customers in addition to the university, including the State University of New York (SUNY) College of Environmental Science and Forestry, SUNY Upstate Medical University, Syracuse VA Medical Center and the Crouse Irving Memorial Hospital.
Georgetown University, another private university, reached an agreement with ENGIE North America to enhance, operate and maintain its electrical, heating, cooling and domestic water systems.
The deal, announced in early April 2021, is expected to help Georgetown meet its sustainability commitment by reducing energy consumption. ENGIE will be responsible for significant upgrades to Georgetown's major utility, distribution, monitoring and control systems.
The university said in a press release that it "could see a reduction of at least 35% in its energy use intensity—energy per square foot per year—by the end of the decade" and "the partnership will help Georgetown achieve its sustainability goals of becoming carbon neutral and water positive by 2030 and achieving '100% renewable power' by 2035."
ENGIE secured a similar role at Howard University, where it will design, construct, operate and maintain a new central utility plant on the university campus.
University of Maryland
The university issued a request for proposals to a shortlist of five teams competing for its NextGen Energy Program P3 to replace its aging energy and utility system.
The shortlisted teams responded to an earlier request for qualifications issued in April 2020.
The final RFP is expected later this year and a preferred consortium is expected to be chosen in 2022. The university expects the negotiated arrangement to have a 30-year term, but the term could be anywhere from 20 to 50 years, depending on the proposals the university receives.
Louisiana State University
LSU recently agreed to award a 30-year contract for modernization of its energy plants, distribution systems and building mechanical systems on its Baton Rouge campus to a team of CenTrio Energy and LA Energy Partners. CenTrio Energy is expected to finance the initial energy plant and distribution system improvements and certain other improvements during the term and be responsible for operation and maintenance. LA Energy Partners, a joint venture between Bernhard LLC and Johnson Controls Inc., is expected to design and build the initial improvements and future building mechanical systems improvements.
LSU said the arrangement is "projected to save LSU and the State of Louisiana approximately $90 million over the next 30 years." The agreement is also expected to address $22 million of deferred maintenance annually.
At least six universities around the country are planning or considering similar arrangements.
The University of Louisville is expected to release a request for qualifications for a 40-year lease of its utility system later this year.
Iowa State University earlier this year solicited advisors to assist with a potential utility system P3 for the Ames campus. The board of regents approved a similar P3 for the University of Iowa in 2020.
The University of Florida has hired advisors for a potential utility system P3 to replace an aging co-generation plant and other utility infrastructure serving the Gainesville campus.
The University of California at Berkeley is considering a P3, among other options, to replace a 30-year-old co-generation plant that produces steam and electricity with a new clean energy system.
The University of Washington asked potential bidders for expressions of interest in replacing its aging power plant and distribution system at its Seattle campus.
Finally, the University of Virginia is studying whether to expand its existing Massie Road power plant and whether to use private funding or other innovative delivery options for the project.